Physical Address
304 North Cardinal St.
Dorchester Center, MA 02124
COVID-19 Relief Bill Is Good News for Investors
The Coronavirus Aid, Relief and Economic Security Act signed on March 27 provides about $2 trillion of emergency aid for the businesses and families hurt most by the economic disruption caused by quarantines, shelter-in-place orders and social distancing.
The magnitude and structure of the relief bill was positive news for investors.
The bill that passed the Senate is considerably better than the early ideas floated out of the White House and on Capitol Hill. Specifically, the bill does much to target the companies and individuals hurt in the initial stage of the pandemic.
No legislation is perfect, but this will certainly help.
The relief package is more than double the size of the $800 billion stimulus passed during the global financial crisis. The bill provides support to hospitals and researchers, funding to businesses and payments to families.
Small businesses, among the hardest hit by the crisis, get access to loans or grants. The bill provides incentives for small businesses to use the aid for payroll, rent and utilities.
Loans and other aid will also be provided to large companies, states and municipalities. Airlines will receive grants to help them pay worker salaries and benefits.
Restraints and oversight mechanisms are designed to prevent government aid from being used for stock buybacks, dividends or executive pay; the intent is for the aid to be a “bridge” that keeps workers employed.
Expansion of unemployment benefits are an important component within the bill, lengthening the duration of benefits, raising the amount of unemployment pay, and extending unemployment pay to include contract workers and nontraditional gig workers.
Direct payments of $1,200 to adults and $500 per child (subject to income phase-outs) are designed to supplement the income of middle- and low-income workers; the hope is that the direct payments will boost consumer spending, but the more likely outcome is that it will be saved until social distancing measures ease.
It will take time to digest the details within the bill, and certain aspects of it will undoubtedly be controversial. There is the risk that temporary support for the economy turns into more permanent policy that distorts worker and business incentives.
Uncertainty about how long the crisis will last creates the potential for the benefits of the relief package to fade if the economy remains shut down for an extended period. One crucial detail is yet to be determined: How quickly will the funds be distributed? The sooner the money is disbursed, the greater the effectiveness.
The fiscal support provided in the Senate bill accompanies extensive monetary measures initiated by the Federal Reserve in response to the pandemic.
The Fed realized early in the crisis that the availability of credit and smooth functioning of markets was more an issue than the price of credit. The Fed’s policies went beyond its normal playbook of lowering rates. The Fed is buying Treasury, mortgage-backed, investment-grade corporate and asset-backed securities to maintain market liquidity; the Fed is also helping money market funds, supporting small business lending and bolstering financial markets for state and local governments.
The actions taken by the Fed have parallels with European Central Bank president Mario Draghi’s response to the euro zone debt crisis in 2012. Draghi rescued a currency union verging on collapse by saying “within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”
Fed Chair Jerome Powell is having his own “whatever it takes” moment during this pandemic and is rising to the challenge.
Congressional and Fed actions may only provide temporary relief for a country forced to make uncomfortable choices between prioritizing physical or economic health. Without progress on containing the pandemic, another relief package may be needed in the not-too-distant future.
Lessons learned from Asia, particularly South Korea, may provide a map for the U.S. and other countries. Advances in testing, tracking and treating those infected with the coronavirus would help contain the pandemic and reduce the need for drastic social distancing measures. Life may not return completely to normal, but economic activity would gradually start to recover.
It may be necessary to adjust portfolios in response to a changing economic outlook.
Some companies with high leverage and weak balance sheets may be in jeopardy because of the slowdown in economic growth, lacking the staying power to “get to the other side” of the pandemic.
Highly cyclical companies may also struggle, with energy companies particularly vulnerable to the combination of slowing demand and the deluge of supply resulting from the oil price war between Russia and Saudi Arabia.
On a more positive note, market dislocations can provide opportunities to upgrade portfolios, as some high-quality companies experienced steep price declines in the wake of indiscriminate selling. Investors with a well-informed point of view can take advantage of panic-driven situations to buy stocks that are temporarily undervalued.
Tax-loss harvesting is another opportunity to consider – selling investments that are at a loss and replacing the sold position with a similar holding may be a good way to offset capital gains.
Until there is a slowdown in the number of new COVID-19 cases and progress in the ability to treat victims of the outbreak, it will be hard for people to resume normal living.
In these uncertain times, it may be appropriate to prioritize liquidity and capital preservation over investment options that offer the highest but most uncertain potential returns.
Disclosures: Registration with the SEC should not be construed as an endorsement or an indicator of investment skill, acumen or experience. Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal. Unless stated otherwise, any mention of specific securities or investments is for hypothetical and illustrative purposes only. Advisor’s clients may or may not hold the securities discussed in their portfolios. Advisor makes no representations that any of the securities discussed have been or will be profitable.
