Alex B. from Lexington, KY asks: Hello Mitch, my question for you is about another economic stimulus plan. On the one hand, I worry that the economy will take a long time to recovery without more stimulus, but on the other we obviously have a debt problem. What is your take?
Mitch’s Response:
Thanks for emailing, Alex. You ask a “trillion-dollar” question – and one that does not appear to have a resolution in sight (at least over the very near term).
Democrats and Republicans are very far apart on spending proposals to date. Republicans prefer a smaller bill with less funding for states and local governments and no expansion to funding for the Affordable Care Act. Democrats have resisted Republicans’ more piecemeal spending plans that are focused on small businesses with some relief for American households – though smaller than what Democrats are pushing for. Democrats are also pushing for a national plan for testing, tracing, and treatment of the virus, which Republicans do not include in their plan.1
In all, we have two sides that are very far apart in terms of arriving at some form of stimulus, and I do not think it is likely we see a breakthrough before the election.
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As it relates to markets, we have seen increasing short-term volatility any time stimulus talks have broken down. When President Trump instructed his chief of staff and Treasury Secretary to call off talks, the market sold off sharply. Stocks recovered when talks were resumed. I expect this back-and-forth – and volatility – to continue until a deal is done.
With regards to the economy and your question, I think more stimulus is needed now to help bridge millions of American workers into the next six months. Many of the jobs that were considered temporary layoffs are now becoming permanent job losses, and I think it could take a year or two to see the economy return to full employment. The Federal Reserve Chairman, Jerome Powell, said as much when he urged Congress and the White House to provide more fiscal stimulus to the economy. The economy is at increasing risk of evolving from an event-driven recession to a cyclical one, where recovery is generally longer and more drawn out.
As for debt, there is no doubt that rising deficits and debt pose a risk to future economic growth. But the United States is currently in a unique position where the net interest cost of borrowing is close to zero, meaning the country can access capital at a low cost. Adding to the national debt may not feel like the most desirable outcome in a crisis, but if the U.S. can borrow at 1% and earn 2-3% long-term (GDP growth), then in my view it is a worthy trade-off. The alternative may be that the economy follows the path of a cyclical recession, which could take years to recover from. Better to spend more now, as we get closer to a vaccine and return to normal life, than to wait.
In addition to stimulus concerns, many investors are concerned about the potential impacts of the upcoming presidential election. As the election draws near, we know that it is essential to study historical patterns and trends to help understand our current situation. And while every election is unique, we can look at the historical effects of presidential elections on the market to get an idea of what we can potentially expect from the markets in 2020.
To give you insight into these historical patterns, we have created a new guide – How Will Election Uncertainty Affect the Stock Market?
If you have $500,000 or more to invest, get our free guide today. This guide will provide you with key facts and our insights into how the upcoming election may impact the market and your investments.
Disclosure