Please contact us for any questions – or for periodic updates to this checklist as new emergency relief options are introduced.
For Small Business Owners:
With recent legislation to help small businesses deal with the impact of the coronavirus pandemic, it has become confusing to keep all the eligibility rules straight and the types of relief small business owners can receive. This checklist covers the following key planning points related to:
Eligibility issues for PPP and EIDL programs
The types of relief qualifying business owners can receive from various programs.
How loan forgiveness works
The extent to which these programs work in conjunction with each other
Key points of the Employee Retention Credit
Key points of payroll tax deferral
The purpose of this checklist is to provide a high-level overview of the major financial planning points that we are discussing with our small business owner clients.
This week we appear to be witnessing the worst psychological – though not statistical – impact of COVID-19.
While we are currently waiting on the details of the fiscal stimulus program that will help combat the economic effects of the coronavirus, the monetary stimulus has arrived.
Earlier this week, the Federal Reserve cut the federal funds rate to zero, announced a program to buy $700 billion in Treasury and mortgage-backed securities (i.e. quantitative easing or “QE”), and activated dollar swap lines with five other central banks (to provide liquidity). This occurred during an emergency session just days before the Fed’s next scheduled meeting and came on the heels of the Administration declaring a national emergency in response to the coronavirus. Although investors widely anticipated a Fed rate cut to zero, the immediate global market reaction was negative.
In these historic times, it’s important for us long-term investors to keep our perspective and clarity. Maintaining perspective is no assurance that markets always go up – or bounce back immediately. It also doesn’t mean that there aren’t serious issues affecting public health or the economy. Nor does it guarantee that the financial journey will be easy.
Instead, just like having the right perspective on a problem can help to solve it, having perspective in investing is about addressing the right issues…while knowing what we can and cannot control. At the public health level, we cannot control the nature of the coronavirus or change how far it has already spread. At the economic level, we cannot change the fact that growth will slow for several months or even quarters, nor can we directly control the response of governments and central banks. At the market level, we cannot change the fact that there is significant uncertainty…and that volatility of late has been historic.
What we can do is react to each of these appropriately. We can heed the advice of public health experts. We can keep a close eye on the economic data to assess whether this is a transitory event or whether there are structural implications. And, most importantly, we can maintain discipline in our investments by staying diversified, maintaining a long time horizon, and not overreacting.
Given recent events, it’s natural to draw parallels to past crises. At the moment, there are two primary reasons that some pundits are drawing comparisons of late to the 2008 financial crisis.
The more superficial reason is simply that markets have fallen into bear market territory with large swings, both positive and negative, on any given day. Last year, the average daily move in either direction was about half of a percent for the S&P 500. This year, the average swing is almost 2%. 12 trading days have been above plus or minus 3%, 9 days above 4%, and two days larger than 9%. Not only are these swings larger than investors have experienced in twelve years, they are some of the largest since the Great Depression.
The second and more substantive reason for investors to draw comparisons to 2008 is the fear of financial contagion. While this is still not the most likely outcome, there are scenarios in which short-term liquidity problems can cascade into long-term solvency ones. For instance, it’s one thing for an individual to go without a paycheck for a couple weeks because their small business is closed. It’s quite another if this spans months and the individual faces a cash crunch.
Multiply this problem across the economy and scale it up for large companies who rely on bond markets for funding, and it can become a serious problem. Credit spreads have spiked in recent weeks and bond market volatility has risen significantly as well. The MOVE index, essentially the bond market’s counterpart to the VIX, has risen to its highest levels since the global financial crisis.
However, the federal government and the Federal Reserve understand this and, as per the above, both are on it. Economic stimulus and liquidity provisions have been implemented in recent days, alongside public health measures. These go hand-in-hand, since one of the main side effects of slowing the virus is an economic slowdown. So a key difference now versus 2008 is that the Federal Reserve and Uncle Sam both have playbooks that were developed during the last crisis – and are being implemented quickly.
For long-term investors, it continues to be important to maintain perspective and focus on what we can control. Although markets are in bear market territory and daily swings have increased, the broadest perspective one can have is to understand that markets behave in cycles – both in terms of prices and investor psychology. The history of the market is filled with manias, panics and crashes which, viewed in hindsight, could have been handled better by investors. While each episode may have its own unique circumstances, the fact remains that staying disciplined and not overreacting to backward-looking market moves is the best way to achieve long-term financial goals.
Below are a few charts that help to put recent government stimulus actions in perspective.
1. The Fed has implemented emergency stimulus measures.
The Fed made an emergency rate cut to the zero lower bound just days before its next scheduled meeting. This is the first time rates have been at zero since 2015, and is the largest cut since the 2008 financial crisis. The Fed will release new economic projects at its next meeting which should reflect its latest decision.
In addition, the Fed also announced $700 billion in asset purchases, a resumption of the post-crisis quantitative easing program, in addition to dollar swap lines with other central banks. This is to prevent a short-term crisis from harming the plumbing of the financial system.
2. Credit spreads have widened as volatility has risen.
Bond yields have jumped in recent weeks in response to the coronavirus, although this should be put in perspective relative to the 2008 financial crisis and the 2014-2016 oil price collapse. Still, volatility in the bond market has also spiked to its highest level since the 2008 financial crisis. While the plumbing of the financial system still appears to be orderly, the Fed’s emergency actions along with the government’s public health and fiscal stimulus are an attempt to preempt problems down the line.
