We spent last week warning policymakers about the urgency and magnitude of the economic fallout from the coronavirus. To be fair, Congress will always lag market participants, and politics constrains a quick response. But the gap was so wide between financial market participants and policymakers that we were deeply concerned. Exactly one week ago today, the consensus view in Congress was to take a wait-and-see approach. But as we all know, once the slowdown hits the data, we are too late. Financial markets have been suggesting that monetary policy is not enough and fiscal policy will be too slow to respond.
The good news is that policymakers now understand the severity of what the country is facing. Stocks will be fighting both Congress and the Federal Reserve employing their massive balance sheets to offset the effect of the coronavirus. For example:
- The Fed has moved quickly and with force. More is likely coming if needed. Please take note of Ben Bernanke and Janet Yellen’s op-ed in the FT today calling for the Fed to purchase corporate bonds. Speaker Pelosi yesterday specifically urged Chairman Powell to help state governments, which we took as Pelosi giving the Chairman political cover to move forward on municipal bonds. It feels as if we are moving towards some action by the Fed to purchase corporate and municipal bonds, although it may take an act of Congress as part of a stimulus bill to authorize this action.
- Safety net legislation for laid-off workers is likely to pass the Senate today and be signed into law by President Trump quickly thereafter. Getting this expanded safety net in place is critical, as unemployment is expected to increase.
- President Trump is no longer fighting the all-out policy response needed from a health and economic perspective. Regardless of what happened in the lead-up to this point, we can feel a more positive attitude in client conversations related to the government response in recent days. Trump is speaking later today about developments at the FDA in response to the virus.
- We are also seeing more urgency from Congress in discussing the fiscal stimulus response. We expect the Congressional response to lag financial markets, but any talk of $500bn in stimulus one week ago was met with eye rolls. We are now nearing consensus of roughly $1 trillion in fiscal policy stimulus with the president’s plan and Senate Democrats calling for at least $750bn. Yesterday afternoon, Federal Reserve Chairman Jay Powell urged Speaker Pelosi to go big on fiscal policy with zero percent interest rates, and we anticipate that Pelosi will rise to the occasion.
But getting the size right is just a first step. We still have several more challenges that financial markets will be facing in the coming days:
- First, When Can Legislation Pass Into Law? We had initially set April 2nd as a goal for passage, but financial markets are likely going to force Congress to act faster. As we discuss below, there remains a great degree of difference among Republicans in the Senate, Republicans and Democrats in the Senate, and the House and Senate over what should be included. Reaching a deal will require significant compromise in a polarized political environment, during a presidential election year, on one of the fastest timelines a divided Congress could act. It should be noted that the House is still out of session so the Senate will need to take the lead until the House returns. And once the legislation passes, then we have the implementation speed, which will become the biggest issue for investors. We get the sense that the Senate wants legislation passed by next week.
- Second, When Can The Stimulus Start To Take Effect? This will be the biggest issue for investors and delivering timely fiscal stimulus is not easy. We are perplexed by some policymakers saying they can get checks out in a matter of weeks. Our experience with checks has been a much longer timeline. In fact, in both 2001 and 2008, it took 3.5 months. Let me say that again: 3.5 months for the first round of checks to go out. Neither were effective stimulus either. Maybe this time is different, but the federal government just doesn’t have the capacity to have everyone with a check in two weeks. Fortunately, our unemployment insurance system was built to ensure timely payments for laid-off workers and will help fill the gap. We actually believe we can change the withholding rates faster than distributing checks. Two trade-offs, however, are: 1) withholding changes only impact employed workers and 2) taxpayers would receive about $40 per paycheck more, rather than receiving a lump sum. But if policymakers want fast and efficient payments, a combination of withholding (via a payroll tax cut) and checks is needed. This is not an “either-or” situation that is playing out in Congress. We also see a growing push to include infrastructure dollars as part of the package. That’s fine, but that money will not come out until 2021. Infrastructure spend has little impact on GDP and is not timely.
- Third, Not All Stimulus Is Created Equal. An All-Of-The-Above Strategy Is Needed Here: This is not the time to let perfect be the enemy of good. Getting cash to families is critical. Helping unemployed workers is critical with unemployment insurance and checks. But what should be avoided are income-capped payments, such as the 2009 refundable tax credit which was too limited to have any meaningful effect on consumption or confidence. Most US workers are going to keep their jobs through this event and their confidence is eroding as they are isolated to their homes and stocks fall. Taking an either-or approach at this time is not warranted. All US workers should be given assistance right now, no exceptions. As everyone knows, I am not a huge fan of a payroll tax cut. But it beats the alternative. Cutting the payroll tax cut on the employee side is like the government giving workers a raise. Cutting on the employer side helps business cash flow and helps to avoid layoffs.
- Fourth, Some Conditions Will Be Applied To Industries: With the financial crisis still fresh on the mind, we anticipate that there will be a push for conditions to be attached to companies taking money from the government. Elizabeth Warren put out a list of conditions yesterday. Some are just ideas that Warren wants to do anyway, and she is using the crisis to effectuate. But others are likely to have more traction. In particular, stock buybacks are going to be under attack.
Source: Strategas
Please call or email us with any questions you may have.
Sincerely,
Fortem Financial
www.fortemfin.com
(760) 206-8500
