Unemployment Expiration Could Skewer Consumer, Market, and Economy

Treasury Secretary Steven Mnuchin

Stocks fell this morning in a surprise response to massive earnings “beats” from Big Tech last evening. Facebook (NASDAQ: FB), Amazon (NASDAQ: AMZN), and Apple (NASDAQ: AAPL) all reported huge numbers after the market closed Thursday. Moving forward, the companies expect things to only get better from here.

The record-breaking quarterly results – impressive as they may be – weren’t enough to offset a market slump today. With emergency unemployment benefits set to expire completely, and Congress unable to agree on a replacement plan, investors are concerned about the economic impact it could have.

“Blowout big tech earnings, a better than expected China PMI and strong German retail sales are doing little to offset the disappointment surrounding fiscal package 4 negotiations,” said Dennis DeBusschere, macro research analyst with Evercore ISI.

Explaining the muted response to the far-better-than expected tech earnings was Adam Crisafulli, founder of Vital Knowledge.

“Obviously, no one was doubting any of those companies so the fact they all exceeded expectations isn’t exactly shocking,” he said in a note.

“Investors are now trying to smooth out some of the numbers (i.e. how much of the monster upside was a function of extremely conservative guidance along w/an unsustainable spike in revenue and decline in expenses?)”

Arguably dragging these stocks down the most are their already sky-high valuations. Facebook, Amazon, Apple, and Google-parent Alphabet (NASDAQ: GOOG) control more than $5 trillion worth of market cap. Amazon alone is up 65% on the year.

Will these companies be able to continue their hot-streak when demand subsides? Big Tech leaders claim that it’s certainly possible. If anything, though, a prediction like that will only set shareholders up for disappointment down the road should FAANG fail to achieve Q2-like growth.

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And now that millions of jobless Americans will be forced to forgo their federal unemployment checks (possibly for several weeks), Q3’s already hitting a rough patch just one-month in.

But how much damage will a lack of additional unemployment benefits truly cause?

According to the latest Personal Income and Spending data, released this morning, the drain on the U.S. economy could be staggering. The report says that 25% of all household income in the U.S. now comes from the government, down from 31% in April when jobless claims were at their worst.

And though a decrease in that number would normally be a good thing, in this case, it hasn’t dropped nearly enough with benefits set to completely expire tomorrow. Some Americans already fell off the wagon on July 25th.

Now, everyone’s getting bumped. The U.S. economy will endure a 25% drop in household income as a result, starting tomorrow and lasting until who knows when.

The Census Bureau has never measured a drop of this size in personal income in its history. Nor has it seen one happen so suddenly.

It won’t be permanent, of course, but even one week of a hobbled consumer could wreak havoc on the economy and, by proxy, the market.

The last thing equities need right now is more chaos. A historic decrease in household income would certainly bring that in spades.

And if volatility spikes again, it just might kick the major indexes down for good.

Even after the market’s top performers just reported “blowout” earnings across the board.

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