A Look at the Reach of the $2T Stimulus Bill

Markets rallied double-digits last week off dramatic lows after the Fed announced “unlimited” support and as Congress crafted a $2 trillion stimulus plan to help address the nationwide shutdown to the economy due to COVID-19. We outlined our view of the pathway to success in our First Edition of Road to Recovery, which included the need for this kind of government action.

In this edition, we evaluate the scope and impact of Congress’ plan: how far reaching is it, and will it be enough to get the economy back on its feet?

RESULTS OF OUR ANALYSIS

• By our analysis, we believe the stimulus plan is a solid start to getting the economy on better footing, providing probably two to four months of necessary support, on a range of perhaps 8% to 12% temporary unemployment. Importantly, we do not believe a vaccine is necessary to begin economic recovery, but improved testing is a must.
• The risks to our outlook are mainly twofold: 1) the government can’t get aid to the targeted recipients quickly; and 2) efforts at containment fail, allowing the virus to spread more rapidly, straining the healthcare system and driving unemployment higher.
• Should another round of stimulus be needed, we believe the Fed has the resources and would remain aggressive this summer with a quick response. Concerns over long-term fiscal health of the US (national debt, deficits) should remain in the background as near-term policy response takes center stage.

INVESTMENT IMPLICATIONS

• Markets should remain volatile as economic news gets worse (rising unemployment, challenging business conditions) and infections in the US rise quickly.
• We aren’t recommending changes to client investment objectives as a matter of course. We are coaching clients to stay on plan. We are putting new money to work for some long-term investors.
• In fixed income, we continue to scrub client bond portfolios for quality and sustainability. Downgrades to credit ratings are happening daily at a rapid pace, as you would expect, requiring us to be as proactive as possible.
• In equities, we are finding good quality companies and asset groups priced for recession, or worse, across most sectors and industries. We see best opportunities in cyclical stocks (those tied to economic recovery) and smaller stocks. Our approach puts particular emphasis on strong cash flow generation and above average balance sheets, in an effort to provide some cushion to further bad news.

THE BACKDROP: A MASSIVE SHUTDOWN RISKS LASTING DAMAGE
With the forced shut-down of the American economy, business activity in key industries and services came to an immediate halt over the past two weeks. Consider that:

• Nonessential retail is reportedly seeing foot traffic down 50%-80%–much worse than in the Financial Crisis of ’08—with the need for heavy discounting.
• Unemployment is about to surge, causing a challenge over the next two to four weeks as paychecks go uncollected. Perhaps 40%-50% of working adults live paycheck to paycheck.
• Small businesses are hit particularly hard. They employ nearly half of American workers and account for almost half of our economic growth. The median small business reportedly has cash on hand of only 27 days.

Without a rapid solution over the next few weeks, important drivers of our economy could disappear, impeding economic recovery.

UNEMPLOYMENT BENEFITS: ENOUGH TO LAST FOUR MONTHS?
The stimulus plan earmarks an estimated $260 billion for unemployment benefits[1], which we believe could support roughly 15 million to 20 million unemployed Americans for four months. This level equates to unemployment of 9% or 10% in April, by our math, which is in-line with many estimates we’ve seen. So, to a reasonable extent, this stimulus bill does a sufficient job of addressing some serious fallout in our workforce.

If unemployment is higher (we’ve seen one estimate of 40 million unemployed), it would mean that either the US economy would need to rebound within two months to put people back to work faster or Congress would need to provide further support, perhaps in May or June. The challenge is that we cannot rush quarantine and testing, in our view.

SMALL BUSINESS SUPPORT: VITAL TO THE RECOVERY
The stimulus plan promises an estimated $377 billion in loans and support, much of which is forgivable based on how many workers are retained during this crisis.

We understand there are six million employee-owned businesses paying taxes in the US, most of which have less than 100 employees, and about 70% with revenues of $500,000 per year or less (using 2013 data from the IRS, via JP Morgan).

By our rough math, if the current stimulus plan were to provide forgivable loans of about $300,000 on average per small business (roughly in line with annual revenue for most small firms), it would mean:

• 20% of firms might stay in business for another year, who would have otherwise failed (about 1.2 million firms saved), with the loan covering much or all of their annual revenue;
• Roughly 11 million jobs perhaps saved, implying what would have been an 8% unemployment rate.

That scenario would equate to keeping about half of the employees in the restaurant, retail, and hotel industries on the job for the coming year, for example, give or take.

This is obviously only a directional analysis at best, but it underscores that this stimulus can have a meaningful impact if it gets deployed within the next two weeks. If these businesses were to close, it would be more difficult to bring them back. The risk is, the longer it takes to get loans to smaller businesses, the higher the risk of failure and the more the need for additional support.

QUICK SNAPSHOT OF THE STIMULUS PLAN, FOR CONTEXT
The analysis above focuses on about $1 trillion in fiscal stimulus (direct payments to individuals, unemployment benefits, and small business support), or about half of the total plan. The balance of the plan focuses on large businesses, state and local governments, hospitals, other government agencies, and tax cuts (see exhibit). All are vital to the economic recovery.

BOTTOM LINE
Last week brought encouraging news on the Road to Recovery: the Fed’s quick and adaptive response helped stabilize important parts of the credit market, and Congress approved a comprehensive stimulus plan to address the forced economic shutdown.

Both steps provide an important element on the pathway to success—essentially a “bridge” between economic dislocation and a more productive economy.

By our quick analysis, we believe the stimulus plan is a solid opening salvo in the war against COVID-19, providing perhaps two to four months of support.

The degree of success depends on how quickly the stimulus can be distributed (a matter of weeks) and how well Americans change behaviors to contain the spread of the virus.

We are not out of the woods yet on this Road to Recovery, but this is a necessary start.

[1] At the high level, Congress’ plan provides one-time payments of $1,200 to individuals earning $75,000 annually (or $150,000 in joint households) and $500 per child, totaling an estimated $290 billion. More meaningful, by our read, are the unemployment benefits, totaling approximately $260 billion: $600 per week for up to 16 weeks (in addition to a person’s standard unemployment benefits, which vary by state) and also extending a person’s existing benefit payments by 13 weeks (to a maximum of 39 weeks total).