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Sorry Trump, More $1,200 Stimulus Checks Won’t Save the Stock Market

Last Updated September 23, 2020 2:10 PM
Simon Chandler
Last Updated September 23, 2020 2:10 PM
  • Wall Street has priced in another stimulus package. This won’t prevent a stock market correction from happening sooner or later.
  • The CARES Act failed to retain jobs or prevent the worst quarterly GDP contraction ever recorded.
  • A second round of $1,200 stimulus checks will fail to prop up the stock market as long as the pandemic persists.

Hopes for another federal aid package – along with another round of $1,200 stimulus checks – have buoyed the U.S. stock market in recent days.

The Stock Market Has Already Priced in More Stimulus

The S&P 500 and Dow Jones have spiked by more than 1% in less than a week as Congress negotiates how to distribute aid to small businesses and individuals.

Stock market level second stimulus package hopes
The S&P 500 (blue) and Dow Jones (red) have shot higher over the past five days. | Source: Yahoo Finance 

Reports suggest investor optimism is being kept alive by the expected arrival of the package .

The stock market is wrong to get its hopes up.

The first major stimulus package failed to prevent the United States from suffering a 32.9% GDP contraction in Q2, the worst ever recorded .

There’s no real reason to think a second aid package won’t fail just as miserably.

As long as lockdowns remain a threat and consumers fear for their health, the U.S. economy will struggle. And the more the economy whimpers, the more fertile the ground will be for a massive stock market correction.

$1,200 Stimulus Checks Are Too Little, and the Aid Package Is Too Late

The U.S. labor market will continue to shed jobs and operate at reduced levels, even with a second stimulus package.

As was the case with the first package, the support won’t offset much of the economic damage caused by the pandemic.

donald trump, stimulus checks
If Donald Trump thinks more $1,200 stimulus checks will save the stock market, he’s in for a rude surprise. | Source: Twitter 

A National Bureau of Economic Research study  found that the Paycheck Protection Program, one of the most vaunted pieces of the CARES Act:

did not restore the vast majority of jobs that were lost following the COVID shock.

And the $1,200 stimulus checks weren’t any more effective. They didn’t help businesses. Nor did they support the wider economy.

The researchers wrote:

Stimulus checks increase spending particularly among low-income households, but very little of the additional spending flows to the businesses most affected by the COVID shock.

In other words, they didn’t address the most severe disruption in consumer behavior.

The biggest problem for the United States is that lockdowns and the pandemic have caused a sharp drop in spending among high-income individuals.

Second stimulus package spending changes effects
The chart contrasts spending in 2020 (solid lines) against spending in 2019 (dashes) for high-income (green) and low-income (blue) individuals. | Source: National Bureau of Economic Research 

As of June 10, more than half of the total reduction in card spending since January had come from households in the top quartile of the income distribution.

This is a problem $1,200 stimulus checks won’t fix.

For one thing, they won’t provide sustained economic support. For another, stimulus checks are targeted at lower and middle-income households – not the high-income consumers who have slashed their spending.

Consumer spending improved in June, but it was still 6.9% below pre-pandemic levels . And with the rise in cases witnessed in July and early August, spending is likely to dip again.

Covid-19 cases in U.S. stock market impact
Daily confirmed Covid-19 cases peaked in July and are still high. | Source: Our World in Data 

For as long as coronavirus cases rise in the United States, consumers – particularly high-income ones – will stay at home and spend less.

If the pandemic gets worse, we risk encountering something like a repeat of Q2’s disastrous GDP figure.  And if GDP remains sluggish over the next few quarters, this is bound to put pressure on the stock market.

Investors can’t ignore bad fundamentals forever. While quantitative easing has helped inflate  stock prices, the rotation to haven assets like gold is already an ominous sign.

Sooner or later, a stock market correction will strike. A second round of $1,200 stimulus checks can’t stop it.

Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. Unless otherwise noted, the author has no position in any of the stocks mentioned.