Going Over the (Fiscal Stimulus) Cliff

We’re about to hit our first cliff in the economic recovery: a fiscal cliff. Right now, Congress is debating a new fiscal policy plan (i.e., stimulus) that could determine the financial fates of millions of consumers and businesses for the rest of the year. 

Lawmakers aimed high for the first round of stimulus, but many of those benefits expire at the end of this month, including the enhanced unemployment benefit that gave the jobless an extra $600 per week. The next phase of stimulus could be smaller and much less potent. It could rattle investors, too. That’s because we may lose some of the policy support that has helped us get this far in the recovery. 

Time is running out, but we’ve got what you need to know. 

What is fiscal stimulus? 

We talk a lot about the Federal Reserve’s big money moves (zero interest rates, bond buying), and how much they’ve buoyed the public markets. But the Fed’s policies can only do so much for the rest of America (by the way, the Fed’s actions are called monetary policy). That’s why, in March, Congress stepped in with its own historic aid: the CARES Act, which now totals a $3.3 trillion cash infusion to U.S. consumers, businesses, health institutions, and governments. This is called fiscal policy. 

While the size of the first fiscal stimulus package was eye-catching, (in fact, it was the largest economic stimulus package ever passed), its contents were arguably more important. The CARES Act included a bunch of help for the average American: stimulus checks, additional unemployment benefits, longer unemployment collection periods, and debt payment relief. The government also doled out Paycheck Protection Program (PPP) loans to small businesses willing to keep employees on payroll, and billions in help to larger industries hurt by the pandemic (think airlines and cruise liners).  

Click here to learn more about the CARES Act. 

Did it work? 

So far, so good … mostly. Overall, extra jobless benefits and stimulus checks have helped support incomes as unemployment has soared to record highs.  

There were some hiccups with PPP money, and the recovery (while impressive) hasn’t been smooth sailing. 

Overall, the CARES Act did its job, but it was just a bandage for the economy for a pandemic many expected to be short-lived. Today, coronavirus cases are still peaking, and we’re realizing it may be a while before we return to “business as usual.” Still, several parts of Congress’ first plan are scheduled to expire over the next few months, so lawmakers are rushing to push a new stimulus package through. 

Why can’t we just keep the stimulus going? 

It’s a balancing act, because the U.S. operates on a budget (like we all do). And right now, America is about $3 trillion over budget. Some lawmakers have argued that the U.S. needs to spend less on the next round. It’s a valid concern but may be misplaced given the dire economic situation we’re in. 

About 50% of U.S. households have had at least one member lose a job since March, and about 35% of respondents said they expect to lose their job in the next four weeks, according to census survey data. On the flip side, job openings are at a six-year low, and businesses are still grappling with lots of uncertainty (which doesn’t bode well for hiring).  

That sounds like a big deal. 

It is, and it’s not just unemployment benefits on the line. Americans have benefitted from other less publicized CARES Act initiatives: bans on evictions from federally owned housing (expires July 24), student loan payment relief (ends September 30), and mortgage forbearance (six–month grace period). Put it all together, and unemployed Americans could lose income while other bills come due.  

Don’t forget about businesses. While another round of PPP loans may be in the works, many businesses still can’t open at full capacity.  

What does this mean for me? 

Investors are having a hard time predicting what happens next. On one hand, not much has phased the market these days, thanks in part to unwavering support from the Fed. 

On the other hand, the government’s help for individuals and businesses is drying up. While there’s still some negotiation ahead of us, Democrats and Republicans remain far apart on the total amount of stimulus needed. At a minimum, any fiscal cliff headlines could be minor speedbumps as the S&P 500 eyes record highs. Sectors that are heavily dependent on consumer health – retailers, travel, homebuilders, real estate – could be especially sensitive to negative headlines. 

Congress’ decision on a new wave of support could make or break the next leg of the economic recovery. Near-term, a smaller fiscal response could result in lower consumer confidence, slowing the recovery. Longer-term, the market is hanging its hat on hopes that the worst is behind us and the development of a vaccine or drug could allow for a return to “business as usual.” While the market is always forward–looking, there’s increasing risk that investor optimism could fade if the recovery slows. Markets and the economy may be miles apart right now, but they will eventually converge (one way or another). 

The opinions expressed here are not meant to be used as investing advice. For more information, visit our website.

Lindsey Bell is Ally’s Chief Investment Strategist, responsible for shaping the company’s point of view on investing and the global markets. She is also President of Ally Invest Advisors, responsible for its robo advisory offerings. Lindsey has a broad background in finance, with experience on the buy-side and sell-side, in research and in investment banking and has held roles at JPMorgan, Deutsche Bank, Jefferies, and CFRA Research.

Lindsey holds a passion for teaching individuals how to become successful long-term investors. She frequently shares her knowledge as a guest on national news outlets such as CNBC, CNN, Fox Business News, and Bloomberg News. She also serves on the board of Better Investing, a non-profit organization focused on investment education.