The last week’s market highlights:
Each week, we present our featured topics in the context of the major themes listed below from Nuveen’s 2020 Midyear Outlook:
- U.S. economy: Looking for a full recovery by late 2021, albeit with high unemployment.
- Global economy: More monetary and fiscal stimulus is needed to keep businesses afloat.
- Policy watch: No Fed interest rate hikes until well after the economy has healed.
- Fixed income: Lean into higher-risk assets to generate income.
- Equities: Focusing on quality across the board (and dividend payers, too).
- Asset allocation: Consider benefits of active management amid idiosyncratic opportunities.
Quote of the week:
“When people don’t respect one another, seldom is there honesty.”
― Shannon L. Alder
― Shannon L. Alder
The EU strikes a deal…
After months of delays and, more recently, tense negotiations, on July 21 the European Union’s (EU) 27 member states agreed to a €750 billion ($870 billion) stimulus package to fight COVID-19’s devastating economic effects. In its latest forecast, the EU noted that “the road to recovery is still paved with uncertainty” and projected GDP for the region will contract by 8.3% in 2020.8
The program will be paid for by the EU’s executive branch, which will issue bonds with maturities ranging from three to 30 years. Debt repayment will come from the EU’s budget, meaning countries that contribute the most, like Germany and France, will be shouldering more of the financial burden.
There are two components to the stimulus plan. Under the first part, about €390 billion in grants that do not need to be repaid will be distributed to the hardest-hit countries. Italy and Spain are among the largest beneficiaries, receiving around €80 billion and €70 billion, respectively.9 The second component, representing roughly €360 billion, will be made available as low-interest loans.
Both in dollar terms and as a percentage of the EU’s GDP, this aid package is smaller in scale than the coronavirus-related fiscal and monetary programs passed in the U.S. But that’s partly because most EU member states already have more generous labor laws and social safety nets than those offered stateside. In effect, although €750 billion is still a tidy sum, Europe could spend less than the U.S. to build a support mechanism for displaced workers from scratch. Also, many EU countries enacted national paycheck replacement laws earlier in the year, freeing up this recovery plan to address business-related hardships like warding off bankruptcy.
The EU’s new stimulus was widely heralded as an unprecedented act of solidarity given objections from some of the financially stronger countries—particularly the “Frugal Four” of Sweden, Denmark, Austria and the Netherlands. This group opposed the original grant target of €500 billion, later consenting to the lower amount after being promised rebates on their EU budget contributions. Germany, despite its long-standing aversion to debt, also played a key role in brokering a deal.
Whether this agreement allows the EU to move more decisively and demonstrate stronger collective action in the future remains to be seen. In the meantime, the European Parliament must approve both the stimulus package and the EU’s €1.1 trillion budget to which it’s attached. A rubber stamp is not guaranteed. While Parliament has expressed satisfaction with the EU’s plans to deal with the COVID-19 pandemic, there are concerns about some of the EU’s proposed cuts to pay for the program—particularly reductions in climate-change research.
…while the U.S. Congress is still working on one
Progress on “Phase 4” of U.S. stimulus—essentially a renewal of parts of the CARES Act passed in the spring—is being held up by disagreements between the Republican-held Senate and the White House. For its part, the Democratic-led House passed a $3.4 trillion relief bill in May and now awaits the Senate’s version before negotiations can begin. The president has already been forced to scrap his desired payroll tax cut given its lack of support among legislators of either party.
We expect the final package, which probably won’t pass until next month, to run somewhere between $1 trillion to $1.5 trillion, the bulk of which will be: (1) relief checks to individuals; (2) a modified renewal of the unemployment insurance supplement (likely less than the existing $600 per week cap, which expires on July 31); (3) small business aid; and (4) direct assistance to states and localities to help open schools and avoid layoffs.
The delay in passing this badly needed bill may disrupt the nascent U.S. economic rebound. Many of those on unemployment insurance will see their $600 weekly benefits vanish after next week, and it could take some time for a new round of individual relief checks to circulate through the economy.
Even if individual checks are paid relatively quickly, a temporary interruption in unemployment benefits may well trigger a sharp drop in personal income growth in August. A pause in consumer spending growth is also possible, as many recipients of jobless aid tend to spend virtually 100% of their incomes. The residential housing market, which has thus far been one of the recovery’s bright spots, could also be affected.
A lapse in supplemental unemployment insurance is unlike a shutdown of the U.S. government, which can turn spending on and off like a light switch. State unemployment offices, on the other hand, will encounter difficulties adapting to new benefits formulas, just as they did at the outset of the program in March and April. And schools are already budgeting for the 2020-21 school year without knowing what, if any, additional assistance is coming. Even if federal aid is on its way, local officials and administrators may not have time to determine how best to use the money with reopening guidelines already uncertain and in flux.
To sum up: the next round of stimulus may not be “too little,” but we think it might end up being “too late” for many of those it was intended to help.