With its scope of $2.2 trillion in fiscal spending (approximately 9.5% of U.S. GDP), the CARES Act is a significantly sized, much needed emergency relief program for this health crisis slowdown. Based on current estimates of size and severity of the negative economic effects, the plan aims to provide assistance to those affected the most in the private and public (state governments and federal agencies) sectors. The Act should reduce the immediate downside risks as well as systematic shocks to the U.S. economy and financial system, thereby reducing damage and allow for a faster recovery.
From an investment standpoint, we believe the Act creates opportunities for certain health care companies, companies that need access to the investment grade fixed income market, and companies whose stock price currently reflect a significant, long-lasting slowdown in the overall economy
The virus mitigation strategies are having a significant negative impact on small businesses, lower-income workers, and some specific larger transportation/travel related businesses. This economic stress is also reducing the access to financing across all businesses. The Act focuses on keeping workers paid and liquid, businesses intact and ready to re-engage in recovery, additional spending on health care related items, and providing fixed income market liquidity.
Increased unemployment benefits will help affected individuals come closer to equaling lost wages, while direct rebates to many individuals can help replace lost hours of work, commissions and tips, while offsetting increased spending as may families cope with child care costs, and health care spending. We’re also encouraged to see measures that will help smaller businesses weather this health crisis, including loans and subsidies that should allow employees to remain on payrolls and help with payments made for rent, mortgage and utilities.
Meanwhile, corporate tax relief can help larger businesses as well, and there are additional measures targeted to businesses most directly impacted by the pandemic—such as airlines and cargo, national security and hospitals. Getting people the medical treatment they need is also crucial to the recovery, and the Act includes provisions that will help a wide variety of state and federal agencies make medical purchases.
While we saw improvements in liquidity conditions last week, there is still more work to be done. The Exchange Stabilization Fund will help address liquidity concerns, by allowing the Federal Reserve to purchase up to $4.5 trillion in assets (including corporate bonds, munis, and other income fixed instruments) to provide additional fixed income liquidity.
Implementation speed is key, and the Act is set up to move relatively quickly from here—as it needs to. The timing of payments to small businesses and individuals is important as cash outflows (rent/mortgages/utilities/payroll) occur in the short term and frequently. We’re pleased to see that documentation requirements for loan programs aren’t arduous and payments to individuals should also be dispersed in the near term. Although there may undoubtedly be some implementation hurdles to overcome, we believe the Act will be successful in its overall goals.
During the Great Financial Crisis of 2008–2009, the U.S. government did not act as quickly and decisively as it could have. With the CARES Act, the U.S. has made a massive contribution to the global fiscal response. The first three bills we’ve seen in the U.S. total $2.8 trillion, about 56% of the global fiscal response. We expect additional fiscal response from the rest of the world in the near term. There may be a need for additional U.S. fiscal spending if the shutdown lasts for longer and is more severe than anticipated and if there is a desire to stimulate end demand to re-start the economy. So far, the U.S. government has acted swiftly and with a thoughtful and appropriate sized response.
Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. The views and strategies described may not be suitable for all investors. References to specific companies, securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to buy or sell. Investing in non-U.S. markets entails greater investment risk, and these risks are greater for emerging markets. The above commentary for informational and educational purposes only and shouldn’t be considered investment advice.