Stalled Build Back Better Act Is A Major Headwind For Stocks
0The stock market is coming to terms with the fallout from the December Fed Meeting which saw a decisively hawkish pivot in monetary policy amid persistently high inflation. The Fed is now signaling up to 3 rate hikes in 2022, which has implications for the broader economy. That said, there was another development this week that is likely also generating volatility. Indeed, reports suggest the Build Back Better Act (BBB) representing over $2 Trillion in spending over the next decade has stalled in the Senate , adding to macro uncertainties. The package touted as a sweeping update to the nation's social safety net and an effort at addressing climate change also includes an extension of the current enhanced Child Tax Credit (CTC) that is set to expire this month. In contrast to much of BBB which is based on investments over the next decade, the CTC extension was a one-time shot for the next year seen as a quasi-stimulus. The potential that the program is not renewed represents a major risk to the near-term economic outlook and headwind for stocks. Our data shows that CTC has propped up consumer spending in recent months which would face a growth cliff entering Q1. We highlight the importance of the CTC which may abruptly end resulting in downside risks to the economy and corporate earnings. (source: CBO) CTC as a $16 billion monthly Stimulus The advanced Child Tax Credit payments program was created through the American Rescue Plan Act of 2021 as one of the first pieces of legislation in the Biden administration. While a child tax credit has existed for several years within the tax code, this version expanded the amount per child from a previous $2,000 to $3,000 per child up to age 17, and $3,600 per child under age 6. The unique aspect of the program is that it included the option for families to receive half the payment of $1,500 or $1,800 as a direct cash payment between July and December of this year. The Build Back Better Act includes a provision for a one-year extension through 2022. The program has been hugely popular considering it effectively represents a tax cut for poor and middle-class families even as the income eligibility extends to households' earnings upwards of $150,000 per year. The numbers are impressive. Since July, data from the Treasury Department shows that over 36 million families, or nearly half of the 72 million households with children, have received a cumulative of $93 billion with an average monthly amount of $444. (source: U.S. Treasury ) For the poorest families, the payments have been described as "life-changing" with research showing it has helped to cut the poverty rate by 25% . Indications are that 91% of households receiving the payments are spending the money directly on necessities like food, utilities, rent, clothing, and education. Anecdotally, this type of accounting is difficult as families get the extra cash flow into their budgets and it provides flexibility for all types of spending. (source: CBPP.org ) The point we want to highlight is our sense that most investors may be missing the importance of this program as it relates to broader consumer spending. For context, looking at the official census bureau data, retail spending in the United States during November totaled $639.89 billion. (source: U.S. census bureau) Connecting the dots, the CTC distribution of $16 billion per month contributed upwards of 2.5% to retail spending. To be clear, it's not a direct relationship because some of the cash ends up being saved or spent on other categories like paying down debt. Nevertheless, even assuming only half goes towards retail goods and considering retail spending climbed 0.3% m/m in November, it's fair to assume that without the CTC, the retail sales figure may have contracted. One takeaway is that the underlying strength of the U.S. consumer ex- the Child Tax Credit "stimulus" is even weaker than it appears. Major Headwind for Consumer Discretionary For this article, we are not here to argue for or against the CTC. Clearly, most people support any effort that feeds hungry children. The challenge we see is that the market likely has been assuming the program would be extended for 2022 going back to the enthusiasm for the initial passage of BBB in the House of Representatives last month. The setup now with the potential that the program does not get renewed for January has major implications to the broader growth outlook. Specifically, consumer discretionary and staples sectors have been benefiting through a boost in sales due to the CTC. There is likely a material downside to revenue and earnings estimates for 2022 if this proverbial rug gets pulled. Again, the CTC has been specifically cited as contributing to the retail spending momentum in recent months. In August, Mastercard Inc. ( MA ), which tracks credit card spending, noted a substantial boost to retail spending in part ref