When the COVID-19 pandemic forced businesses to close in 2020, the CARES Act provided much-needed economic stimulus in the form of low-interest loans for businesses and direct payments to eligible individuals. In late December 2020, Congress passed a second round of stimulus, providing more loan opportunities for businesses as well as another direct payment to individuals in the amount of $600. Congressional Democrats along with former President Trump had initially sought larger payments of $2,000 and during the lead up to his inauguration, Joe Biden promised to make up the difference with another stimulus of $1,400 for eligible Americans once he assumed office in January 2021. Of course, with Democrats failing to secure a simple majority in the Senate, this promise may be difficult to keep as legislation will require strong bipartisan support for it to reach President Biden’s desk. If another stimulus is passed in 2021, how could it affect your retirement plans?
The Economic Effects of the 2020 Stimulus Measures
When the CARES Act was passed in 2020, the U.S. economy was struggling. Business closures in March sent stock indices tumbling, causing the Dow Jones Industrial Average to lose 11,000 points from February to March. Luckily, the stimulus package provided a temporary fix and ended the so-called Coronavirus Crash by early April. Although the stock market reached new record highs following the crash, many Americans continued to struggle financially. To address these economic struggles, a second stimulus was passed just days before the close of 2020. This influx of cash provided a similar boost, and the Dow closed above the 31,000 mark on January 7th, 2021. These record high stock market numbers were a welcomed sight for cautious investors, but certain economic indicators question whether this economic path is sustainable and point to what could potentially be the formation of the largest economic bubble in history.
How Would Another Stimulus Affect Your Retirement?
Based on past performance, monetary stimulus is a sure-fire recipe for short-term economic success. If Congress manages to pass another stimulus that includes $1,400 direct payments along with other measures, it is likely that U.S. markets will continue to temporarily rise. Of course, stimulus measures do not solve the underlying problems that caused the Coronavirus Crash, nor will they be able to revive many of the businesses, especially small businesses (which employ nearly half of American workers), that were forced to close permanently because of government mandated shutdowns and restrictions. Investors, however, are trying to remain hopeful that early complications with vaccine distribution for the COVID-19 virus will dissipate and continued stimulus efforts will keep the economy afloat to help restore a sense of normalcy throughout the country. If the number of daily infections does not drop over the course of 2021, any economic boost provided by a stimulus could be short lived.
A New Administration
After Joe Biden was sworn in as President on January 20th, 2021, the Senate worked quickly to appoint members of his new cabinet. That included approving the nomination of Janet Yellen, who is the first female to serve as Treasury Secretary. You may remember Secretary Yellen from her time as Federal Reserve Chair (2014-2016) during the end of the Obama administration and beginning of the Trump administration before she was replaced by current Chairman Jerome Powell. Under her leadership, the Fed continued to keep interest rates low despite fears of inflation and she is credited with helping shape the economic boom that the country experienced prior to the pandemic. As Treasury Secretary, Yellen will likely support continuing Quantitative Easing (QE) measures that were restarted during the Trump administration as a way of propping up the economy during these difficult times, as well as crafting a new economic stimulus that will address many of the issues President Biden has been keen on passing.
Keeping Your Retirement Safe
Presently, our unexpectedly strong stock market performance seems to be heavily dependent on stimulus measures and QE, which could potentially create a much bigger economic issue down the road coming in the form of excessive debt. Senate Republicans have already signaled they will not support President Biden’s sweeping $1.9 trillion dollar stimulus package, meaning the deal will likely need to be altered if they have any hope of it being signed into law. For anyone in or near retirement, the reality is that although current stock market performance seems strong, it is more fragile than we think. Failure to pass a new stimulus deal, reductions in QE spending, looming debt complications, a brewing retirement crisis, and many other factors could all send the markets crashing at any moment. If you hope to keep your retirement nest egg secure, avoiding the risk of the stock market altogether may be the best option for you.
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