Bear Rally Backed by Stimulus Bazooka

March 27, 2020

Encouraged by the government passing a $2 trillion lifeline package and the Federal Reserve, who has vowed that it will not run out of ammunition in its support for financial markets, investors sent the S&P 500 surging by 20%+ over a 3-day period. The government’s massive stimulus package is unprecedented in its size and the speed with which it has been approved – an acknowledgement that a recession is at hand and it is a race to get dollars in the hands of Americans now that COVID-19 has shuttered the doors of many businesses. The bill’s main provisions include backstopping critical industries, providing forgivable loans to small businesses to keep workers on the payroll, sending payments directly to some Americans, and extending unemployment benefits to those who have lost their jobs – including contractors and gig workers. The bill comes just as the first crop of post-U.S. COVID-19 reports hit the markets, which include 3.3 million jobless claims. This is an astounding figure that shatters the previous, all-time record high of 695,000 from 1982. Abroad, the Eurozone PMI posted its largest decline in Eurozone business activity in the index’s history. Friday saw traders taking some profits, but for the week the S&P 500 still managed to rise 10.26%.

Unemployment Claims Reach Records

The Labor Department reported that a staggering 3.3 million claims were filed for unemployment last week as businesses closed their doors to abide by local social distancing requirements. Markets took the number in stride as economists had widely predicted between 1 million and 4 million claims were to be filed. The heaviest job losses were concentrated in the food services, arts, entertainment, and recreation businesses. Spillover effects were also felt in the transportation and warehouses which cater to food, entertainment, and recreation venues. The week’s claims figures highlight the unique challenge that self-imposed isolation poses for a service based economy. With jobless claims considered to be the best windows into current economic conditions given both that they are released on a weekly basis and they cut to the heart of the consumers consumption capability, subsequent economic readings are likely to be equally spectacular.

Business Activity Collapses to Record Low

Flash PMI reports from around the world reached record lows in March as COVID-19 infected global economies. The Eurozone Composite PMI fell to 31.4 in March, down from 51.6 in February. Numbers above 50 indicate economic expansion, while numbers below 50 indicate recession. The services PMI, which measures activity in the services sector, fell to 28.4 from 52.6 the previous month while Eurozone manufacturing fell to 44.8 in March from 49.2 in February. The story was similar for the US, which saw its steepest drop since 2009 in March. Here too, services were hit much harder than manufacturing, and both were well in recessionary territory. Japan was even worse than Europe, with its composite hitting 35.8. This is the worst hit Japan has taken since the 2011 Tohoku earthquakes. The correlation between PMIs and GDP, while not perfect, is pretty consistent and, given the magnitude of the changes we are seeing, it would seem clear that Q1 will be a contraction. The test for a recession is two quarters of contraction, and given the infection rates we continue to see, it is difficult to see how Q2 escapes a similar fate.

A lot of dismal expectations have been baked into the market’s decline and this week’s rally was primed by investors seeing a government that was finally showing signs of effectively mobilizing on the healthcare front, while at the same time putting their money where their mouth is by providing Americans with an economic lifeline. Whether or not we hit our lows on Monday and are now into a new bull market is impossible to know. Market bottoms are only known in hindsight, and if history is any measure, we will have a number of false rallies along the way. Friday’s profit-taking is proof that there are still plenty of sellers out there, but even if we are not seeing the start of a new bull market, there is good news in seeing the market bounce this week. Most importantly, we have started the process of helping the economically vulnerable while at the same time marshalling the resources to take on this disease. Mountains have been moved both in terms of the speed and magnitude of the economic package, and while it still needs to be executed to be effective, help is on the way. On the healthcare front, some of the early resource frictions are easing, and while that may not be apparent in the COVID-19 infection rates presently, it will. To bet against the market longer term is to bet against science and the world’s best healthcare system. The good news is that once you solve or control the underlying problem, you are a long way to solving the economic problems and we’re one step closer this week. Lastly, a rally, even one that may not ultimately hold, is important to shake out negative momentum — whether that be mechanical trading, legitimate fundamental concerns, or simply negative psychosis. We may very well test recent lows again, and maybe even gap lower, but to get to a bottom you must have a bottoming process. The fact that we got a rally at all tells us we’re now starting that process.

The Week Ahead

Traders will be pouring over key reports on nonfarm payrolls and manufacturing and services activity.

All in Favor, Say “Aye”: Stimulus Bill Passed Today Includes 2020 RMD Waiver


President Trump signed a $2 trillion stimulus package today that will provide emergency relief to Americans and businesses hit hard by the impact of coronavirus. The president signed the CARES Act (Coronavirus Aid, Relief, and Economic Security Act) from the Oval Office this afternoon.

The House of Representatives approved the stimulus package in a voice vote today nearly unanimously. The legislation passed the Senate earlier this week by a 96-0 vote. Lawmakers on both sides of the aisle rushed the legislation through the Senate and House and onto the President’s desk.

The CARES Act is the largest economic relief package in U.S. history, and, as mentioned in our Week in Review above, it will provide aid to Americans through direct payments, expanded unemployment benefits, giving loans and grants to businesses, and providing much-needed rescue funds to hospitals. Lawmakers hope it will ease the economic strain caused by the epidemic.

The bill also includes relief for retirees who would otherwise be required to take required minimum distributions (RMDs). Under the CARES Act, RMDs are waived for 2020. RMDs are congressionally mandated distributions from a qualified retirement plan, such as a traditional IRA or Simplified Employee Pension (SEP) plan. The waiver does not apply to inherited IRAs.

With the RMD waiver, retirees who can afford to skip their 2020 distribution can now leave that money invested an extra year. RMD amounts are calculated based on the recipient’s life expectancy and the value of retirement accounts at the end of the previous year. RMDs taken in 2020 would be based on the value of the account on Dec. 31, 2019. Additionally, the RMD results in a higher income tax bill, so there is a two-pronged benefit of reducing taxable income and allowing investments to regrow.

The Secure Act that went into effect on January 1, 2020 raised the age that individuals must start taking RMDs from 70½ to 72. Previously, anyone who turned 70½ in 2019 still had to take their RMD for last year by April 1, 2020. However, individuals who turned 70½ last year and have not yet taken their first RMD will get to have two distributions waived — one for 2019 and one for 2020. Prior to the coronavirus stimulus, an individual who skipped an RMD would have faced a 50% tax penalty on the amount that should have been withdrawn.

If you have questions about your RMD or how the legislation may affect your business or employees, please reach out to one of our advisors.