• Joel

US stocks in for a shock amid gridlocked US stimulus talks

US stocks in for a shock amid gridlocked US stimulus talks

Up until the 31st of July 2020, millions of Americans (who had lost their jobs since March due to the Covid-19 pandemic) were receiving income support from the US government in the amount of $600 per week.

These unemployment insurance payments had been agreed by Congress back in March as an emergency response to the Covid-19 outbreak (it is unimaginable that under anything other than emergency circumstances, as was the case in March, that Republicans would agree to such a policy).

However, this income support scheme has now expired without a replacement being agreed on and passed by the US Congress. Hence, millions of Americans now do not know when or even if they will be receiving further financial assistance from the government, and how much this might be.

This uncertainty is expected to weigh heavily on the US economy at the start of August, as millions of unemployed Americans tighten their spending habits even further.

However, this hit to the economy shouldn’t be too bad if Congress can get their act together and get government funds flowing back to Americans soon. Given the gravity of the situation, most analysts expect that Congress will be able to get a deal on further fiscal stimulus (in the form of an extension of the unemployment insurance programme and some direct payments of cash) sooner, rather than later.

This is how the US stock market, which is heavily dependent on the health of US consumers, seems to be seeing things, anyway. The S&P 500 (the largest 500 US companies by market capitalisation) is trading just shy of post-pandemic highs of around 3277 – looking at US stocks, you wouldn’t know that millions of out of work Americans had just been thrown onto zero income.

So how are talks going?

Still deadlocked.

The Democrats and Republicans have agreed that in the next round of fiscal stimulus, all Americans should receive a direct $1200 payment. Moreover, officials in both parties have agreed that unemployment insurance ought to be extended. However, the amount that the unemployment insurance scheme should pay people each week is being hotly contested.

The Democrats are reportedly refusing to accept anything less than a continuation of the $600 per week, while Republicans had been pushing for a much lower number of $200 per week.

In terms of the latest; Politico this morning reported comments from an anonymous senior US administration official, who told them that "the sides remain miles apart on the size of enhanced unemployment benefits, aide to state and local governments and a handful of other big issues".

Moreover, added the source, "progress is only being made on smaller stuff". However, the source did say that they still thought "a deal would get done in the next week or two but had no idea what might lead to a breakthrough absent some really bad economic numbers putting enhanced political pressure on both sides heading into the heart of the election season."

The longer this deadlock continues, the more concerned markets are likely to become and the more volatile on headlines things such as US equities might get. If Congress still cannot get its act together within a few weeks, US equities could be in for some downside.



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