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When the Stimulus Tailwinds Fade


Big numbers are showing up in U.S. economic data, partly due to the low levels of economic activity a year ago, partly caused by the reopening, and partly caused by the generosity of Uncle Sam.  We’ve had three helicopter money drops, two of them in 2021.  The economy is rapidly reopening as seen from the latest OpenTable data which shows U.S. restaurants in late April down -20% to -30% vs. 2019 comps.  This past February, these numbers were still in the -40% to -50% range. 

Labor Markets

The labor markets continued to show signs of life, as we expected, as the reopenings continue.  State Initial Unemployment Claims (ICs) finally turned down after several weeks of lower ICs in the special Pandemic Unemployment Assistance (PUA) programs.  Those PUA program ICs for the last two reporting weeks (April 10 and 17) showed up at just over +130K, the lowest level, by far, since the PUA programs were initiated in May of 2020 (see the right-hand side of the chart). 

State programs, too, continue to show progress with the data from the April 17 week showing ICs just over +566K, the lowest count there in more than a year (since the week of March 14, 2020).  Total state and PUA ICs are now under +700K vs. +1.2 million in early March and +1.3 million in February.

Continuing Claims (CCs) (people receiving benefits for two or more weeks), continue to be the big worry, and are not falling as rapidly as are ICs.  There are 17.4 million such individuals.  Of these, 3.9 million are from state programs, 12.9 million are in the PUA programs, and 0.5 million are on an extended benefit plan (both state and PUA).  If you add in the 6.9 million labor force drop outs who would take a job if offered, that puts the total over 24 million.  In addition, there are those 5.8 million who are working part-time but would prefer full-time work (known as “part-time for economic reasons”). 

As we have previously written, the biggest complaint in business surveys today is finding employees (the ubiquitous “Help Wanted” signs).  Overgenerous unemployment benefits are playing a big role here.  Come early September, those benefits for the 12.9 million people on PUA CC roles are due to end.  If they actually do end, maybe some of those “Help Wanted” signs will begin to disappear (perhaps a good thing!).  But, as we mentioned last week, many jobs have disappeared as companies figured out how to manage with fewer employees, either through more efficient processes, through automation, and, of course, via overtime.  As a result, we think unemployment will be the major economic issue for the foreseeable future.

Market Valuation

Bob Farrell was the chief stock market analyst at Merrill Lynch where he worked from the late 1940s to the early 1990s.  He is famous for his 10 Rules for Investors which are still revered today and often quoted, as they appear to still be relevant.  Here are some we think should be heeded today:

  • #2: Excesses in one direction will lead to an opposite excess in the other direction.
  • #3: There are no new eras – excesses are never permanent.
  • #5: The public buys the most at the top and the least at the bottom.
  • #9: When all the experts and forecasts agree – something else is going to happen.

There are two charts shown here.  The first is the value of equities as a percentage of household assets.  The historical high was Q1/2000 (dot.com era) at 38.3%.  The latest data (Q4/2020) shows 38.0%, and we know that it will be much higher in Q1/2021.  Rules #2, #3, and #5 certainly apply. 

The second chart shows margin debt which reached $482 billion in Q4/2020 and is certainly a lot higher today.  That $482 billion was $97 billion higher than in Q3.  The prior peak in margin debt was $402 billion in Q3/2008, and that showed a similar spike of $111 billion from the prior quarter.  The dramatic happened next (housing bubble burst) and you can see from the chart what happened to margin debt as massive liquidation occurred to meet margin calls.  While we don’t see such drama on the near-term horizon, we continue to be concerned by the extremely high readings on all market valuation metrics.

Finally, we think Farrell’s Rule #9 is relevant too, as we continue to see pervasive bullish market sentiment along the lines issued by First Trust’s Economist Brian Wesbury in his Monday Morning Outlook of April 21 entitled, “Yes, Stocks Are Still Cheap.” 

The Coming Moderation

In prior blogs, we have discussed our view that reopening would clearly benefit the services and travel industries (restaurants, bars, theaters, airlines, hotels…), but that we also saw pent-down demand for industries that benefitted from the “stay-at-home” economy.  We are now seeing the beginnings of this pent-down demand paly out in some Q1 earnings releases.

