We want to start this update by saying we hope we do not provide you with “information overload” with our periodic updates. We want to keep you informed as much as possible and with the current situation so fluid and ever-changing, we will attempt to give you new or additional information as it becomes available.
Coronavirus Aid, Relief and Economic Security Act (CARES Act) Passes
CARES Act for Small Business Owners
Low-interest business loans and potential loan forgiveness now available to small business owners with less than 500 employees. The loans offered through the Small Business Administration and coordinated through various local banks. Demand will be high, so the sooner one applies, the better chance of receiving funds. The program is called the “Paycheck Protection Program” and will be funded with $349 Billion. Applications can be submitted starting April 3rd through June 30th. The possible loan amount is the lesser of 2.5X the average monthly payroll costs or $10 million and will cover the period to June 30, 2020. The loan can include payroll costs, group health benefits, paid sick or medical leave, salaries (up to $100,000 per employee), and other certain expenses. Check with a bank that is participating in this program for more details as soon as possible. We believe this program will be oversubscribed and may see further aid. If you have further questions, feel free to call us as well.
CARES ACT Provisions for Individuals
Required Minimum Distributions from IRA accounts are waived for 2020. Those of you that are subject to this requirement now have a choice in 2020 whether or not you wish to receive the distribution or skip it for 2020 and save paying taxes on the distributed amount. This also applies to inherited retirement accounts such as 401Ks and IRAs. Call us with any questions.
The deadline for funding 2019 IRAs or ROTH IRAs has been extended to July 15th to coincide with the extended tax filing deadline of July 15, 2020.
Know your current options when seeking relief from debt obligations. The FHA has imposed a 60-day moratorium for foreclosures and evictions for homeowner’s with FHA insured mortgages. The CARES Act also suspends required federal student loan payments through September 30, 2020. The Act also excludes up to $5,250 from income for any employer payment made to an employee before January 1, 2021, for purposes of student debt payments. Other lenders may also be offering relief as well, so be aware of your options.
Penalty-free withdrawals from retirement plans and IRAs for “corona-related distributions” up to $100,000 are now provided under the CARES Act. Up to $100,000 can be distributed after January 1, 2020, and before December 31, 2020, from retirement plans without penalty or the 20% mandatory withholding tax. The Act allows an individual to include income attributable to the distribution over a three-year period and allows for the recontribution of the distribution for a plan or IRA within three years and taxes already paid can get refunded. You need to carefully consider taking funds from a retirement account and how it might affect your long-term planning and funds should only be used to cover emergency needs or hardships encountered due to the current situation we all face at this time.
The CARES Act also liberalizes loans made from a qualified retirement plan such as a 401K plan. The Act allows for a loan of up to $100,000 or 100% of the vested balance to be made at this time, double the previous maximum loan of $50,000 through December 31, 2020. Repayment of the loan is also delayed for an additional year compared to the previous 5-year limit.
Most individuals are about to get at least $1,200 after passage of the stimulus bill designed to ease the economic downturn that is occurring. Throw in $500 per child and a family of four nets $3,400. Are you eligible? For singles, $1,200 is phased out between $75,000 and $99,000 in adjusted gross income. For married couples, the range is $150,000 to $198,000.
Unemployment Mirage
In normal market environments when the economy is stalling, unemployment can be a meaningful measurement. It can give some insights to the wide-spread layoffs that may be happening due to business slow-downs. However, this current event is very different. It again is spurred by governments forcing business closures. Therefore, the large number of individuals being furloughed are not due to economic conditions. Additionally, many employers are guiding their employees to file for unemployment for the next few months. This makes the surge in jobless claims not necessarily reflective of the real economic conditions at the present time. The job loss is indeed real; we are not denying that. However, we are seeing some unemployment benefits now exceed prior pay for individuals due to the fixed $600/week increase included in the CARES Act. We believe this could potentially cause unemployment to remain elevated for quite some time, potentially through the end of the year. We would not interpret data like that as a negative to the overall economy itself as it would be without this additional relief.
To give an example, let’s look at a furloughed Oklahoma employee who was making $30,000 per year. Prior to the CARES Act passage, that employee would receive roughly $15,000 per year in unemployment benefits. Under the new CARES Act, because of the additional $600 flat weekly increase, that same employee will receive the equivalent to roughly $45,000 per year in benefits. The breakeven point in Oklahoma is roughly $53,000 per year. Meaning, an individual at that income level will be roughly in the same position receiving unemployment benefits. This is unlike any time before. Employees earning above this amount would be worse off. We believe this disconnect below this threshold between an actual loss in pay from returning to work will present some short-term structural issues. However, the SBA loan program also included in the CARES Act incentivizes small businesses to get back to the same employee count as before by June 30. Knowing this deadline, we would expect unemployment claims to dramatically improve by then, if not in July. However, we also would not expect to observe any further dramatic movements until January 2021 when all of these unemployment benefits expire.
And keep in mind, these unemployment benefits are at the individual level. Some families with two working spouses could end up being in a better position than before when they were actually working. As you can see, these are not normal times, and we do not believe one can measure typical economic indicators during this period such as the unemployment rate. We believe people extrapolating these impacts to events of the past are misguided.
