What the Senate Coronavirus Stimulus Package Means for You

As the COVID-19 situation continues to evolve, and its ramifications reverberate through the economy and financial markets, we want to keep you abreast of the latest developments and Pure’s response to this situation. The Senate just passed a landmark bill, so here we want to examine what the stimulus package might mean to you and how it is impacting financial markets.

Overview of Congressional Coronavirus Stimulus Bill

Following days of political wrangling, the Senate unanimously voted late Wednesday night to approve a $2 trillion stimulus package designed to support the economy during the current shutdown. A House vote is expected early Friday, and all indications are that it will pass with bipartisan support, at which point it will move to President Trump’s desk for signing.

Here is a summary of some of the bill’s key provisions, as they stand right now:

• Payments to many Americans, in the form of stimulus checks
  • $1,200 for individuals; $2,400 for married couples
  • $500 additional for each child
  • Benefits start to phase out at $75,000 adjusted gross income (AGI) for individuals & $150,000 AGI for couples. Benefits phased out completely at $99,000 and $198,000

• Enhanced unemployment insurance
  • Adds $600/week for up to 4 months on top of what states usually provide
  • Expands eligibility to self-employed and “gig economy” workers

• $367 billion in forgivable loans to small businesses to cover payroll and employee benefits
• $500 billion pool to make loans, loan guarantees, or investments in larger businesses as well as up to $150 billion to state and local governments damaged by the crisis
• $50 billion for the airline industry
  • A portion to continue paying employees
  • Portion for loan guarantees

• The bill includes restrictions on stock buybacks, dividend payments, and executive compensation while loans are in effect
• Distribution of all loans will be overseen by an inspector general
• The bill delays the employer portion of payroll taxes until 2021 and 2022
• Provides emergency funding for hospitals and other health care providers
• Suspends federal student loan payments through September 30th with no interest accrual

Federal Reserve Actions

As the COVID-19 crisis has evolved, the Fed has moved aggressively to support the economy and financial markets. In addition to lowering the overnight lending rate to 0%, the Fed has also:

• Pledged to buy longer-term Treasury and mortgage-backed bonds in unlimited quantities (a process known as quantitative easing.) This process helps keep long term interest rates lower, which reduces borrowing costs for businesses and consumers, thereby supporting the economy. Quantitative easing also helps provide liquidity to the bond market.
• Been granted the authority to purchase corporate bonds, a move that should support corporate America and its ability to finance itself.
• Reinstituted Financial-crisis era programs to provide liquidity to money markets and the commercial paper markets. These markets are akin to “oxygen” for the economy, and the Fed’s moves here could help avoid a credit market failure of the type we saw in 2008. 

Market Reactions

As the Fed continued to aggressively move to support the economy and hopes for fiscal stimulus increased, stock markets rallied furiously the past several days.

• Tuesday = best day since 1933; Dow Jones Industrial Average (Dow) up 11%
• Wednesday = Dow up again
• Thursday = Rally continues; Dow up 6%

In aggregate, the Dow rose more than 20% over the course of three days, the biggest rally since 1931.

In addition to the jump in stock prices, anecdotal evidence suggests that liquidity in the bond market is also improving. The sharp increase in interest rates we saw last week has reversed, and corporate bond spreads have stabilized for the moment.

Overall, the general tone in markets is more positive, though that could change again depending upon how this situation develops. Importantly though, stocks are a good deal less expensive than they were a month ago, and there is hope that the government’s responses will support the economy until daily life and economic activity return to normal.

Our Portfolio Responses

Interest rates have been at low levels for a number of years, but they recently have fallen to record lows below 1%. And while negative rates in some other countries have demonstrated that the “zero-bound” no longer exists, the experience to date has been that rates have not moved significantly below zero anywhere, which leads us to believe that the risk/reward outlook for bonds is currently skewed.

With that in mind, we moved this week to reduce the overall duration of our bond portfolio. Although bonds had not done as well over the past several weeks, they had a great run before that, having increased by double digits in some cases last year. So, in addition to reducing risk, this move also allowed us to lock in some profits.

Importantly, this is intended to be a temporary move. We will continue to monitor the level of interest rates, and when the risk/reward opportunity normalizes, we will look to resume a slightly longer duration. We will also continue to monitor the credit markets. Spreads (additional compensation) have widened significantly, which all else being equal makes corporate bonds more attractive. However, given the shutdown of corporate America, it seems a bit early to move into corporate bonds. However, we will monitor the situation, and if conditions warrant, we will add more credit to the portfolios.

Regarding stocks, we have been rebalancing portfolios over the past several weeks, which allowed us to buy more stocks while they were “on sale.” And while we don’t know if the past several day’s moves are the start of a sustained market upswing, we do expect that over the long run, stocks will move higher from these depressed levels. As such, we are also evaluating opportunities to position the portfolios to capture slightly more of that eventual rebound.

Finally, recent market volatility has created significant tax-loss harvesting opportunities in taxable portfolios. We have been aggressively taking advantage of this strategy, which will allow clients to produce tax-free income down the road.

Planning Opportunities

• Roth conversions: The decline in stock valuations means that it may make sense to consider accelerating the timing of Roth conversions. Doing so can potentially allow you to move more shares into a tax-free pool with a lower tax bill. Then, when markets eventually recover, you’ll enjoy that future growth free from taxes.
• Asset location: In conjunction with Roth conversions, asset location can allow you to hold more of the assets with the highest expected returns in accounts that will be tax-free or at least tax advantaged.
• Mortgage refinancing: The decline in interest rates may provide opportunities to reduce your monthly housing payment by refinancing your mortgage. Keep in mind, though, that there are generally costs to doing this, and that you definitely want to consider the strategy within the context of your overall financial plan.
• Invest excess cash: While we cannot predict the future, we do know that all else being equal purchasing investments at depressed levels can enhance future returns. With that in mind, it may make sense to consider investing any excess cash that has been sitting on the sidelines. This can be done all at once or through dollar-cost averaging.
• Consider the impact of IRS changes: As part of the government’s COVID-19 response, the tax filing deadline has been delayed until July 15th. Additionally, the IRA contribution deadline has been aligned with the tax filing deadline, so for 2020, it is July 15th. Finally, required minimum distributions (RMDs) have been suspended for 2020, which means individuals will not be forced to withdraw money from their accounts at depressed levels.

For more information on recent market movements, how we are managing portfolios in this environment or planning opportunities in this evolving landscape, check out the replay of our Update Webinar from Tuesday, March 24^th.

And as always, if you have any questions about recent government actions, market volatility, or planning opportunities, please don’t hesitate to reach out to your Financial Advisor or anyone else on the team here at Pure. Although many of us are currently working remotely, we are still delivering the same level of financial planning, investment management, client servicing, and financial guidance we always do.

Thank you,

Pure Financial Advisors, Inc.
A Registered Investment Advisor
3131 Camino Del Rio North, Suite #1550
San Diego, CA 92108
T | (619) 814-4100, Fax | (619) 814-4109
W | purefinancial.com

Note: All figures and updates in this article are as of 2:00 Thursday, March 26th

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