3. While this is a challenging time for investors, it’s important to maintain a long-term perspective.
While investors can’t directly control government actions or the spread of the coronavirus, they can maintain the right perspective and focus on what they can control: staying disciplined and maintaining appropriate portfolios. The chart above shows that markets have pulled back at many points across history – sometimes for extended periods. However, those with the right perspective and patience are better able to achieve their financial goals.
The bottom line?
Investors should focus on what they can control: their own behavior. While there is much about the coronavirus that remains fluid and uncertain, investors who stay disciplined are much more likely to ride out the storm successfully.
Please let Retz or I know if you have any questions. And stay safe out there.
– Cale ______________
Cale Smith Managing Partner Islamorada Investment Management
After 11 years, a perfect storm around the new coronavirus has pushed markets into bear territory. The World Health Organization officially declared the COVID-19 outbreak a pandemic, markets were disappointed by government policy responses, and containment measures increased as cases continue to rise globally. Given the swiftness by which the coronavirus has spread and of the market decline, it’s natural for many investors to have concerns about their portfolios. Before they react to headlines, however, it’s important to keep a few key facts in perspective.
First, at the risk of debating semantics, it’s important to discuss definitions. Just as the WHO is careful and deliberate when declaring an outbreak of disease a pandemic, we should be careful in clarifying what it means to be in a bear market. A commonly-agreed-upon definition is that a bear market is a 20% decline in a broad market index from its peak. The Dow closed on Wednesday with a peak-to-trough decline just over 20% and other major indices have since followed.
While a 20% decline does meet the dictionary definition and trigger bear market headlines, the spirit of the term is of a protracted period of deep market weakness and uncertainty which is almost always tied to an economic recession. Case in point: the average bear market since World War II experiences a market decline of 35%, far worse than the standard 20% definition.
This is important because we have seen near-20% pullbacks in recent years – first in 2011 when the U.S. debt was downgraded, then in late 2018 when many economists were forecasting an imminent recession. This is where the semantics become tricky. Is a 19.8% decline (September to December 2018) materially different from 20%? Should we call it a bear market if it recovers within months?
This doesn’t mean that any market pullback is pleasant or that the situation can’t deteriorate. It’s simply a reminder that we’ve seen similar declines before, regardless of what we call them.
Second, it isn’t the label that causes markets to fall – it’s the underlying fundamental cause. In this case, the spread of coronavirus has been swift, resulting in aggressive government actions. In many ways, slowing the spread via social distancing and other measures is an attempt to immunize society, but with side effects that harm the economy.
At the moment, based on the available data, it appears that the rise in global confirmed cases is accelerating even as new cases in China have flatlined. Going forward, there are a wide range of possible outcomes depending on government and the health sector actions.
This is the heart of the issue. Markets are built to “price in” all available information. It’s true that if the economy is disrupted then growth, profits and cash flows may fall. However, the bigger problem is that significant uncertainty, especially in the absence of relevant historical guidance, makes it difficult to assign a value to investment assets.
In technical finance terms: the discount rate is high. In simple terms: it’s hard to know what to pay today to receive $1 in the future because it’s very unclear what that future may look like.
So, what do we know?
We know that the U.S. economy was strong prior to the coronavirus outbreak, increasing its likelihood of recovery.
We know that the cause of this bear market isn’t inherent to the economy or the financial system. This isn’t 2008 when financial markets seized up or 2000 when valuations were at astronomical levels. There are scenarios where short-term liquidity problems can become long-term solvency issues, but we’re not there just yet.
We know that we will see poor economic readings over the next several months and possibly quarters. This should not be a surprise when it happens.
We know that markets will be sensitive to headlines and government policies in the short run. Ideas such as payroll tax relief, delayed tax filings, small business loans and more could help minimize the economic impact. The Fed is also expected to cut rates again at its meeting next week.
Finally, and most importantly, we know how investors can navigate significant periods of uncertainty, regardless of the catalyst. Portfolios that are appropriately tailored to an investor’s financial goals is the best way to navigate any type of market. Staying disciplined allows you to handle the bumps in the road without having to swerve around each pothole.
While the future is uncertain and the causes unique, there have been many market pullbacks and bear markets in the past. In each case, the best response for long-term investors has been to stay the course.
Below are three charts that may help to put the bear market pullback in perspective.
1. The spread of coronavirus is still uncertain
Global confirmed cases of COVID-19 have accelerated as the coronavirus spreads through Europe and now the U.S. Health officials have communicated that the path of the lines above will depend heavily on the public response. This has created significant uncertainty for markets and investors.
2. Major indices are officially in bear market territory
Major stock market indices fell into bear market territory this week – commonly defined as a decline of 20% from recent peaks. However, deep, prolonged bear markets often only occur alongside recessions and protracted economic weakness. While this is possible, depending on the outcome of the coronavirus, we are not at that point just yet.
3. It’s important to keep this market decline in perspective
It’s important to keep this bear market pullback in perspective. Historical bear markets have been much worse because of economic weakness. Still, even with the tech bubble and 2008 financial crisis, markets tend to recover once there is clarity and growth resumes. Long-term investors seeking to achieve financial goals over years and decades should keep recent market swings in context, shown in the chart above.
The bottom line?
Investors are facing significant uncertainty due to the nature of the coronavirus. However, staying disciplined has been the best course of action across all types of bear markets.
Please let Retz or I know if you have any questions or concerns.
We are available to talk more at your convenience.