Macro Perspectives

Tuesday 21 July 2020

Despite what has been billed as a terrible earnings season, we have so far, 73% of S&P 500 companies beat on earnings with 78% beat on revenues. Again, these are beating a low expectations bar, however we are seeing the influence of the massive wave of intervention. Keeping consumers and businesses solvent through the shut-down - and attached to jobs coming out of it - has resulted in positive surprises on the earnings front.

The question is, is this sustainable?

On that note, the biggest news this week will be progress toward another stimulus bill. Here's what's at stake:

The big federal unemployment subsidy expires on July 31 - that's $600 a week for the unemployed that goes away.

Add to that, the federal moratorium on evictions expires on July 25 - this with unemployment at 11%.

This is a formula for pain, and, unfortunately, it brings us to a collision course of gridlock coming on Capitol Hill. 

The Democrats have already crafted a $3 trillion plan. The Democrats are fighting to extend the $600 a week federal unemployment subsidy through January. Based on the number of unemployed that are making more on unemployment than they would working, this could keep more than 60% of the unemployed at home through January. That clearly handicaps the economy.

The Republicans are now working on a $1 trillion plan. The "back to work bonuses" that would expire right around the election. That would get them back to work and for minimum wage workers, they would make more, adding in the Federal subsidy, than they would have made on unemployment.

I suspect we'll get neither.

If push came to shove, the Republicans might give way on the unemployment benefit. However, as we've discussed, the catalyst for gridlock on another stimulus bill has everything to do with mail-in voting. The Democrats have continued to work through strategies to cram mail-in voting into legislation. That would probably seal the election for them. The Republicans would have no choice but to reject it.

With that, I suspect the Democrats will hold the economy hostage for it. We will see.