President Trump outlined a framework for executive orders to
create further stimulus over the weekend, as bipartisan talks stalled. These
orders are small and maybe subject to legal and implementation challenges.
However, throughout the back and forth of recent stimulus negotiations the
stock market has retained is general upward trajectory. The stock markets
appears optimistic on real stimulus. In stark contrast, the bond markets appear
far more downbeat.
Why The Executive Orders Are Underwhelming
The executive orders from the President over the weekend
appear underwhelming in their economic impact. However, fundamentally, even if
the orders work exactly as intended, they are tiny, when compared with a full
stimulus package such as we saw with the Cares Act and may see again if
bipartisan negotiations bear fruit. This matters because if the goal of
stimulus is to boost the economy, then greater spending naturally has a larger
impact.
Payroll Tax Deferral
The payroll tax deferral per this weekend’s executive order
may not have impact. This is because it’s only a deferral at this point, not a
tax cut. Employers may not offer their employees any deferral. Doing so risks
have to deduct a large amount from paychecks a few months later. Especially if
they can be liable for the later taxes if the employee can’t pay them. This
means the measure could have little impact on the economy and therefore on
markets.
Unemployment Benefits
Unemployment benefits are the one area where there executive
orders do make progress on stimulus. Though even here, the money is coming from
other government sources and not new spending. That lessens its impact. The
spending is also relatively small. The intent is to boost unemployment until
December, but the funds may not last that long. The orders on housing and
student loans are weaker still in terms of stimulus impact.
Total Spend
Therefore, spending from the executive orders may amount to
under $100 billion. In contrast the Cares Act cost $2 trillion. For every
dollar the Cares act spent to boost the economy, the executive orders offer
five cents. Therefore, the main value from the executive orders may be in
prodding negotiators back to the negotiating table to agree on a far larger
package with a possible spending level of $1 to $3 trillion of stimulus. Of
course, that hasn’t happened yet. Still, we may see progress this week. That
the stock markets have remained on an uptrend, suggests some optimism that
stimulus will happen. However, bond markets have a different take.
Different Stories From Stocks And Bonds
While the stock markets are up 6% since mid-July as stimulus
negotiations continued, the bond market doesn’t show much optimism. Yield
remain historically low, with the yield on the 10-year flat to down over recent
months while the stock market has been on a tear.
The yield curve is not showing the aggressive steepening
that can be useful in signaling recovery. For example at the start of 2010, as
we put the last recession behind us 10 year Treasury bonds yielded around 3%
more than their 2 year equivalents. Now that same spread is much smaller at
closer to 0.5%. If there’s a major rebound coming, then the bond markets aren’t
seeing it.
Of course, there are plenty of other factors impacting
markets beyond stimulus. Vaccines, lockdowns, case rates, the trajectory of the
U.S. dollar and the coming election to name just a few themes. Still, just as
stimulus boosted the markets materially in recent months, so we may see
material impact in the remainder of 2020 too if stimulus measures pass.
It’s unlikely that the limited executive orders over the
weekend gave the stock markets the fuel they needed for U.S. growth over the
second half of 2020. However, market’s recent momentum perhaps implies optimism
that a bipartisan deal will ultimately be struck. In contrast, bond markets
don’t share the stock market’s recent exuberance. That could be a worrying sign
for the economic outlook, regardless of where the stimulus debate lands.
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