Markets Maintain Range

April 3, 2020

After rallying as much as 18% from its March 23rd low, the S&P 500 settled into a range this week. Drug industry breakthroughs, a stronger federal government response to tackle the COVID-19 outbreak, and news of a potential deal between Saudi Arabia and Russia to cut oil production helped to support stocks on Monday and Thursday. But within these positive developments, markets struggled following the grim model projections for the COVID-19 outbreak in the U.S., weaker than expected nonfarm payrolls, and a slowdown in the manufacturing and services industries. It was back and forth for the week, with the S&P 500 slipping -2.08% by the time the final bell had rung on Friday.

Payrolls Plunge

March nonfarm payrolls fell by 701,000 as the unemployment rate rose to 4.40%. That’s a sharp reversal from February’s nonfarm payrolls report which showed 275,000 jobs added during the month with an unemployment rate of 3.50%, a 50-year low. March’s payroll drop was the first decline in growth since September 2010. Nonfarm payrolls proved to be worse than economists had forecasted as businesses seemed to have been quick to furlough their staff, anticipating they would need to shut their doors for an indefinite period of time to contain the COVID-19 outbreak. Unsurprisingly, the hospitality industry, which includes bars and restaurants, bore the brunt of the job losses. The jobs report did provide some positive news for those fortunate enough to still be working. For those individuals, wages rose 3.10% year-over-year. Nonfarm payrolls are expected to remain under pressure for the foreseeable future, however, and wages will likely slip looking ahead. Consistent with the reduction in payrolls, a record number of workers filed for unemployment benefits last week, with jobless claims surging to more than 6.6 million. That doubles the previous record set just last week and it is ten times higher than any single weekly unemployment claim figure observed from 2007-2009. The worst is still yet to come unfortunately, with the Congressional Budget Office disclosing on Wednesday that they had advised on the sizing of the recent stimulus package assuming a 12% unemployment rate.

Manufacturing Index Suggests Recession as Services Continued to Expand

The ISM Manufacturing Index slipped into recession in March as the coronavirus pandemic made landfall, contracting to 49.1 from 50.1 in February. Figures below 50 indicate contraction, while numbers above 50 indicate expansion. Strength in food, beverage, and tobacco were not enough to offset an overall decline in new orders and production. In contrast, the services sector continued to grow, although at a much slower pace. The ISM Non-Manufacturing Index reported the services industry registered 52.5. That’s down from the 57.3 it reported in February but above expectations of a 45 reading from most economists. Growth in new orders and order backlogs helped to offset a slowdown in business activity, employment, and imports, but as these work their way through the pipeline, services are all but assured to slip into contraction by the next reading. Technically speaking, the ISM report was a win in that it beat expectations, but markets are forward looking – so that fact provided little lift.

Following last week’s rally, we spoke about finding the good news in the midst of the bad. We admitted that even if last week’s bounce proved to be nothing more than a false bear rally, it would still be a positive in our book because it suggests we are beginning to progressively move through the phases required to ultimately bottom. We can all agree that we’ve moved beyond the initial denial phase and now recognize the reality of this situation. The question last week was whether or not we are through the worst of the panic phase. If you look at the markets this week, they were still volatile, but less so and range bound. We were able to put a little distance on the extreme selling experienced two weeks ago, and we have been able to hold in a 5% band since March 23rd, even as the actual news and data have continued to worsen. This is positive, and it may suggest that the acceptance phase may not be too far away. Whereas the market’s -35% decline in March suggested a panic, a -25% decline reflects a market having accepted the reality of a recession. It will be a shortened trading week next week due to Good Friday and one that will hinge on how effectively the stimulus program is perceived to operate and on the developments on the healthcare front.

The Week Ahead

Markets will be closed on Good Friday for the Easter holiday. In observance, Week in Review will be taking a break from the action. Our next edition will return on April 17th where we’ll pour over the first batch of Q1 earnings reports and guidance from CEOs.

