about 3 years ago • 3 mins
The US government finally put together a $900 billion coronavirus economic aid package over the weekend.
What does this mean?
It’s taken more than half a year and the deterioration of a bunch of economic indicators, but the US government has finally settled on a new support package to help pandemic-bruised Americans and their businesses. If the deal gets signed into law, it’ll become the second-biggest economic rescue measure in the country’s history – second only to the $2 trillion aid package passed in March. But for all the much-needed support it’ll offer, the package might be too little too late for the almost eight million Americans who have fallen into poverty since the last round of benefits expired.
Why should I care?
For markets: Economic water wings.
Governments and central banks all over the world have spent this year promising to do whatever it takes to cushion the economic blow of the pandemic. That might’ve given notoriously forward-looking investors more confidence in future company profits and stock prices – hence why financial markets have been rallying. Now, though, those investors are essentially relying on all this extra support to keep the global economy afloat until enough vaccinations have been doled out – a potentially precarious position to be in.
Zooming out: Coronavirus 2: This Time, It’s Personal.
The UK, for its part, might be looking longingly at the extra money the US is now pouring into its economy: parts of Britain were plunged into an even stricter lockdown last week, after its government warned of a new coronavirus strain thought to be 70% more transmissible than the original. Thousands of businesses have been told to shut up shop, while countries across the world have stopped travel from the UK altogether. The UK’s central bank and government might want to be on standby: it could spell disaster for the country’s economy.
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What does this mean?
Earlier in the year, the Fed – along with other major central banks – capped how much banks could pay in dividends, while banning them from buying their own stock altogether. That way, they’d have enough money on hand if things got really bad.
Now, though, the Fed’s loosening up those rules. See, the central bank regularly tests how banks perform under doomsday scenarios to make sure they’d be able to keep lending to households and businesses, and in turn keep the economy ticking over. And after these latest so-called “stress tests”, the Fed decided that the country’s banks were robust enough to buy back their own shares again – within limits.
Why should I care?
Zooming in: Don’t mind if I do.
When a company buys back its own stock, it reduces the number of shares that are publicly available even as its earnings stay the same. That means its earnings per share will be higher, and its price per share should be too. So just like dividends, the overall aim is to pay shareholders back for their loyalty.
For markets: Play it cool, guys.
To say banks were eager to increase shareholder payouts is an understatement: JPMorgan Chase – the biggest US bank by assets – announced it’d buy back $30 billion of stock next year within minutes of the Fed’s announcement. And to say investors were eager to have them is another understatement: the biggest US banks saw their stocks jump on the Fed announcement. Share buybacks typically make up 70% of the money paid out to shareholders, so the prospect of better returns should lure investors back to a sector that’s underperformed the broader stock market this year.
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