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Latest on Economic Stimulus: What Investors Are Side-Eyeing

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Stocks have been boosted by strong fiscal and monetary stimulus efforts of late. While falling oil prices too center stage a few weeks ago, the latest on stimulus programs remains a key part of investor sentiment. 

The Small Business Administration is likely getting its second round of appropriated funds from congress to lend to small businesses. That’s a $484 billion fiscal spending plan that includes over $300 billion of funds for the SBA. This comes after a $2.2 trillion fiscal plan that Congress has already set in motion, a plan that includes household checks and small business relief. 

And since March 23, the bear market low, the S&P 500 has railed 25%, accompanied by support in credit markets and treasury yields remaining low, as the Federal Reserve supports all areas of the bond market. The 10 year treasury yield has slipped in a month from 0.85% to 0.61%. 

Regarding the $484 bill put to vote this week, the SBA has noted in a release out Thursday that it wants to ensure that large public companies that are mostly classified as small caps do not take money that is largely intended for small businesses. Small businesses are essential, as they account for roughly 45% of U.S. GDP and about 60% of U.S. employment and they’re told that if they retain employees, their loans are forgiven. This could support employment meaningfully. 

The SBA clarified in its release that borrowers in the paycheck protection program must show their liquidity position is poor enough to qualify for loans. The agency said it is “unlikely” that many pubic companies will qualify. 

What’s worse, data out from LendingTree shows that only 5% of small businesses were approved i the first round, even though the total amount appropriate to the SBA of more than $350 billion was burned through quickly. For small businesses, every day that goes by without cash flowing in is another day closer to closing doors. 

While market sentiment remains strong as Congress seems to act quickly, some are very concerned about the program. 

"Policy support for businesses and households through the crisis has been sizable and swift, but we see strong indication that demand destruction is larger,” wrote Lauren Goodwin in emailed remarks to reporters. "The backlog of PPP loan applications shows that the program could run out of money again in a matter of days. The process is likely to be slow and non-linear, creating risks for investors.” 

"Small businesses continue to struggle as they wait for additional funding of the SBA's Paycheck Protection Program," said Hunter Stunzi, senior vice president of Business Loans at LendingTree. "Many small business owners without existing banking relationships haven't been able to access the much-needed funds through the PPP.”

As for small public companies, they’ll have to rely on properly functioning capital markets, which they can access far more easily than mom-and-pop shops can. Credit spreads have compressed, a huge positive for corporates. The Federal Reserve has bought all types of corporate bonds, supporting price and pressuring interest rates. The spread on high yield bonds over the 10 year treasury yield remains at above 7%, higher than the long-term historical average of roughly 4%, but under 2020’s peak of 11%. 

Small cap companies have been notorious for taking on too much debt in recent years and recent stimulus have benefited them, as the Russell 3000 is up 25% since March 23, in line with the S&P 500. But many small caps remain highly levered, making it more difficult to access debt capital from lenders, compared to healthier companies that may have some liquidity risk. 

Here’s a list of small cap stocks Morgan Stanley Chief Equity Strategist Mike Wilson wrote in a note are in relatively healthy financial positions: 

  • PVH  (PVH)
  • Evercore  (EVR)
  • Citizens Financial  (CFG)
  • Cushman & Wakefield  (CWK)
  • Vista Energy VST
  • NRG Energy  (NRG)

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