It Passes: The Coronavirus, Economic Stimulus, and the Market
Congress passed and President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, which at $2.2 trillion (9.2% of GDP) is the largest fiscal stimulus package in U.S. history. By comparison, the Recovery Act of 2009 was $831 billion (5.7% of GDP at the time).
In addition to fiscal stimulus, the Federal Reserve has pledged to do whatever it takes to support financial markets in the coming weeks and months, including the buying of Treasury bonds, corporate debt, and even bond exchange-traded funds (ETFs). This is even more expansive than the quantitative easing done by the Fed following the financial crisis.
Meanwhile, the number of Coronavirus cases nationwide continues to increase, and health experts warn the worst is yet to come. And on the economic front, new unemployment claims soared to 3.3 million – the largest jump ever. However, despite the gloomy developments in the public health and economic spheres, in the past few days at least, the stock market has rebounded. Why is this and what does it mean for investors?
A helpful way to look at this is to separate the public health situation, the economic situation, and the market. As much as we think the three move in sync, they don’t. In the coming weeks, we’re likely to see an increase in new cases of Coronavirus before things flatten out. And, we know that upcoming economic data on unemployment, corporate earnings, and GDP will be ugly as the U.S. economy falls into recession. However, the market is always forward-looking and up to this point, has priced in a lot of pretty bad news. Can the market go lower? Sure. But it can also continue to rebound even in the face of ugliness regarding the virus and the economy. That is why we discourage market timing and choose to focus on more productive activities like tax-loss harvesting and rebalancing.
Fiscal Stimulus Package – it includes many different components, here are some of the highlights:
- Direct cash payments of $1,200 to each individual plus $500 per each dependent child, subject to a certain income level ($75,000 Single / $150,000 Joint to receive the full amount).
- $250 billion towards expansion of unemployment benefits adding an extra 13 weeks of benefits (on top of the 26 weeks allowed by most states) and $600/week of additional benefits until the end of July.
- Postponement of tax payments for businesses into 2021/2022 to help with cash flow.
- $350 billion of assistance for small businesses in the forms of loans that will be forgiven if assistance is used to cover payroll, rent, and utilities.
- $475 billion of loans to distressed companies including $50 billion for airlines, $8 billion for air cargo, and $17 billion for businesses critical to national security such as Boeing.
- $140 billion in appropriations for the healthcare system along with $11 million to support research and development for vaccines and treatment.
- $150 billion of aid to state and local governments.
- No Required Minimum Distributions (RMDs) for 2020. Regardless of age, individuals will not have to take required distributions from 401ks and IRAs in 2020. Inherited IRA RMDs are also waived.
As painful as this market decline has been and as challenging as it is to see individuals, businesses, and the overall economy struggle and to have our daily lives disrupted, there’s always light at the end of the tunnel and we will get through this together. Please do not hesitate to reach out at any time. We are here for you.
As a member of the Investment Committee, Matt is instrumental in developing BDF’s overall investment strategy. Matt received his Bachelor of Science in Economics with concentrations in accounting and finance from the Wharton School of the University of Pennsylvania and his MBA in finance and strategic management from the University of Chicago Booth School of Business.