Stimulus Checks Affect More than Your Bank Account

Are you a recipient of a stimulus check? And if so, what have you spent it on, or have you spent any of it? The first stimulus package, known as the Coronavirus Aid, Relief and Economic Security Act, or CARES Act, was signed into law on March 27 of 2020. Individuals with adjusted gross income below $75,000 received $1,200 and couples earning below $150,000 received $2,400 and those who filed as head of households earning $112,500 or less received $2,4000. Qualifying Americans collected their corresponding check in the middle of April 2020, just about a month after businesses began to shut down due to the pandemic. The second stimulus check was not sent out until late December of 2020 and this time being $600. Americans who qualified for the second stimulus check included taxpayers, receiving a maximum of $600, married couples, receiving $1,200, and those who have children would receive $600 per child under 17 years old. And just a few weeks ago the third stimulus package was passed under President Biden on March 11, 2021. Americans with adjusted gross incomes of $75,000 or less will get $1,400, married couples who make $150,000 or less will get $2,800. Each dependent of any age also results in an additional $1,400 to the check. Those who filed as head of households who earn $112,500 or less will get $1,400 and an additional $1,400 per qualifying dependent.

But how exactly do these stimulus checks affect the economy? Large chain companies reported fourth quarter increasingly high revenues: Walmart hit a record of $151 billion, up 7.3 percent from the prior year, and Target surged in digital sales. Services like curbside pickup have become a new norm as it allows people to avoid possible exposure to the virus. However, other apparel retailers weren’t so lucky. Companies like Gap and Macy’s saw a slip in their sales as customers shied away from malls because they no longer needed new clothing to wear while being quarantined in their homes. But once people began receiving their stimulus checks, apparel sales began to escalate. As pictured above, the Commerce Department reported on household savings, showing a $1.6 trillion increase in savings in January 2021 compared to December 2020, and a $2.5 trillion increase compared to February 2020, before the pandemic struck. But retail sales suggest that not all government aid is being saved by individuals: purchases at stores, restaurants and online jumped a seasonally adjusted 5.3% in January 2021. Home improvement, such as furniture, and work-from-home, such as electronics, have shown the largest increases in spending above all other retail categories. Although retailers are beginning to see increasing numbers again, the recovery in consumer spending is predicted to be bumpy. As a result of the shifts in consumer spending, retailers may encounter another decline in sales once the recent stimulus money is spent.

Consumer spending is the main driver of the U.S. economy thus, motivation behind issuing stimulus packages is to ideally create a domino effect that will result in the improvement of the overall economy. If consumers receive money from the government, they will go out and spend it, which allows companies to bring in revenue which they can use to pay employees, then these employees will go out and spend a partial amount of their earnings which then allows more revenue for more companies. With the dispersal of stimulus checks, a positive feedback loop is created that will allow the economy to grow and dig itself out of a recession, right? Of course, this is the ideal theory behind the issuance of stimulus packages, but studies conducted in 2001, 2008, and 2020 suggest that consumers consistently behave in a different way. University of Chicago economist Milton Friedman proposed that households do not spend unexpected fortunes from the government because they manage their spending for the long run. If consumers believe taxes will increase in the future to fund for government borrowing in the present, they will save their unexpected checks from the government because they do not think it is permanent. The government has tested this hypothesis with rounds of payments to households in 2001, 2008, and in 2020 which yielded different results including a stock burst in 2001, a stock crunch in 2008, and a health crisis in 2020. However, household behavior remains consistent with people spending about one-third of the money after receiving it, therefore, Friedman was partially correct. Hence, the ideal theory behind stimulating the economy in the short run is not as effectual as the government had hoped, which brings in the question: Will we need a fourth stimulus package? CEOs of large retailers are hopeful for another round of checks being sent out, but other concerns such as debt come in to play as well. Since the most recent stimulus was passed just a few weeks ago, Americans and President Biden will have to wait and see how the economy will respond. - JK

Among Chatty Recovery Expectations, the Fed Remains the Voice of Reason

“When we see we’re on track we’ll say so, and we’ll say so well in advance of any decision to actually taper.” - Jerome Powell, Fed Chair

Prior to the second meeting of the year, the Federal Open Market Committee (FOMC), the yield on a U.S. Treasury 10-year note had soared to a relatively-high 1.69% after concerns over high future inflation radiated among investors and bank officials. The interest rate for longer-term government bonds traditionally reflects the expectations of rates in the future and serves as a cyclical representative of the risk of forecasted inflation rates being different than expected yields. Since the start of the coronavirus pandemic, the Federal Reserve has maintained their commitment to low rates far into the future. But with no way to guarantee this result and the recent passing of a $1.9T stimulus bill, investors and bond holders have reflected their inflation-anxieties through the fluctuating long-term bond yield. These movements in rates are significant because they provide insight on the extent the market not only fears rising inflation, but also investor-confidence in the central bank to accurately control and predict prices. Due to concern over the ongoing and future values of moving variables and their wider impact, as well as monetary policy’s duty in maintaining economic conditions conducive for healthy prices and labor markets, the FOMC’s response and subsequent policies possess significant implications in the stock market and the flow of credit to households and businesses. Thus, the FOMC statement regarding the meeting outcomes on March 17, 2021 were highly anticipated and telltale of the path to economic recovery.

As predicted by those familiar with monetary policy and market operations, despite fear and rising Treasury yields, the FOMC reinforced its commitment to maintaining low rates and continuing to conduct the same level of quantitative easing. In its statement describing the policy achieved by the meeting, the committee detailed an economic recovery in terms of inflation, the Federal Funds target rate, and the Fed’s purchasing-level of Treasury and mortgage securities. The FOMC emphasized a recovery heavily dependent on the course of COVID-19 infections and vaccination rates. Additionally, the statement reaffirms that inflation has continuously run below the Fed’s 2% goal and addresses the importance in achieving inflation above this for some time in order to average 2%.