The CARES Act: Key Provisions for Individuals and Businesses

Last week, we addressed the Required Minimum Distribution (RMD) waiver included in the Coronavirus Aid Relief and Economic Security (CARES) Act signed by President Trump on March 27, 2020. Recently passed stimulus legislation also includes new and modified tax provisions and loan programs to provide additional assistance to individuals and businesses affected by the COVID-19 pandemic. Below are some of the key provisions of the CARES Act for individuals and businesses, including the following:

  • Direct payments to individuals

  • Employee retention credit

  • Deferral of the employer’s share of payroll taxes

  • Small Business Administration (SBA) Loans


Direct Payments to Individuals

American taxpayers will be sent economic impact payments equal to $1,200 per person, plus $500 for each qualifying child under the age of 17. The payments will be available for incomes up to $75,000 for single filers, $112,500 for head of household, and $150,000 for married filing jointly. A phaseout will begin once adjusted gross income (AGI) exceeds these income thresholds and will decrease by $5 for every $100 of excess AGI. Therefore, when AGI exceeds $99,000 for a single filer, $136,500 for a head of household, and $198,000 for married filing jointly, no payment will be issued. The complete phaseouts could increase slightly based on the number of qualifying children in the household. Checks are based on an individual’s tax return. Social Security recipients and railroad retirees who are otherwise not required to file a tax return are eligible for the payments and will not be required to file a return. The IRS website indicates that eligible taxpayers who filed tax returns for either 2019 or 2018 will automatically receive payment of up to $1,200 for individuals or $2,400 for married couples and up to $500 for each qualifying child. The payments are expected to go out within three weeks to those for whom the IRS already has direct deposit information on file. You can read more about the payments on the IRS website here.

Employee Retention Credit

The Employee Retention Credit is intended to encourage businesses to keep employees on their payroll during the pandemic. The CARES Act provides a refundable tax credit of 50% of wages paid by an eligible employer whose business has been financially impacted by COVID-19. The credit is provided for the first $10,000 of compensation (including health benefits) paid to an employee starting March 13, 2020 through December 31, 2020. Qualifying employers must fall into one of two categories:

  • The employer’s business is fully or partially suspended by government order due to COVID-19 during the calendar quarter.
  • The employer’s gross receipts are below 50% of the comparable quarter in 2019. Once the employer’s gross receipts go above 80% of a comparable quarter in 2019, they no longer qualify after the end of that quarter.
  • *Note that the CARES Act imposes certain limitations on compensation payable by businesses that receive a loan or loan guarantee under the act.

Deferral of Employer’s Share of Payroll Taxes

Employers and self-employed individuals may elect to defer payment of the employer’s share of the Social Security tax they are otherwise responsible for paying (generally a 6.2% tax on wages or earned income) for the 2020 tax year. The deferred employment tax can be paid in equal amounts over the two following tax years, with half of the amount required to be paid by December 31, 2021 and the other half by December 31, 2022. The employee’s share would still be collected and passed on to Uncle Sam.

Small Business Administration (SBA) Loans

The CARES Act appropriates more than $360 billion for new loans administered through the SBA, a government agency, in a program called the Paycheck Protection Program that is designed to provide a direct incentive for small businesses to keep their workers on the payroll. SBA will forgive loans if all employees are kept on the payroll for eight weeks and the money is used for payroll, rent, mortgage interest, or utilities. Many businesses with fewer than 500 employees (subject to certain limitations) can qualify for these loans. The loans, which are issued by participating banks and other qualified lenders and guaranteed by the SBA, can equal the lesser of $10 million or 2.5 times an employer’s 2019 monthly annual payroll. All or a portion of the loan amounts can be forgiven by the government if the employer maintains both the number of employees as well as their salaries. There is a waiver of SBA fees for one year, but interest will be accrued.

New information is continually being provided by the federal government about the relief package. Business owners and individuals are encouraged to speak with an advisor to maximize the potential benefits of the coronavirus economic assistance programs.


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