In this article, we review:
- The key provisions within the recently passed COVID-19 economic stimulus package
- Important points for investors to recognize about this stimulus package and its role in helping the economy and the markets recover in the months ahead
As we stare into what will likely be the worst quarter of economic contraction since the 1930s, Congress has passed, and the President has signed into law, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the largest, fiscally based economic stimulus package ever. Totaling $2.2 trillion, or about 10% of aggregate U.S. gross domestic product, this legislation covers numerous areas of great urgency to everyday people, municipalities, small businesses, and major corporations, all of which are now fighting a common enemy in COVID-19.
Here is a look at the most important components of the stimulus package and what its implementation will mean for a potential economic and market recovery.
Perhaps most importantly, the CARES Act provides for $350 billion in direct loans and grants to small businesses of 500 employees or less. This is a vital provision as small businesses employ approximately half of the nation. A key attribute to this component of the package is the Paycheck Protection Program that allows for ultimate forgiveness of these federally guaranteed loans if companies do not lay off employees during the term of their indebtedness. Proceeds of these loans, which can tally as high as $10 million per company or proprietorship, may be used for worker salaries, benefits, rent, mortgages, utilities, and interest on previous debt. Treasury Secretary Steven Mnuchin has commented publicly that if this $350 billion portion of the legislation looks to become fully utilized, he will seek additional funding from Congress.
Another vital provision is $500 billion allocated for direct loans, guarantees, and other assistance to large- and mid-sized business. Recipients here will range from medium-size companies (500–10,000 employees) to major corporations that have incurred or are expected to incur financial losses due to COVID-19 impacts. Specific industries carved out for direct loans include airlines ($25 billion), cargo air carriers ($4 billion), and businesses critical to national security ($17 billion). The remaining $450 billion plus will be allocated by the U.S. Treasury to programs and credit facilities created by the Federal Reserve to support businesses, states, and municipalities. All businesses receiving financial assistance will be subject to tight constraints on future dividends, stock buybacks, and executive compensation. This provision is also of great importance as it allows government assistance for specific industries in dire need, and allows the Treasury Department to provide major funding into the Fed’s credit facilities.
Also of significance is $150 billion of direct assistance designated to states and local municipalities. The precise dollar amount will vary for each state, roughly according to population, with a $1.25 billion minimum. This is an important feature of the stimulus package because it will not only improve the financial conditions of state and local economies but also should enhance credit quality within the municipal bond market. This provision comes in addition to the announcement last week that the Fed will begin buying municipal bonds as part of its open-ended asset purchase program.
In addressing the front lines of the crisis, the legislation also provides $100 billion directly to hospitals and other healthcare providers. In the language of the Act, this funding has been designated to such providers and facilities to compensate “for healthcare-related expenses and lost revenues attributable to coronavirus.” This will also be extremely helpful in providing for COVID-19 testing, diagnosis, and treatment.
Individuals and families will receive direct cash payments from the government providing short-term financial relief on a national basis. Individuals with annual incomes of $75,000 or below will receive $1,200 ($2,400 for couples earning less than $150,000) with an additional payment of $500 per child. This will help those cash strapped by recent job losses or income reductions to better weather the downturn. These payments could also potentially generate incremental economic activity.
Additional unemployment benefits will also provide much needed relief for displaced workers. Those losing employment due to the COVID-19 crisis will receive Pandemic Unemployment Compensation of $600 per week in addition to any existing benefits. This will also prove crucial to individuals and families during the months ahead.
Taking these highlights of the CARES Act stimulus package into account, we believe the following points are also extremely important to recognize:
For the economy to successfully emerge from the depths it appears to be facing in 2Q, we will need to see a real turn in the medical data currently driving the COVID-19 spread. This would include declines from peak infection trends, lower fatality rates, and higher ratios of recovered cases to total reported cases. While the CARES Act and recently announced monetary stimulus in regard to interest rates and asset purchases by the Fed could prove critical in terms of magnitude and timing, a recovery is unlikely to occur without real victories against the virus itself.
That said, this stimulus package is likely to play a vital role on two fronts – as a bridge and a tailwind. All of the provisions and programs mentioned above should help individuals, families, small businesses, corporations, and municipalities to better sustain financial viability during the extreme but potentially short-term economic contraction that is now upon the U.S. and global economy. If that can be accomplished and an economic recovery appears evident in 2H20 or at some not too distant point thereafter, this fiscal stimulus as well as the Fed’s monetary stimulus will likely stay in place, providing a tailwind for such a recovery.
The CARES Act is likely not the last we will see in regard to COVID-19 fiscal stimulus. As the crux of this legislation becomes implemented and virus numbers continue to escalate, look for potential follow on economic stimulus to be crafted perhaps in the late summer or autumn months. Remember, we are dealing with an uncharted medical crisis that very well could require an uncharted stimulus response as well.
In assessing the virus trends, bear in mind there will be a lag between reducing the pace of infections, or “flattening the curve,” and improving fatality and recovery rates. Even after peak infection rates subside, fatalities will continue to rise and recovery ratios may continue to fall. It will be important for investors to realize that lag and understand the nuances of when the medical data might be inferring the worst is over.
As the medical data awaits evidence of a turn, it highlights just how crucial it is that this stimulus package has been passed and is now ready to be enacted. Combined with the Fed’s monetary stimulus, there is now a real economic firepower behind the plan to endure the upcoming downturn. Had Congress failed in its responsibilities to pass this legislation, we would be in a far more precarious spot. We may not know exactly how much of the tunnel remains ahead, but we now have a much brighter light.
Remember, the stock market is the great discounter of future events. At the point a recovery appears in place, be it in three months, six months, or further out, the market will probably react quickly, similar to March of 2009 while near the low point of the financial crisis and Great Recession.
The upcoming months will include economic difficulty and market volatility. Infection trends will look worse before looking better even as they improve. However, a meaningful stimulus package is now in place and looks ready to play an important role in serving as a bridge to, and tailwind for, a future economic and market recovery.
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