Market Overview

10 August 2020

Trump Overtakes Democrats in Shining Armour to Keep Relief Package Going

Before the new week's start, the U.S. President Donald Trump severed the Gordian knot of lingering long negotiations in Congress on the pandemic relief package. He has taken the situation out of the impasse and decided to avoid all the "checkpoints" by signing a series of presidential executive orders. The extension of unemployment benefits is a life tube for the tens of millions of Americans and the new payroll tax cut bill pours the additional money directly into the employees' pockets providing more social security. 

The order states that the payroll tax break for every American who earns less than $100,000 per year will definitely take effect from September 1, but Donald Trump added verbally it would "most likely" be retroactive for August translating into "a big paycheck for working families." According to various estimates, about 98% of U.S. citizens have their income less than this ceiling limit for the tax cut sum. The federal payroll tax rate in the U.S. is over seven %. Mr. Trump promised to both prolong this decree beyond 2020 and, more importantly , that the tax payment reduction would be completely forgiven later, so that the people would not  have to pay this money back at a later stage, if he is only re-elected as a President of the United States in November. 

This could be regarded as a smart election move too, in the legal framework of the law, but giving the American voters an extra reason to vote for Trump and for them to receive free pocket money at the same time. Trump's decisions may be to get at least part of the protesting student electorate on his side as the interest on student loans, which were frozen from March until July, will be suspended now until the end of the year. Meanwhile, another of Trump's orders directs states’ authorities to provide temporary financial assistance to tenants and homeowners struggling to meet their monthly rental or mortgage obligations in order to protect both sides from evictions. Justifying the need for this measure, Mr Trump said: "We don't want people to be evicted, and the act I'm signing will solve that problem - pretty much, hopefully, completely." 

By the way, this part of the orders is unlikely to face a severe resistance from Democrats as Nancy Pelosi, the House of Representatives speaker, has already asked the President to take such a move. As for a possibility regarding any broader bailout package to companies or citizens, which would include Obamacare health insurance, various incentives for the green economy, and other forms of wishful thinking of the Democratic wing at the cost of up to $3 trillion, it is now seen as an extra option as  the core principles of the package are already active, so such possibilities are probably off the table. 

What part of the market could be happy with the interim decision of the U.S. President, which, however, may be the final decision? Additional "pocket money" for working citizens and the unemployed will definitely raise consumption. Consumption is a critical aspect of the U.S. gross domestic product, so it signifies the mild but slightly faster transition to a more natural business environment for retailers and landlords that is just starting to look normal now. For example, an increased $600 unemployment pandemic benefits expired last week, and now the amount for August has been decreased to $400 – which is  much better than nothing. The continuation of the package at least in this way is not only good news for those who lost their jobs since the start of the quarantine and are considered to be entitled to the funds but it is also good news for all the shops and delivery services as the money may fund continued spending. 

Green Street Advisors estimate that more than 30% of shopping centres and office tenants are expected to withhold at least a portion of their rental payments this year. Socorro Asset Management has increased its exposure to the real estate and retail sector, expecting consumers to return to physical stores and then more workers to return to offices once the pandemic is over. They said they are also planning to increase the fund's share in apartments and shopping centres, because of "more attractive yields than those on government or corporate bonds". 

So, the main beneficiaries may not only be corporate bonds, but also the shares of famous and small retail chains of fast food, such as Walmart or McDonalds. Therefore, since Friday evening, and then in the Asian early hours of Monday, fresh annual highs were reached again by the U.S. S&P500 broad market index, which skipped the next "brook" at 3360 points and is a step away from historical February peaks located in the area around 3400 points. Since high-tech companies have not received such a powerful boost from Trump's executive orders, the broad market represented by S&P500 index may begin to catch up with high-tech growth rates, slowly but steadily if no signs of lockouts appear on the horizon.

 

Disclaimer:

Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.

Lysakov Sergey
Market Focus

Material posted here is solely for information purposes and reliance on this may lead to losses. Past performances are not a reliable indicator of future results. Please read our full disclaimer.

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