Stimulus checks are widely discussed in social media, political commentary, and the news, and the long-awaited economic assistance could represent a meaningful event for the stock market. The government made direct payments of nearly $270 billion to individuals and families between April and September, which was enough to catalyze stock market participation and improve second-quarter financial results in a handful of specific industries. Having some extra exposure to these industries during a stimulus quarter earnings season is an avenue to consider for outperformance.
Political log jams ahead of the November elections have thus far prevented any agreement on the next round of stimulus checks, but leaders of both parties continue to voice commitment to supporting the American consumer. Moreover, the Federal Reserve has made public comments indicating that economic consequences could be dire without targeted assistance. There are definitely hurdles to overcome, but it would seem that stimulus is in everyone's best interest, so an eventual deal seems likely.
We have data on the use of previous stimulus funds, so reliable projections can be made about future rounds. Direct payments were provided to households at every income level, so the range of uses was correspondingly large. However, previous fiscal stimulus was deployed by Americans to increased savings and investment, debt repayment, and consumption. Key areas of consumption were housing, basic needs, utilities, medical care, and basic goods.
A small spike in consumption for certain categories could drive better-than-expected results for stocks in those spaces, and provide a one-off upside opportunity for shareholders.
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Look for a resumption in elective medical procedures
There will be a fairly drastic reduction in the number of elective medical procedures in 2020 for the U.S. Government decrees, hospital policy, and consumer preference have led to the delay of many non-emergency treatments, while the healthcare sector turned its focus to keeping its staff safe and capacity utilization low. Many elective medical and dental procedures become necessary over time, and providers have a financial need to satisfy with higher patient volumes. Elective procedures are resuming in various parts of the country, and investors should expect improving results from healthcare providers and suppliers.
Pent-up demand for services is likely to make the fourth quarter relatively strong, with a big year forecast in 2021. Surgical device companies are especially prone to the fluctuations in elective procedures, and the iShares Dow Jones US Medical Device ETF (IHI 2.04%) is a great vehicle for diversified exposure to that group.
Consumer staples are boring and reliable
Consumer staples might not be exciting, but they are a reliable category. Survey respondents and spending data showed that households used stimulus checks to purchase food, clothing, and basic items. Some portions of this sector are recession-proof, as they experience sustained demand even in the worst economic conditions. However, certain apparel, cosmetic, nutritional, and hygiene purchases are sacrificed during lean times, and it appears that stimulus checks have supported those categories earlier this year, as well as in previous recessions.
There are a ton of different ways investors can gain exposure to these stocks, but a great place to start is the Vanguard Consumer Staples ETF (VDC +0.67%). This is a very reputable fund with plenty of AUM and trading volume to provide great liquidity and narrow bid-ask spreads. A low expense ratio and adequate 2.27% distribution ratio are also attractive. This ETF is never going to provide outrageous growth opportunity, but it does offer the rare combination of potential upside with downside protection. The stimulus bump could give a nice little bit of assistance to holders, while the non-cyclical characteristic along with quarterly distributions should reduce drawdowns while providing returns through bad market spells.
Opportunities with cyclical exposure
Stimulus checks were also spent on housing and durable goods, the consumption of which is usually dictated by economic cycles. Many of the housing payments were directed to rent and mortgage obligations, so consumer banks and residential REITs are among the beneficiaries. However, these represent limits to downside risk rather than opportunities for short-term growth.
Better-than-expected results are possible in consumer discretionary categories such as home improvement, electronics, appliances, and automobile sales. Homebuilding and new automobile sales are more likely catalyzed by employment and low interest rates than stimulus of the magnitude provided earlier this year, but promising trends in both housing starts and total auto sales show a willingness to purchase big-ticket items. Moreover, purchases of houses and cars could divert stimulus funds toward furnishings, decor, fixtures, and auto parts.
The Consumer Discretionary SPDR ETF (XLY 2.89%) has exposure to popular electronics retailers, home improvements and furnishing stores, and auto parts leaders, making it a great way to capitalize on rising durables sales. Investors should be aware in this case, though, that bad economic news and high unemployment could be more than enough to wipe out any gains from stimulus spending. This sector tends to perform poorly following the crest of an economic cycle.
Investors who are looking for a stimulus play should follow the dollars from previous rounds, and identify some targeted but diversified portfolios to gain the appropriate exposure. The above ETFs are great places to start.
