What the American Rescue Plan Means for the Economy, Markets, Corporations & Investors

Fiscal Policy and Economic Forecasts (Alec Phillips)

• The American Rescue Plan was signed into law as a $1.84 trillion package, representing 8.5% of U.S. GDP, slightly below the President's initial $1.9 trillion request but exceeding Goldman Sachs' $1.5 trillion forecast.
  • Funding allocation prioritizes direct payments and the expanded child tax credit ($500+ billion), state and local aid ($350 billion), school funding ($170 billion), and unemployment benefits extension ($300/week through September).
• Timing of expenditure will vary by category, with state and local aid expected to be spent over 2022–2024, shifting significant fiscal impact into future years.
  • Goldman Sachs Research has revised long-term fiscal assumptions to include a permanent extension of the expanded child tax credit (now $3,600/child), projecting an additional $100+ billion in annual fiscal support through 2023 and beyond.
• Future legislative outlook anticipates a potential $2 trillion infrastructure package over a 10-year horizon, likely the last major fiscal stimulus before the midterm elections.
  • Funding for future packages is expected to come from tax increases, with a corporate tax rate hike to 24–25% and capital gains adjustments projected to raise approximately $1 trillion over a decade.
• Economic growth projections have been significantly upgraded following the package's passage.
  • 2021 U.S. GDP growth is forecast at 8% (Q4/Q4), significantly above the 6% consensus estimate; 2022 growth is projected at 2.9% versus a 2.6% consensus.
  • The unemployment rate is expected to decline to 4% by year-end 2021 and 3.5% by year-end 2022, approaching pre-pandemic levels.
• Concerns regarding deficit sustainability are currently mitigated by the Treasury's long average debt maturity, which delays the pass-through of rising interest rates to borrowing costs.
  • Fiscal restraint may become necessary in the medium term if interest expenses rise substantially relative to the enlarged debt stock.

Market Dynamics and Inflation (Amelia Garnett)

• Market performance has shifted from a growth-led rally to a value-led rotation, with the value basket outperforming the growth basket by 25% since November vaccine announcements.
  • This shift correlates with themes of reopening, inflation expectations, and a resurgence of retail investor participation, which now accounts for nearly as much trading volume as mutual funds and hedge funds combined.
• Approximately $400 billion in direct stimulus payments are expected to hit American households in the coming weeks, with surveys suggesting up to 50% of these funds from younger demographics could flow into equity markets.
  • Historical precedent indicates that stimulus check distributions often correlate with outperformance of popular retail stocks and spikes in call option volume.
• Inflation concerns are driving market caution, particularly in the commodity sector due to two decades of underinvestment in "old economy" capex (oil, gas, metals) relative to demand recovery.
  • Investors are pricing in potential tax offsets (corporate rate hikes, capital gains increases) for future infrastructure spending, which may truncate upside distributions for equities despite the stimulus boost.

Corporate Finance and Capital Markets (Susie Scherr)

• Nearly $9 trillion in total stimulus over the pandemic (40% of U.S. GDP) has restored corporate confidence, driving a recovery in M&A activity.
  • M&A volume rebounded to $30 billion in the first two months of 2021, moving away from the depressed 2020 levels of $93 billion toward a five-year average of $230 billion, with deals trending larger and across more sectors.
• Corporate debt issuance has accelerated as issuers seek to lock in low financing rates ahead of anticipated rate hikes.
  • U.S. debt supply reached $400 billion year-to-date, a 32% increase versus the same period last year, with the investment grade index nearing all-time tightest spreads at roughly 2.25%.
• Equity issuance has surged, driven largely by an active IPO market and record Special Purpose Acquisition Company (SPAC) activity.
  • Year-to-date equity issuance includes nearly 700 deals totaling $212 billion, compared to 200 deals and $54 billion in the prior year, with IPO volume already at 65% of 2020's full-year total.
• Potential headwinds to the bullish market outlook include high valuations, rising 10-year Treasury yields, and the risk of companies going public prematurely via SPACs or traditional IPOs.

Fixed Income and Asset Management (Ashish Shah)

• Fixed income strategies are adapting to a steeper yield curve, favoring growth-exposed assets like bank loans with floating rates while noting that longer-duration bonds without growth exposure have lagged.
  • High-yield bank loans and emerging market debt are identified as attractive opportunities for income generation and diversification away from equity volatility.
• The $350 billion state and local aid package is expected to significantly improve municipal balance sheets by offsetting revenue declines and pandemic-related costs.
  • Municipal credit quality is projected to improve, potentially leading to upgraded ratings and reduced issuance volume as governments replenish coffers without needing to tap the debt market aggressively.
• Consumer balance sheets are strengthening as stimulus funds are used to pay down debt and service student loans, positioning households for increased spending in face-to-face service sectors (travel, dining) and housing.
  • The Federal Reserve's commitment to keeping financial conditions accommodative until inclusive full employment and 2% average inflation are reached is viewed as supportive for investor portfolios.