Stimulus Package Update
This week, I wanted to provide a quick update on the status of additional fiscal stimulus legislation being considered by Congress. This has been top of mind for me, not only for its impact to the individuals who have been struggling to make ends meet, but also the impact to the broader economy and what it could mean to investors when passed. Bottom line is everyone is interested in what will happen when a new bill is passed.
First, a quick reminder of some of the signature pieces of the CARES Act which included:
One-time $1,200 stimulus check for adults (and $500 for children)
Weekly $600 federal unemployment benefit until July 31st
Waived interest payments on most federal student loans until September 30th
“Paycheck Protection Program” (PPP) small business loans
No 10% early withdrawal penalty from retirement accounts for qualifying coronavirus-related expenses
Temporary waiver for required minimum distributions (RMDs)
The current additional Federal unemployment benefit of $600 / week will expire at the end of July. If not extended in some form at least until the end of 2020, the result could be catastrophic. While the unemployment rate has improved over the past several weeks, overall it continues to be very high by historical standards (see chart below) and the "real" unemployment rate may actually be much higher than what is officially reported, possibly 2x - 3x. As states roll-back reopening due to elevated COVID-19 cases as been happening recently, this could lead to even more layoffs and more unemployment. At best, the recovery is uneven. At worst, it stalls out completely. The unemployed, already struggling to pay for rent / mortgage, car loans, credit cards, groceries and other necessities will quickly find themselves in a dire situation.
Also, the continued weakness in the economy now clearly calls for another stimulus payment in addition to the $1,200 made part of the CARES Act. Fortunately, it appears that both an extension of unemployment benefits and a stimulus payment will likely be part of the next stimulus package, although the income level for people to receive a stimulus payment is likely to be lower than the CARES Act (possibly half as much or $100,000 for couples and $50,000 for singles).
There has also been talk of reducing the additional Federal unemployment benefit from $600 / week, possibly by adding a "return to work bonus" while reducing the weekly benefit or adjusting the maximum weekly benefit based on the state's unemployment rate. This is because of concerns that individuals receiving unemployment are actually making more than they were when they were employed. Indeed, a National Bureau of Economic Research study recently found that 2/3 of unemployment recipients were receiving more and 1/5 were receiving double their lost wages.
Other requirements of the package will be assistance to state and local governments (who will soon be facing layoffs of their own without more funding to replace lost tax revenue). The package will also have to provide some support for healthcare as well, including possibly some provisions to help older people who are laid off switch from COBRA to Medicare (if over 65) without penalty.
Also, there is talk of including a payroll tax "holiday," similar to what was done during the Great Recession (2% temporary reduction in payroll taxes), which will help those who are working but not the unemployed or retirees. The Senate is very interested in adding liability protection for companies who bring back their workers to work and who subsequently contract COVID-19 - this will surely be debated.
The Senate and White House alike want to keep the total cost of the package down to $1 Trillion or possibly up to $1.5 Trillion to minimize the impact to the Federal deficit, so there there will be some pressure to limit the benefits to the hardest-hit portion of the population to reduce the cost.
Given the state of the economy, the real question is how quickly can this get done? Below is a timeline for the Senate. I think it will be important for them to get it done by August 7, but that could be a challenge given the differences between the House and Senate objectives. This certainly won't go as smoothly as the prior stimulus bills. Delaying action to September or October would not be a good idea.
SENATE TIMELINE FOR MAKING A STIMULUS CHECK DECISION
Indeed, even Chairman Powell of the Federal Reserve has called on Congress to approve more stimulus and has said (with regards to concerns about increasing deficit spending):
"When the economy is strong and unemployment is low, that's the time to be addressing those concerns. I think now, when we are facing the biggest shock that the economy has had in modern times, is, to me, not the time to prioritize considerations like that."
I believe similar to last time, when a stimulus bill is passed it will be very bullish for the stock market and there will be a short-term rally in the wake of it. That will be good news for investors. As I have written previously, additional stimulus with Fed support of low interest rates and credit markets puts a very solid floor under the stock market. As the economy recovers in the coming months, this should be a good setup for the market to move higher, albeit with plenty of volatility day to day and week to week. Buy and hold quality stocks for your portfolio or if you seek diversification within your stock portfolio, index ETF's are a good choice for long term investors (SPY, QQQ, IWM). Patience will be a virtue.
Stay safe, healthy and positive. I hope you find this post useful as you chart your personal financial course and Build a Financial Fortress in 2020.
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