by Jason Norris, CFA
Executive Vice President
This week, as we usher in a new administration, there has been an increased focused on another stimulus package to keep the economy on solid footing. While the lame-duck session of Congress recently passed a $900 billion stimulus and checks have started being issued, the current administration is looking for an additional $1.9 trillion in stimulus. While negotiations will most likely bring this number lower, clients are voicing concerns about the national debt.
Even though total debt will be increasing, the more important concern is how much does it cost to service? The chart below shows the interest cost as a percentage of federal revenues.
Source: Federal Reserve, CBO
While interest costs have increased somewhat over the last several years, 2020 forecasts anticipate lower costs due to low interest rates. Even if additional stimulus is passed by Congress, the interest costs will still be very low. The U.S. Treasury has been issuing debt between two and seven maturity periods. If this trend continues, the current cost of this debt should be between 0.15 percent and 0.75 percent. In other words, for every $1,000 of debt, the average service charge will be $4.50.
While there can be pain in increasing the national debt, the relatively low cost of financing additional stimulus will serve as a kind of pain-relieving balm. Eventually the U.S. will have to raise taxes and/or reduce spending to lower the debt, but at this time we do not consider this concern as an investable issue.
On the positive side, stimulus checks are starting to hit American’s bank accounts, in the amount of $500 billion. Even without any additional funds, this should be a boost to the economy and the key beneficiary could be the retailers.
Source: Federal Reserve
The chart above highlights how the initial stimulus from Washington helped retail sales “snapback” in the summer. As we moved into winter and parts of the economy began a new series of shutdowns and unemployment increased, we saw retail sales stagnate once again, as the most recent data from the Federal Reserve shows above.
With any additional stimulus and a continued increase in vaccine distribution, we expect consumer spending to increase, which will benefit retailers throughout the spring.
Our Takeaways from the Week
Stocks finished the week higher as corporate earnings kicked off and results were ahead of expectations
Additional vaccine approval and increased distribution will help us gauge the speed of economic recovery