Is the Market’s Health Contingent on Additional Federal Aid?

Congress continues to debate what a next round of federal COVID-19 aid might look like, including whether or not to provide funding for state and local governments, who have not yet received any assistance. In the meantime, many investors may be wondering just how important a new round of federal spending is to the overall health of the US economy and its slow but steady recovery from the worst days of the pandemic.

Cash Is (Still) King
It’s important to note that American workers – and US consumers – have a ton of cash sitting under their mattresses. Recall that the March 2020 CARES Act delivered $1,200 to all adults making up to $75,000 annually, an additional $500 for children, and an extra $600 weekly in unemployment benefits. This spending has gone a long way to replace income lost by the shutdown, with 38 states providing more money on average to workers than they were earning as income when employed. As some of those checks were cut off at the end of July, market bears began warning of fiscal cliff.

What Cliffhanger?
As the chart below indicates, there has been a massive spike in personal savings in the US during the pandemic. Pre-virus, savings were running at an annual rate of $1.22 trillion. During April, that level skyrocketed to $6.35 trillion. As of June, personal savings measured $3.37 trillion – still an excess savings level of $2.15 trillion above trend. In aggregate, excess savings has increased to almost $12 trillion on an annualized basis during the pandemic. That equates to approximately $80 billion in monthly spending power over the next 12 months.

US Personal Savings (12/31/17–6/30/20)

Source: Bloomberg

Checking In, Paying Up
Where has all this saved money gone? The data suggests that much of it is being stored as “dry powder.” Checkable deposits have spiked by some $1.5 trillion during the COVID-19 period. US consumers have been deleveraging as well, with credit dropping by roughly $100 billion during the pandemic, which leaves credit cards to be dialed back up if needed or desired.

Save the Drama?
None of the above is meant to suggest that the US consumer is on its most solid footing historically speaking. Clearly, significant public health challenges and economic challenges remain – particularly for workers whose industries have been particularly hard hit by the events of this year. We remain of the belief that further federal aid dollars are needed, including at the state and local level. Nevertheless, talk of a “fiscal cliff” in the days or weeks following the crash of the first spending wave was likely overwrought. There is money out there that can act as a cushion – for now.