Netflix had long predicted that its subscriber growth would cool, as, with nothing to do but stay home, the pandemic pulled Netflix’s growth into 2020.  As soon as the Q1 results were released, the company’s stock took a digger.  It is likely that we will see this scenario replay for other companies (e.g., Zoom, Peloton…) as America and the world moves forward with reopening of the services sectors.  As we have previously indicated, the manufacturers (or importers) of many goods benefitted from the shutdown of the services sectors.  So, when the public begins to re-spend on services, it may be at the expense of those companies that benefitted in the stay-at-home months. 

We also know from detailed studies done at the NY Fed that much of the latest helicopter money is either being saved (25%) or used to pay down debt (34%), leaving about 42% for consumption.  The savings rate has clearly risen.  Many economists and Wall Street pundits believe that these savings will become the fuel that will continue to propel the economy after the “stimulus” wears off.  The NY Fed, however, thinks differently.  “These savings,” they said, “are not that excessive… and they are unlikely to generate a surge in demand post-pandemic.”  This conclusion “does not rule out a strong economic recovery…it only implies that spending out of excess savings won’t be one of its major drivers.” 

So, we ask: if there is no new helicopter money, if the PUA program dries up, and if unemployment is a big problem, how do we get robust economic growth and inflation?  This view, which we have held for several months, is now being echoed by none other than the Goldman Sachs economists in a note to clients on April 21: “Although our economists expect US GDP growth will remain both above trend and above consensus forecasts through the next few quarters, they believe the pace of growth will peak within the next 1-2 months as the tailwinds from fiscal stimulus and economic reopening reach their maximum impact and then begin to fade.”


Throughout the pandemic, housing has buoyed the economy, as there has been a big push from city dwellers, now working from home, to move to the suburbs, as city services were either not available or vastly reduced.  We’ve seen new starts and permits on the rise.  But, the surge in demand has caused prices to skyrocket.  The median home price rose +5.9% M/M in March and is now up 17.2% Y/Y.  The peak growth rate of home prices in the housing bubble was in October 2005 at 16.6%!  Be that as it may, we have now seen two months in a row of falling sales in the existing home space.  March showed a -3.7% M/M fall on top of the -6.3% drubbing in February. Some of the weakness is likely due to low supply (2.1 months in March vs. 2.0 in February), some to higher prices, and still some more to rising interest rates.  But we believe, that, like the demand that was pulled forward in the case of Netflix, we are likely seeing some exhaustion in the city to suburbs flight.  If this is the beginning of a slower housing market, then our low/slow future economic growth vision takes on more credibility.


  • We have continuing concerns about how the economy will fare once the “stimulus” impacts pass. 
  • Regarding the financial markets, we believe that all of the good news is already “priced in;” why else would markets react so violently on Thursday (4/22) to the announcement of the President’s proposed tax hike on the capital gains rate, only to snap back on Friday when the realization set in that this was only for those with annual incomes greater than $1 million, and the rate would likely be pared down in Congressional negotiations.
  • We see at least four of Bob Farrell’s Rues for Investors at play in today’s financial markets.
  • Most of the latest helicopter drop of stimulus money is either being saved or used to pay down debt.  The NY Fed doesn’t think the rise in savings is excessive and doesn’t believe that the money added to consumer savings over the past year will be used for consumption any time soon.
  • As the tailwinds from the January and March stimulus payments fade, our view is that stubborn high levels of unemployment will substantially reduce future expected levels of economic growth, will keep “systemic” inflation low, and will keep the Fed on the sidelines for a much longer period of time than the financial markets have currently priced in.

Robert Barone, Ph.D.

Joshua Barone

April 26, 2021

Robert Barone, Ph.D. is a Georgetown educated economist. He is a financial advisor at Four Star Wealth Advisors. www.fourstarwealth.com. He is nationally known for his writings and Robert’s storied career includes his having served as a Professor of Finance, a community bank CEO, and a Director and Chairman of the Federal Home Loan Bank of San Francisco. Robert is currently a Director of CSAA Insurance Company (the AAA brand) where he chairs the Finance and Investment Committee. Robert is the co-portfolio manager of the UVA Unconstrained Medium-Term Fixed Income ETF (FFIU)


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