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  1. Home
  2. / Investing
  3. / Stocks

Assessing the Impact of Economic Stimulus: Would It Stave Off a Recession?

I can appreciate something needs to be done, but I'm hesitant to call these potential proposals a boom for stocks.
By TIMOTHY COLLINS
Mar 10, 2020 | 10:30 AM EDT

The White House goosed the fallen market with the mention of possible stimulus packages in an attempt to offset potential negative impacts from Covid-19.

A possible payroll tax cut, even if only temporary, has been floated along with possible measures to help those forced to take time off from work. In Italy, we've already seen the idea of mortgage holidays for up to three months during the lockdown.

The question becomes will this prevent a potential recession seemingly signaled by the action in U.S. Treasuries? I think it is highly unlikely.

FICA currently hits above the 15% level, but unless you are self-employed, the employer picks up half that total. Sure, that will help businesses in general, but I doubt we see that number flow down to the employees. The potential benefit is keeping a business in business, thus keeping people employed, but for some industries, 7.6% wouldn't be enough.

For individuals, taking home a few extra percentages per pay period would be nice, but I doubt we see it go into discretionary spending. The greater likelihood is we see additional purchases in non-discretionary items, pay down of debt, or cash under the mattress.

This amounts to a conservative or even fearful reaction. No, it's not on the level of doomsday planning, but sounds more like a psychological play aimed at stabilizing the stock market rather than stimulating the economy.

And given the vast majority of FICA (81%) goes into social security, a fund that can hardly stand smaller contributions during its waning years in existence, how big can this cut be?

If the cut comes from the Medicare side, will the result be declining healthcare coverage? It's not as though insurance companies will be generous as a result of this, especially if they become saddled with eating the entire cost of Covid-19 tests.

Don't get me wrong, I'm not defending the insurance companies, but simply trying to think through the economic "stimulus" and what impact it may actually have on the economy. As a whole, FICA is a big number, but when it comes to the individual, I can't help but think the number would only equate to around an extra $50 per week per $100,000 in income for an employee.

This sounds more like a psychological play aimed at stabilizing the stock market rather than stimulating the economy.

The bigger potential help is to those forced to miss work. It takes a ton of extra $50 per week folks or $200 per week per employee to businesses to cover those forced to miss work entirely or businesses to close temporarily. Mortgage holidays may help some, but not those renting or business owners.

Are we looking at a cash for quarantine like the old cash for clunkers type of measure? Again, if we're just replacing lost income, there would be no net boost to an individual's bottom line.

On the plus side, it keeps the economic wheels from turning backward in the short-term, but on the negative side, we are doubling down on the whole "free money" issue that appears to be finally catching up to our economy.

I can appreciate something needs to be done, but I'm hesitant to call these potential proposals a boom for stocks. Rather, they are a humanitarian move. Something like it will be needed, but if you found yourself sick to your stomach on the drop Monday or managed to catch some trades, I would consider taking some overnight profits or hedging positions from potential volatility yet to come.

A collar might be a solid approach, so I'll take a look at that idea on Real Money Pro later today.

Tim Collins provides options trade ideas each day on Real Money Pro, our sister site for active traders. Click here to learn more and get great columns, commentary and trade ideas from Tim Collins, Mark Sebastian, Paul Price, Doug Kass, and others.

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At the time of publication, Collins had no positions in any securities mentioned.

TAGS: Economy | Investing | Jobs | Markets | Politics | Stocks | Trading | U.S. Equity | Coronavirus

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