The Washington Stimulus Game
Clearly, the next round of coronavirus aid should have an impact on both economic activity and corporate profits, and negotiations should begin in earnest this week as the Senate returns from its July 4th recess. Even in a highly polarized environment, it is likely that a bill will be passed as neither political party will want to be blamed for sinking a bill containing much-needed relief. That being said, negotiations are likely to stretch into early August rather than be wrapped up in July.

Considering what appear to be the true priorities of the Administration, Senate Republicans and House Democrats, the final legislation could include:

• Further one-time checks to individuals, although likely phased out at a lower income threshold than in the first go-round. 

• An extension of enhanced unemployment benefits into early 2021, but at a significantly lower level than the extra $600 per week in the CARES Act.

• Some redirection of unused PPP money to a revised program generally targeting companies that have seen a substantial revenue decline.

• Some additional aid to state and local governments, although far less than the $1 trillion+ included in the House’s version of the next stimulus package, passed in May.

• Some additional aid for school reopening.

• Some liability protection for businesses making good faith efforts to follow public health protocols to avoid the spread of the virus.

The price tag for the overall bill would could come in between $1 and $1.5 trillion, added to a national debt that has already grown by over $3.3 trillion this year. Moreover, realistically a further bill will likely be needed after the November election.

The Leak In The Tire
Of course, both the potential fading of the economic recovery and the need for further massive stimulus springs from the growing spread of Covid-19. In just the six weeks, as we show on page 20 of the Guide to the Markets, the seven-day moving average of new confirmed cases has jumped from just over 20,000 to just over 60,000. Mortality rates have fallen, largely due to the changing demographics among those getting infected. However, sadly given the surge in cases, the daily death rate now looks likely to return to 1,000 or more within the next few weeks.

This resurgence of the disease is slowing, stalling and, in some cases, reversing, the staged reopening of the economy and will likely continue to hobble the restaurant, hotel, travel, entertainment and retail industries. Moreover, the uncertainty about when the pandemic will finally subside will slow investment, hiring and lending decisions across the economy. In addition, investors are aware that the money being spent to pump stimulus into the economy today must inevitably lead to higher taxes in the future.

This outlook contrasts with the still buoyant U.S. stock market, with the S&P 500 nearly unchanged for the year and it does suggest a risk of a correction. However, there clearly are still opportunities for long-term investors.

• First, as has been the case since the start of the pandemic, it still looks like 2021 will be a year of recovery for the economy and corporate earnings. This suggests the need to hedge against equity volatility in the short run while maintaining equity exposure to take advantage of an economic surge once Covid-19 has been tamed.

• Second, there are growing divergences within equity valuations and dividend-paying stocks in sectors that are less exposed to the pandemic look attractive for income-focused investors, particularly in an environment of still very-easy monetary policy.

• Finally, there are many countries around the world, particularly in East Asia, and more recently in Europe, that have done a better job in corralling the virus. This should allow their economies to continue with a phased reopening, with less damage done to their economies and public finances. For those who are underweight international equities, this may be a good time to consider increasing exposure to companies than can benefit from economic revival in these countries. 

David Kelly is chief global strategist at JPMorgan Funds.

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