Booster Shot

Booster shot.  Stocks advanced for a second day in a row on hopes of a deal in the Senate.  The back-to-back, two-day rally was the first since early February, but it almost didn’t happen as equities lost ground in the final hour of trading while Senators continued to bicker.  

N O T E W O R T H Y

Help is on the way!  WHILE YOU SLEPT, the Senate unanimously approved the $2 Trillion aid package aimed at softening the economic blow of the Coronavirus.  Many details are still emerging but I want to provide some of the highlights, as follows:

• Direct payments to American taxpayers.  Americans with incomes of up to $75 k will receive $1,200 per tax payer. The amount scales down for incomes above $75 k and ends at $100 k.  Couples filing jointly with a joint income under $150 k will receive a $2,400 payment.  Families will also receive $500 per child. The payments will be made in the form of checks and direct deposits made from the US Treasury.
• Aid for companies critical to the nation’s security.  $17 billion has been allocated to help companies that are essential to the country’s security.  This appears to be code for: Boeing.
• Aid for the healthcare system. $100 billion is set aside to assist hospitals and healthcare workers fight the pandemic.  An additional $20 billion was allocated to stockpile medical supplies and equipment.
• Funds for local and state governments.  $150 billion in funding was circled to help states and cities with costs related to fighting the virus and to fill budget gaps associated with decreases in tax revenues.
• Small business loans.  $360 billion in loans to small businesses will be federally guaranteed and offered by community banks.  The loans would carry minimal interest rates but funds used to keep employees on the payroll, rent, and utilities would not bear interest.  New tax incentives will be available to small companies who keep workers employed.
• Unemployment extension.  Unemployment claims will be extended by 13 weeks and benefits will be increased for four months.  Furloughed workers, gig-economy workers, and freelancers are also eligible to apply for these benefits.
• ‘Corporate relief funding.  $500 billion was allocated to aid ailing companies.  $75 billion has been provided for hard-hit industries such as airlines.  The additional $425 will be handed over to the Federal Reserve to leverage into loans to distressed companies.

Regarding the last bullet, there are some notable details which were the source of much negotiation between the parties.  Democrats argued for strict oversight of fund distribution as well as aid recipients.  Further, beneficiaries will be publicly disclosed and would be unable to conduct stock buybacks or issue dividends for the duration of their funding plus one year.  This can have a major impact on investors who hold dividend paying stocks for current income.  Recall that many investors who historically invested in bonds have shifted to dividend stocks in the past 10 years during which bond yields have been perpetually low.  A loss of dividends would be an additional blow to many investors who have already lost significant drawdowns in this past equity market rout.  It is important to note only companies receiving the aid would be subject to the rule and many companies have already secured alternative funding sources to meet cash shortfalls. Investors who do rely on dividends for income should consult with financial advisors to determine potential exposure. The legislation will go to the House where representatives are expected to vote quickly and send a bill to the President for approval.

THE MARKETS

Stocks traded up for a second day in a row as traders were optimistic about the massive financial assistance package being worked on by the Senate. Investors bought up shares of recently beaten down sectors impacted by the virus outbreak on hopes that Government aid would fix the damage.  The S&P500 rose by +1.15%, the Dow Jones Industrial Average climbed by +2.39%, the Russell 2000 traded up 1.26%, and the NASDAQ Composite Index slipped by -0.45%.  Bonds climbed again as spreads came in slightly and 10-year treasury yields rose by +2 basis points to 0.86%.  Crude oil advanced by +2.00%, but still remains below $25 a barrel.

NXT UP

- Annualized Quarter over Quarter GDP is expected to have grown by +2.1, same as the prior reading.  This number is from Q4 of last year so it does not reflect the ongoing economic slowdown.

- Weekly initial Jobless Claims are expected to have jumped to 1.64 million compared to last week’s 281k new filings. This is a big one and will be watched very closely.

- Kansas City Fed Manufacturing Activity is expected to come in at -10 for March compared to 5 from last month.

- Chairman Powell will be interviewed this morning on live TV, which can impact the tenor of today’s trading.

daily chartbook 2020-03-26