During periods of downturn and recession, the Fed utilizes nominal interest rates and the real rate of inflation to control tumultuous changes in demand and consumption. However, with each economic recovery assisted by the Fed’s lower-bound nominal rates, the real rate of inflation remains lower than prior to quantitative easing in the onset of recovery, leaving the Fed with less “bullets” to fight the next recession. This is perhaps the most vital reason the central bank has committed to keeping rates low now to ensure a continued economic recovery while maintaining that it will allow higher inflation till over time inflation averages at 2%. In the meantime, the FOMC voting members predicted an ongoing federal funds target rate of 0% to 0.25% until both the labor market and inflationary goals align with the Fed’s objectives. Additionally, the Fed will maintain its quantitative easing levels at a rate of $120B in purchases per month, of which $80B will be allocated in Treasury bonds and $40B in mortgage securities. Likely due to the volatility and reactivity of the stock market and the yield on long-term government securities, the FOMC concluded its statement by pledging to monitor the effects of incoming information and adjusting its monetary policy stance if risks threatening the Fed’s goals emerge.

Within the economic growth conditions set at this meeting by the committee, members increased their 2021 median growth estimate from 4.2%, set at their December 2020 meeting, to 6.5%. They also forecasted a decline in the jobless rate from 6.2% to 4.5% by the end of 2021. These predictions are consistent with a V-shaped economic recovery. Following these affirmations, multiple market indexes reflected the positive growth outlooks. This includes a S&P 500 increase of 0.3%, a Dow Jones 0.6% increase, and a NASDAQ Composite 0.4% increase. While these market indexes have fluctuated both positively and negatively away from these initial growths since the meeting, the Fed’s approximation of sustained recovery is likely to help stabilize inflationary expectations and stocks in general as the Federal Funds target rate continues to be zero-bound for the time being.

In conclusion, while the FOMC committed to maintaining low rates till at least the end of 2022, this likely will change as the economy continues to grow and return to pre-pandemic levels. At an annual rate, the Fed’s Personal Consumption Expenditures (PCE) price deflator has risen 2.8% over the last three months, indicating that prices and inflation are moving towards the Fed’s inflationary objectives. While the markets and consumers may negatively react as the FOMC continues to allow increased prices, the Fed has maintained that any increase in prices will be a necessary, transitory component of keeping the American economy healthy. Essentially, the latest FOMC meeting shows the Fed’s commitment to achieving inflation above 2% for some time, along with near-full employment levels, all without tightening their current monetary policy stances. Despite the market panic given inflationary expectations and increased political pressure with the new administration, the FOMC and the Fed have exemplified that they will continue to monitor the status of labor and inflation in the stable, level-headed manner that our uncertain, tumultuous economy currently needs. - CS

The Rise of the SPAC

Over the course of the past year, a new financial device known as a SPAC, or special purpose acquisition company, has gained significant attention as a relatively cheap and attractive method to take private corporations public while simultaneously offering substantial financial gains to the investors who inject the initial capital. These companies are essentially large pools of money that go public and are traded on an exchange while they seek out private companies to take public through a process known as a “reverse merger.” Because these companies’ only real assets are cash and their only business plan is to find a company with which to merge, the process of going public is simple and cheap – unlike that of most other private corporations.

This type of company has grown in popularity for its noted advantages for both the target company as well as the investors backing the deal. From a private corporation’s perspective, a SPAC offers an avenue to enter into capital markets without having to undergo the more costly and more time-consuming process of an IPO. Investors who form the initial acquisition vehicles are rewarded with gains that average approximately eight hundred percent.

SPACs were first invented in 1993 and had similarities to devices known as “blind pools” a decade before that, though it has only been the past year that has catapulted these companies to unprecedented levels of activity. Over seventy percent of all money raised for the purpose of public offerings in 2021 has been by these acquisition companies, a number which has grown from fifty percent in 2020 and twenty percent in 2019. Eighty-two billion dollars was raised by SPACs in 2020 and by early March of 2021 SPACs had already received over twenty billion in investment. Companies such as DraftKings, Virgin Galactic, and electric car company Fisker have all taken advantage of the SPAC market to officially go public. The fervor in the SPAC market has attracted prominent figures such as former Representative Paul Ryan, hedge-fund manager William Ackman, and basketball star/serial entrepreneur Shaquille O’Neal who all currently have their own SPACs that they are backing. The massive surge in these transactions have overwhelmed some of the investment banks who facilitate the formation of the acquisition vehicles with a recent report unveiling that teams at Goldman Sachs have been working 95 hour weeks to keep up with the increased workload.

The market for companies to merge with has been especially strong in high growth areas that have seen massive gains in traditional market sectors such as technology and electric vehicles. Many of these deals are highly speculative as companies are taken public without any record of significant revenue streams, only a potential for future growth. Due to this, there is also a history of sizable failures in the SPAC market with companies such as Nikola, an electric truck manufacturer, and MultiPlan, a health care firm, becoming targets of short sellers who believed the companies were overvalued. In both cases, the share prices of the companies dropped dramatically as Nikola in particular was revealed to be far less advanced in its technology than initial investors believed it to be.

The momentum in the market for special purpose acquisition companies is unlikely to taper off soon as recent successes continue to drive demand forward. However, it is difficult to predict the future of this financial device as its usefulness is largely tied to its simplicity and speed with which it can allow transactions to occur. If the regulatory framework around these companies were to be modified as some speculate, it could cause a near total drop off in the usage of SPACs, leaving these companies as nothing more than a publicly traded pile of cash. - JR

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