Coming Fiscal Stimulus
Incredibly, the market is so confident a new stimulus bill will pass. The market rightfully expects one to pass because it is extremely necessary. Once the details are clear, the market will react. It’s incredibly difficult to know what the market expects exactly because negotiations are confusing to follow. Initially, the GOP said it was opposed to extending unemployment insurance.
Now we’re hearing discussions of a 2 month transition window where the benefit is lowered to $200 per week. Following that window, the GOP wants a 70% income replacement. In practice, this means the low/middle income people that were getting more money than they would normally get by working will get less money.
It’s much more difficult to calculate a percentage of income than a nominal payment. This might present issues with the plan. However, since the GOP is against paying people more to not work than to work, it might be the only option that has a viable path to becoming law.
The chart above shows the fiscal stimulus disbursements per week will fall if nothing changes. Once the emergency $600 per week goes away, the support will fall from $24 billion to $6 billion. It might fall that low for a week, but it will re-adjust higher once a bill is passed.
A prediction that there wouldn’t be a plan passed by the July 25th final $600 payment was correct. Some have been saying something will pass by the 2nd week of August. Congress goes on recess in August, but they will stay in session for a few extra days to get something done if necessary.
Every day there will be new reports on a potential deal as negotiations ramp up. There is the potential for another $1,200 direct payment. Many scoffed at that last time, but we saw it had a major impact on income immediately and spending later on.
Robinhooders Pick The Best Stocks
Last time a $1,200 check was given out, many people put it in the stock market. It’s fine to add to long standing plans, but many became new traders without any understanding of how the market worked. They did no research on companies. It was very common to see people buy into cruise ship stocks and airlines. New hot stocks are technology, with the cloud stocks and Tesla taking the lead.
As you can see from the chart above, Robinhood traders had good timing and picked winners in the short term. They have no idea about beta and risk. There’s no guarantee their potential picks with the next stimulus round are this successful. Average year to date performance of the top decile of stocks held has a 1.05% gain. This must be tech stocks and other high flying growth names.
Baseball season just started. Some suggested that online gambling could replace stock speculation, but so far it hasn’t. MLB is in hot water as much of the Miami Marlins team has tested positive for COVID-19. If one team gets it, there could be a cascading effect which cancels the season. That would be terrible for the online gambling stocks.
Huge Earnings Season Coming
This week will be the most important week for earnings in the quarter. Initially, there was going to be a hearing with the top internet CEOs in which they discussed competition, but that was delayed. It would have been one of the biggest weeks ever for the FAAMNG stocks. Even still, Thursday will be big for their earnings as Apple, Alphabet, Facebook, and Amazon all report that day.
Facebook moved its earnings which is interesting because now almost all the powerhouses will report after the bell together for the first time ever. So far, Netflix and Microsoft sold off on their earnings. Netflix reported bad guidance and Microsoft saw Azure sales growth fall. Microsoft reported great results, but the stock is so expensive it fell after the numbers came out.
The graphic above shows the initial results from this earnings season. For once, energy is doing well because this reviews the changes to earnings estimates, not the actual results. First 4 energy stocks had their estimates go up 300%. Normally, the rate of change of earnings estimates correlates with the stock market.
But everything happened so fast this year the changes are likely priced in. We might be going backwards now with the recent slowdown due to the spike in COVID-19 cases in the south.
How People Plan To Deal With COVID-19
The chart below shows the historical results of a Gallup survey in which people were asked when they would return to normal activities. It shows anxiety levels. Also, the chart shows 31% of people said they won’t return to normal until there are no new cases in their state. That’s an extreme way to phrase the question since having a few cases with low hospitalizations and no deaths would likely be fine for most people.
Intent of the response is to show they are very hesitant to go back to normal until the issue is under control. With that in mind, anxiety about the virus in mid to late July was higher than it was in June, but not as high as it was at the peak in April. This chart correlates with the number of new deaths.
Deaths per day increased in July, but never got up to the early April peak. If that’s the case, we will see increased anxiety in the next couple weeks. Then it should fall again late in the summer.
Conclusion
Stimulus and earnings season are the most important news events of the week. The market is ignoring the stimulus debates, but they are important. Something will be passed soon.
However, we can’t act as if the details don’t matter. Once something is concrete, we will see a market reaction. This Thursday, most of the big internet firms will report because Facebook moved its report date back a few days.