Waiting on Stimulus News, Investors Tread Water

Wall Street sputtered once again Tuesday as worries among business groups about the government’s floundering stimulus efforts have compounded. 

One stop operator Vickie Gregorio with the Heartland Workforce Solutions talks to a jobseeker outside the workforce office in Omaha, Neb., on July 15. (AP Photo/Nati Harnik)

MANHATTAN (CN) — Despite the S&P 500 inching forward just enough to hit a new record closing, markets flatlined again Tuesday amid increasing worries within the business community about further stimulus.

The Dow Jones Industrial Average dropped 66 points by the closing bell, while the Nasdaq gained 81 points, a 0.73% increase for the latter. The S&P 500 made mild gains to stretch out over the finish line with a new record high point of 3,389 points.  

Many middle-market executives are losing confidence in the path of the economy, according to a survey the U.S. Chamber of Commerce.

The chamber’s Middle Market Business Index fell from 109.1 points in June to 100.7 last month. Though still above the index’s historic low of 87.7 for the second quarter of 2020, the drop shows many in the market expecting a prolonged pandemic. 

According to data compiled by Johns Hopkins University, nearly 22 million have contracted Covid-19 worldwide, while roughly 775,000 have died. In the United States alone, more than 5.4 million have been confirmed infected while nearly 171,000 have died. 

“When we began to see shutdowns in late Marcy/early April, business and policy leaders assumed it would be a short disruption, and policy expectations were formed around that,” said Joe Brusuelas, chief economist for RSM US, who conducted the survey last month. “We now know the pandemic will not be a 15-week affair, and firm leaders are hunkering down for what’s to be an extended adjustment.”

Speaking to reporters after the index was released, Brusuelas noted that particularly troubling is recent data showing that nearly all companies that received loans under the Paycheck Protection Program will seek loan forgiveness, but that only 68% expect forgiveness will be granted. “We’re in a real inflection point right now in the economy,” he said.

According to the index, only 27% of middle-market leaders see the economy currently improving, the survey found, while 42% expect some improvement in the next six months. In the previous index, 56% of executives expected improvement in the next six months. 

“While economic activity rebounded in May and June, that growth is now being suppressed by a surge of coronavirus cases that have undermined economic activity, consumer confidence, and business recovery,” the chamber’s chief policy officer Neil Bradley said.

During a call with reporters, Bradley said the drop in the index “should be a clarion wakeup call to Republicans and Democrats” about the immediate need for passage of a fourth stimulus bill to avoid further economic pain.  

Ideological logjams have hampered another stimulus, with Republicans trying to pare the bill down to no more than $1 billion while Democrats want at least $2 trillion in spending.

Both sides have dug in over key aspects of the stimulus, with Democrats focused on state and local funding and weekly unemployment benefits, and the White House calling for another round of PPP funding and touting its recent payroll tax holiday. 

President Trump has sworn to forgive the tax in full if he is reelected.  Business groups worry, however, that the president’s executive order is merely robbing Peter to pay Paul since many Americans would have to foot the bill in 2021 for taxes deferred in 2020.

A number of trade organizations, including the U.S. Chamber of Commerce, told the White House in a Tuesday letter that their members would not implement the payroll tax holiday.

“Under current law, the EO creates a substantial tax liability for employees at the end of the deferral period,” the groups wrote in their letter to lawmakers. “Many of our members consider it unfair to employees to make a decision that would force a big tax bill on them next year.”

The quagmire over the stimulus has some businesses worried that without the additional unemployment benefits and other stimulus programs, Americans will pare back their spending.

During an earnings call with investors on Tuesday, Walmart CEO Doug McMillon said that the most important factors that impacted the retailer were, in order: “one, stimulus; two, eating at home, three being at home and all the things that you wanted to do to have the indoors and outdoors be more pleasurable.”

In its earnings release, Walmart showed a lesser but still impressive increase in total revenue, from about $130 billion in Q2 2019 to $137.7 billion last quarter, a 5.6% increase. Most of the increase was due to a boost to the company’s general merchandise and food sales, the company said.

Overall, net sales among U.S. stores rose 9.5%, while net sales at Sam’s Club gained 8.8%. Internationally, Walmart did not do as well, with net sales falling 6.8% year over year and operating income dropping 9.1%. 

Second quarter results from a few other retailers also showed promise. Home Depot announced $38.1 billion in sales during Q2 2020, a 23% increase from the second quarter of 2019. The company’s net earnings also similarly increased year over year, from $3.5 billion last year to $4.3 billion last quarter.

Not all the earnings were positive, however. Kohl’s posted a 23% year-over-year decrease in its total revenue, from $4.4 billion last year to $3.4 billion in Q2 2020. The company, which has reopened all of its stores nationwide, reported a staggering 80% drop in net income over that period. 

“During the second quarter we made significant progress in rebuilding our business,” CEO Michelle Gass said in a statement, trying to put a positive spin on the release. “We are well-positioned to capitalize on evolving customer behaviors and the retail industry disruption, which we believe will drive long-term growth and increased market share.”

While the release was certainly not good news, it was certainly better than the company’s first-quarter performance, when its net sales nearly halved and it took on a $541 million loss.

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