We say this to inform you that we fully anticipate jobless claims to skyrocket over the next few weeks and would not be surprised by the unprecedented numbers to continue to be posted. In a normal scenario, this could be detrimental to an economy, since it typically most individuals have substantially less in income. However, with the median US household income around $63,000 per year, it should not have a substantial drag on the economy as one would typically anticipate from such an event. Without this additionally weekly aid, it would be quite a short-term detriment to the economy.
There are so many changes happening rapidly during these times, and we encourage you to call and schedule a personal review, online or by phone, to discuss your personal long-term planning and also any of the recent changes that may impact or be available to you.
Markets
March was a difficult month for all of us, not just because of the market decline, but the anxiety and life changes caused by the coronavirus as well. Since the February 19th market peak, the Standard & Poor’s 500 Index shed 34% to its most recent low (St. Louis Federal Reserve). That’s roughly in line with the average bear market pullback (LPL Research), with bear markets being defined by at least a 20% sell-off from the previous high. However, the rapid decline in the major stock market indices has been unsettling. The 34% drop occurred in just over one month. We have been attempting to take advantage of lower stock valuations over the past month and will continue to do so moving forward. We feel this is a buying opportunity for stocks that we haven’t seen since 2008-2009.
What we are seeing in the economy is without precedent, too. There is an enormous amount of uncertainty. Many industries that require person-to-person interactions are being shut down. And many of the service-related companies that remain open have seen a significant drop in traffic. Since there is no modern precedent on which to model economic forecasts, the second-quarter projections for Gross Domestic Product have been incredibly wide. If we connect the dots, the economic uncertainty has translated into corporate earnings uncertainty which in turn has translated into volatile markets.
A Government-Induced Economic Coma
In order to slow the spread of the pandemic, the government has encouraged social distancing, and several states have ordered lockdowns or strict shelter-in-place mandates. You may go outside to exercise or head to the grocery store or pharmacy, but there is a ban on social gatherings, which could spread the virus. While social distancing will slow the spread of COVID-19, the economic impact has been unparalleled. In a way, the government is putting key sectors of the economy in a coma, as it hopes to stem the spread of the virus. When health and safety dictate, the goal is to bring the ‘patient’ out of the coma. But policymakers aren’t expecting the economy to bounce back on its own. If shutdowns are encouraged or enforced, policy is being put into place to revive the patient when the time comes.
The government response to soften the expected economic blow has been extraordinary and goes well beyond what we saw during the 2008 financial crisis. The Federal Reserve has not only dropped the fed funds rate to zero, but it has implemented several programs designed to support Treasury bonds, investment-grade corporate bonds, commercial paper (short-term IOUs issued by the largest corporations), money market funds, mortgage-backed securities and municipal bonds.
During the financial crisis, the Fed’s focus was on Wall Street and critical credit markets. Today, the scope of support extends well beyond Wall Street and into Main Street. Meanwhile, Congress has passed, and the President has signed a $2 trillion stimulus bill. More could be on the way as well. In addition to mitigating some of the damage from surging layoffs, the Federal Reserve and the Federal government are trying to put a foundation in place that will support a robust economic recovery.
Recent Dire COVID-19 Estimates
We have tried to avoid any detailed analysis in regard to the virus and reported numbers globally as it remains extremely speculative. However, with the recent dire announcement by our own government, we felt inclined to address it and offer our opinion. In a recent announcement, it was stated that the US could witness 100k to 240k deaths from COVID-19. While this isn’t impossible, it would assume the US mismanaged the virus outbreak worse than any other country. If we follow Italy’s population density outbreak, it could imply roughly 1-1.2million reported cases over the following month in the US. If the US were to have this high of mortality rate, it would imply a 10% to 20% rate. Italy and Spain remain the worse at 10%. The US is currently around 2% of reported cases resulting in mortality. Germany is at 1%. South Korea near 1.6%. Again, these numbers are relative to reported cases, not total cases.
After this event has passed, they will try to estimate the total number of cases that they believe existed outside of just reported cases. This will obviously be an estimate, but it could make these mortality numbers much closer to that of the flu than the current estimates. Regardless, if the US maintains a 2% mortality rate of reported cases, that would imply 20 to 24k fatalities related to COVID-19. We find it incredibly difficult to comprehend the recent government estimates and would be shocked to see them become a reality. It should be noted that if you remove New York and New Jersey, reported cases and current deaths are cut in half. Outside of these two states, Louisiana has been the only state experiencing large increases in cases. However, this could be predominantly due to the lack of testing as well, which will begin increasing over the next few weeks. This could change over the prevailing weeks, but it seems unlikely with much of the nation in lock down.
So, why would the government give such dire estimates? Well, we do not see much downside to making such claims. If they proclaim such high estimate for the number of deaths, but we actually see 20,000 not 240,00, they would then be able to tout the US’s successful containment of the virus, having “saved” over 200k lives. However, if we unfortunately do witness such extreme fatalities, it will then appear as though such an extreme outlier scenario was anticipated. Only time will tell the real story.
Closing Thoughts
We understand that what is happening is unprecedented. We are in the midst of an economic and health care crisis. Both breed fear and uncertainty. We are confident this pandemic eventually will pass, and we believe that the underlying fundamentals of the U.S. economy remain strong. Resilience and ingenuity are part of the DNA that make up America. We will persevere, and we will recover. We are here to serve you in any way we can and are available for you. Please call or email us at any time with any concerns or questions.
God Bless,
Your TEAM at F.I.G. Financial Advisory Services, Inc.
Looming Risks Overlooked