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Stimulus Alone Can’t Save Economy: J.P. Morgan’s Kelly

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Don’t expect the next congressional aid package to reverse the current economic downturn. 

“It is the pandemic, rather than any lack of stimulus, that is holding the economy back,” says David Kelly, chief global strategist at J.P. Morgan Asset Management, in his latest weekly note. “In a pandemic economy, stimulus alone cannot trigger a full recovery.”  

Kelly likens more federal stimulus to “pumping air into a leaky tire.” 

“Negotiators from the White House, Senate and House of Representatives will debate the next round of federal relief, commonly referred to as ‘stimulus,’ writes Kelly. “However, for investors, it will be important to keep an eye on the pandemic itself.”

In the U.S. the pandemic, unlike the economy, is gaining strength. The seven-day moving average of new confirmed cases in the U.S. has tripled in just six weeks, from a seven-day moving average of slightly more than 20,000 confirmed cases to just over 60,000, according to Kelly. The U.S., with just 4% of the world’s population, has about one-quarter of the world’s COVID-19 infections, at 3.8 million, and deaths, closing in on 141,000, according to Johns Hopkins University.

“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,” writes Kelly. “Moreover, the uncertainty about when the pandemic will finally subside will slow investment, hiring and lending decisions across the economy.”

In addition, he says investors realize that money being spent to stimulate the economy today will lead to higher taxes in the future.

These factors, however, are hardly reflected in the stock market, which suggests the “risk of a correction,” writes Kelly. The S&P 500 is trading within 5% of its February high, while the Dow Jones Industrial Average is 10% below its mid-February high. 

Kelly doesn’t discount the need for additional federal stimulus, which should help boost economic activity and corporate profits and usher in a recovery in 2021. He favors additional checks to individuals; continued enhanced unemployment benefits, though at a lower level than the current $600 a week; and more aid to state and local governments among other items in the next aid package.

Kelly expects U.S. GDP will finish the year 7.5% lower than the previous year despite a 20% annualized bounceback in the third quarter. 

In the meantime, he says the July jobs report, out on Aug. 7, will show “much slower job gains than in June” as workers temporarily retained by small businesses as a condition of Paycheck Protection Program funding, are laid off, offsetting job gains due to reopenings. The unemployment rate could “remain well above 10%.”

Kelly recommends that investors hedge against volatility in the stock market and those in search of income consider dividend-paying stocks in sectors that are less  exposed to negative impacts of the pandemic. For investors underweight international equities, he suggests  increasing their exposure to companies that could benefit from economic recovery in those countries. 

“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,” writes Kelly.

— Check out Trump’s Payroll Tax Cut to Be Included in Next Stimulus Bill on ThinkAdvisor.