In response to the coronavirus economic shock, the Senate and White House have agreed to a massive, unprecedented economic stimulus package designed to bridge the economy through this extraordinary period. This plan will be helpful to shallow the economic damage that has already been incurred, and will likely continue to be inflicted, until the outbreak subsides. While some details could change before final approval, major provisions included in the $2 trillion package are discussed below.
Cash to Individuals: There is $300 billion that will go directly to consumers, with individuals below a certain income level receiving one-time payments of $1,200 and $500 per child. Unemployment insurance will also be significantly expanded. This should go a long way to support consumers that have had their livelihood disrupted.
Substantial Support for Small Businesses: The bill has about $350 billion in loans for small businesses and nonprofits with 500 or fewer employees (with some exceptions). The maximum loan is $10 million with the important provision that a portion of the loan can be forgiven. Businesses can get a subsidy that equals the cost of their payroll, mortgage or rent payments, and utility costs for the first eight weeks after receiving the loan—a massive cash infusion for small business. These low interest loans will provide important liquidity for small employers.
The loan forgiveness is tied to maintaining company payrolls. To the extent a business has reduced its payroll, the amount a loan could be forgiven would be proportionately reduced. Businesses that have cut their payrolls could get loan forgiveness if they restored their payrolls when they get the loan. This is a major incentive for business to keep employees.
Substantial Support for Big Business: The bill will provide $500 billion to the Federal Reserve’s Exchange Stabilization Fund for loans, loan guarantees, and funds for the Fed’s lending facilities aimed at helping larger businesses, states, and municipalities.
Airlines would get $58 billion in loans/grants and $17 billion in loans would be set aside for businesses important to maintaining U.S. national security. The remaining $425 billion would go toward loans for businesses, states, and municipalities that either the Treasury could issue or the Fed could through one of its lending facilities.
There are no direct payments/subsidies/loan forgiveness for larger businesses. The $425 billion will be used to cover the costs associated with loans that default, so the amount of potential lending under this program could be in the neighborhood of $2-$4 trillion. Businesses are encouraged to retain their workers, but are not forced to do so. There are limits on executive compensation and stock buybacks.
Large businesses would receive a tremendous amount of liquidity, important for companies directly impacted by the crisis that would probably face onerous financing terms.
This massive stimulus package is in addition to all of the aggressive moves by the Federal Reserve over the past few weeks. The Fed has innovated substantially over the past week; on Monday the Fed moved into lending directly to the broader economy and not just to banks. In addition, it shifted to unconstrained security purchases on an as-needed basis, as well as revived old and added new lending facilities to the alphabet soup of market-support programs. These measures are already easing financial stresses that have developed as a result of the crisis.
It is encouraging to see this rapid response to the crisis and these measures should ultimately stabilize the economy and financial markets. We anticipate volatility will persist until there are signs that efforts to contain the virus are successful. We are in favor of maintaining a conservative investment profile until we see stabilization in economic and financial market indicators.
A more detailed piece will be forthcoming after the House has taken up this Phase 3 package of the crisis response and votes it into law.
March 25, 2020
Michael J. Halloran, CFA