Why the Stock Market has Rallied Despite Record Unemployment

Why the Stock Market has Rallied Despite Record Unemployment

Given the economic numbers, it may be perplexing to witness the 35% rally we have seen off the March 23rd lows.  But it is no accident that this rally started with the Federal Reserve’s announcement of a program to support corporate and municipal debt liquidity directly on March 23, 2020 and the passage of the CARES Act on March 25, 2020.  

Historically, Bear Market bottoms occur near the bottom of a recession and thankfully it appears that the worst of the recession may be behind us.  We have started to see signs of a rebound in activity with an increase in airplane passengers, hotel occupancy, and gasoline usage from very low levels over the last several weeks.  This is a sign that people are looking for normalcy and are feeling comfortable getting back out there even if it means wearing a mask.        

Reason 1:

The Federal Reserve has responded quickly and aggressively at supporting corporations during this very difficult time.  At the current time they have been charged with lending over $3 trillion dollars to companies.   During the Great Recession of 2008-2009, the Fed provided its stimulus halfway through the recession.  This time, the Fed appears to be ahead of the curve. 

Reason 2:

There is nearly $5 trillion dollars in money market funds, exceeding the previous highs hit at the peak of the Great Recession Bear Market.   Additionally, investor surveys indicate that sediment is negative.  This would lead us to believe investors have already positioned themselves for the challenging times to come and that the cash on the sidelines will be investing in stocks as the economy improves.  

At the same time, the CARES Act, as well as a couple of other legislative measures, are injecting about $3 trillion into the economy through several different programs.   

Reason 3:

Direct Payments (“Recovery Rebates”) – The first such provision was direct payments to individuals.  Many of you may have already received this payment or will be receiving the payment shortly.  This was done to get cash in consumers’ pockets right away since they knew unemployment systems would be overwhelmed and those payments would be delayed getting to most consumers.   The amount you receive will vary based on the last tax return you filed and your filing status.  Please see the chart below as a guide to what you should expect to receive.

Reason 4

Unemployment Benefits – The federal government increased unemployment benefits by $600 per week from the end of March through the end of July.  This is in addition to the state provided benefits already in place.  In many states, the average worker is receiving more money from unemployment benefits than they would have received if they continued working.  The CARES Act also allows for self employed individuals to apply for unemployment which was traditionally prohibited. 

Reason 5:

5. Small Business Support

  • Payroll Protection Loans (“PPP”) – These loans provide 2.5 months of payroll to eligible small businesses.  The annual salary of each employee must be capped at $100,000.  The portion of the loan may be forgiven if spent on the following items during the 8 weeks after you receive the loan:
    • Payroll
    • Employee benefits such as retirement contributions and/or health care premiums
    • Rent and Utilities

There are other requirements to receive forgiveness on the loan.  We recommend working with your accountant in order ensure that you comply with the loan forgiveness policies and guidance that has been issued.

  • Economic Injury Disaster Loans (“EIDL”) – This loan may not be forgiven but may be used for other purposes outside of the ones provided for in the PPP loan above.  This loan tends to be better for those who are planning on cutting payroll considerably and need additional capital to maintain their business.   The loans must be paid back within 30 years at an interest rate of 3.75%.  Non-profits pay a reduced interest rate of 2.75%.

Self-employed individuals are eligible for small business support.  If your business has been severely impacted by COVID-19, you should consider taking advantage of these support programs. 
There were also several other changes made by the CARES Act that we think you should be aware of.

  1. Required Minimum Distributions (“RMD”) have been suspended for 2020
  2. Early Withdrawal Penalties from Retirement Accounts Have been Waived
    1. Typically, a withdrawal before age 59 ½ would have paid a 10% penalty in addition to the taxes paid on the amount withdrawn
    2. Applies to up $100,000 in withdrawals
    3. Federal Taxes may be spread out over the next 3 years instead of paid during the year of the withdrawal
    4. May be repaid to the retirement account over the next 3 years to avoid the federal tax owed on the distribution

When this quantity of stimulus, totaling over $5.4 trillion (relative to a $22 trillion economy), is injected into a slow economy over a short period of time the money must go somewhere.  

Typically, the stock market bottoms when the fear of mass bankruptcies subsides, and that appears to be happening at the current time.  While this does not necessarily mean “happy days are here again,” it does move the economy in the right direction.  This also does not mean that we are out of the woods yet.  If we get a second wave of the virus in the fall, which slows our economy again, will the Federal Reserve and Congress come to the rescue again?  That is the principle risk as the economy is certainly going to continue to improve over the summer as more states open up, more people go back to work, and we figure out a way to live more normal lives safely.  It may take several years for the economy to get to the point it was in February, but you may recall it took over 10 years for the economy to get back to 2006 levels after the great financial crisis.  With that we had a very good stock market from March 2009 thru February 2020!

Hopefully, we will get effective treatments this fall and a vaccine sometime next year so that we can all get back to more normal lives.  In the meantime, please let us know if you have any questions regarding the provisions in the CARES Act.  We are here to help guide you through the ever-changing world that we live in.  Stay healthy and safe and enjoy this quality time with your families.  

 

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