This week has brought us some welcome clarity in a few areas of the virus-related fog, as well as some relief in the capital markets. The first meaningful glimpse of the magnitude of the impact to the labor market was reported yesterday. The Department of Labor announced that initial unemployment claims for the week ending March 21st increased by over 3 million to 3,283,000. This was by far the single biggest jump in claims in U.S. history. By way of reference, continuing claims (those continuing to collect unemployment benefits after one week) had been holding steady at under 2 million for nearly two years. Prepare to see that number quadruple or more in the coming two to four weeks. Many impacted industries are just now working through the process of cutting costs to weather massive drops in revenue due to the virus and related social distancing measures. This will surely mean more layoffs and furloughs.
Both the Fed and Congress Have Been Busy
In the last 48 hours, the Senate and House of Representatives passed the CARES Act, a $2 Trillion multifaceted support bill in response to COVID-19. President Trump signed the bill this afternoon. The Act provides immediate assistance in the form of checks mailed directly to Americans, ranging from $600 each for low income individuals to $2,400 for most married taxpayers, plus an additional $500 per child (reduced for higher income taxpayers).
For those who have lost their jobs, greatly expanded unemployment benefits are being made available, including extending unemployment benefits beyond the typical 13 weeks. Addition $600 per week payments are also planned to be afforded to claimants. Uniquely, benefits will also be extended to the self-employed and independent contractors who can’t work due to reasons directly related to the virus.
Lastly, individuals who are affected by the coronavirus will be able to take distributions from qualified retirement accounts up to $100,000 without the typical 10% penalty. Taxes on distributions can then be spread over the coming three tax-years.
American businesses are also among the recipients of support from the CARES Act. The Act set aside nearly a half trillion dollars for an Exchange Stabilization Fund to support the Federal Reserve’s TALF program, announced Monday. The TALF will “enable the issuance of asset-backed securities (ABS) backed by student loans, auto loans, credit card loans, loans guaranteed by the Small Business Administration (SBA)” all directed to provide liquidity for borrowers during the economic slowdown. The Act additionally affords $46 billion in loans to airlines and related services.
The CARES Act also affords businesses with the option to delay payment of the employer portion of payroll tax payments for nearly two years (50% due 12/31/21 and 50% due 12/31/22). More relief for employers comes to hard-hit, smaller American companies in the form of Small Business Administration forgivable loans and grants. All of this support is targeted at slowing the amount of impact on American business and related layoffs, as well as support for affected workers caught up in the downturn.
But It’s Really All About The Virus
Though the intervention from the U.S. government and Federal Reserve is welcome by businesses, citizens and investors alike, we must again reiterate that this is completely decoupled from the cause of the problem, the spread of COVID-19. It is the eventual containment and eventual submission of the root of the pandemic that will ultimately lead to the healing of the economy. Simply put, we must get back to normal life to bring back jobs, business activity and consumption. No amount of stimulus can turn that tide.
Last week we discussed the promising patterns observed in China and South Korea regarding the containment of COVID-19 in those countries. We also made very preliminary observations that we were hopefully seeing the initial stages of a decline in the growth rate of the virus in the next two countries that saw major outbreaks, Italy and Iran.
The good news is that China and South Korea continue to see benign activity in newly reported cases of the virus. In both countries, life is beginning to return to normal. Unfortunately, the growth rate in Iran reaccelerated a couple of days after our observations (possibly due to fallacious or errant under-reporting by that totalitarian regime). However, potentially encouraging news is that our very preliminary observation about decelerating growth rates in Italy last week (arguably the worst hit country thus far), have now been supported by a week’s worth of data showing that Italy’s growth rate has in fact slowed meaningfully and may even potentially be in the initial stages of decline. The coming week will tell.
The virus spread to France, Germany and Spain next with those countries crossing the 1,000 cases mark on March 8th or March 9th, so not quite three weeks ago. The growth-rate data out of these three countries is not conclusive enough to make any projections. Each country has shown days of declining new cases only to see spikes in the days that followed. Of the three, France and Germany appear to be more promising at this point, but again, it is too early to tell. It deserves note that these countries were slower to react with isolation measures, so their progression of containment may be elongated.
Two countries that border northern Italy that did adopt early containment measures are showing more encouraging results. Both Switzerland and Austria share the Alps with Italy. Switzerland slowed the spread of COVID-19 enough that they didn’t reach their 1000th case until March 13th, and Austria, not until March 16th. Both countries may have already seen the rate of new cases plateau. Not depicted in the charts are the preliminary numbers for March 27th showing Switzerland adding 1,117 cases and Austria adding 788. It appears that just a few short days to prepare your populations may have made a large difference in subduing the advance of the virus. Again, these are early projections but the initial data is encouraging.
This brings us to the most pressing question, what should we expect with the United states? Santa Clara County, CA began distancing measures on March 9th. The Bay area announced its version of a lockdown on March 15th. New York City waited to roll out their measures until March 19th, and then only did so slowly, despite hitting their 1000th case in NY alone on March 17th. This slow response coupled with high population density has led the New York Tri-State Area to become a Northern Italy all alone. Separation measures elsewhere may have in fact slowed the growth of the virus in comparison to the Northeast. Los Angeles entered separation measures on March 19th. San Diego on March 20th. Since then, the growth of new virus cases in California has been more moderate than other major U.S. metropolitan areas that were later adopters. To determine the trajectory of the growth of the COVID-19 outbreak in the United States, it might be best to think of us more like Europe than as one country. As we continue to state, it is too early to project the pattern here in the U.S. However, the coming two weeks will give us more realistic numbers, based on wider testing and the hopeful effects of separation policies.
We will continue to report on support measures being provided by the Federal Government as well as the Federal Reserve. Global stock markets are likely to see more gyrations until a true pattern for the virus is identifiable and widely accepted. Only once the path of the virus’ spread, containment and eventual retreat are known can we truly start to assess the economic landscape and prospects for recovery and a return to normal life. Stay safe and stay grounded.
Wishing you all the best,
Jim Scheinberg CIMA
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