We’ve been trying not to inundate you with financial market updates, but that doesn’t mean we are not on top of everything going on. As the effects of our nation’s unprecedented attempt to “flatten the curve” of the infections and deaths caused by the Coronavirus continue at breathtaking speed, we note that despite the extreme levels of volatility in recent days, so far overall market losses have been hovering around the 30% level, but today, so far they have dropped even further, to about -36%.
How low the markets will go before they right themselves is impossible to know. Events, both positive and negative, are happening at breakneck speed and the uncertainty they create all combine to unnerve the markets. History shows the biggest market declines usually occur when the fears are around potential long-term collapse of the economy. In 1973-74, our economy was much more oil-dependent than we are now, and we didn’t have enough oil to operate, due to the Arab oil embargo. This caused a severe and long-lasting recession, combined with hyperinflation. Stocks limited their decline to 50% during that period.
In 2008-09, we had the housing bust, and that triggered real concerns that our banks and the entire financial sector would collapse. Again, this series of events led to a 50% market decline.
The events going on today do not appear to approach that level of risk to the long-term health of our economy, which until a just few weeks ago was humming along at maximum capacity. There is nothing systemically wrong with the economy. We are basically taking a breather to protect everyone’s health, and in a few weeks or maybe months, we will be back in business. As a result, it doesn’t appear to merit another 50% market decline, but with the rapid speed of this decline, no same person can say for sure how bad it will get.
There is no shortage of wild reports and predictions in the media about what could happen, and the sheer breadth of predictions acts to frighten people more than necessary. The “experts” with cool heads say this is going to be short-lasting and it will be behind us in a couple of months or so. The ones getting the most attention of course are the extreme fear-mongering predictions of a severe recession and even depression. I wish we could shut that noise down, but what are you going to do? It’s a free country.
Meanwhile, the federal government is hard at work floating and considering many different approaches to easing the financial burden on businesses and workers who have been impacted by the many voluntary and mandated quarantines that have been instituted around the country thus far. Time will tell what they settle on, but for now, the president is soon expected to sign legislation creating an emergency expansion of the Family Medical Leave Act (FMLA), a new federal paid sick leave law, and expanded unemployment insurance benefits.
The final details are yet to be worked out, but the FMLA expansion allows employees to take up to 12 weeks of paid, protected leave to deal with a medical condition or care for an ill family member. Reasons for leave include complying with a recommendation to quarantine due to exposure to coronavirus, to care for an at-risk family member, and to care for the employee’s child if the school or childcare provider has been closed due to a public emergency. During the first 14 days, the employee may use accrued paid sick leave or vacation to cover that time, and after 14 days, the employer must pay full-time employees 2/3 of their regular pay, and part-time employees must be paid 2/3 the average of their last six months’ pay. No employer is exempt from these rules unless they would jeopardize the firm’s business viability, in which case the Secretary of Labor would have to grant an exception. Good luck getting that, small employers!
Employers with fewer than 500 employees also must provide employees with 80 hours of paid sick leave, at the regular rate, in addition to the sick pay already provided. This leave may be used to comply with a requirement or recommendation to quarantine due to exposure to, or symptoms of, coronavirus, to care for an at-risk family member who is self-isolating due to exposure to the virus, and to care for an employee’s child if the child’s school or place of care has been close due to COVID-19. At the employee’s request, this sick pay may be used to cover the 14-day waiting period for FMLA leave.
Employers who make payments in compliance with the two programs described above will receive federal payroll tax credits. For the emergency FMLA, the credit is 100% of wages paid, up to $200 a day and capped at $10,000 total per employee. For emergency paid sick leave, the employer tax credit can be as much as $511 per employee per day, up to 10 days of leave per employee.
In California, the normal one-week waiting period for both unemployment and State Disability benefits has been waived. The filing deadline for our 2019 federal and state tax returns has also been extended by 90 days, to July 15th, and that means that if you owe taxes for last year, you also get to delay paying them for another 90 days, without additional penalties or interest.
These steps seem to go quite a way toward limiting the amount of economic damage caused by the social distancing required to “flatten the curve” of the virus. While they appear to provide real help for employees, they don’t do much for employers, particularly small ones who are in dire straits as long as they have no paying customers. There are ideas being floated for government loans to help them stay in business, but so far, no decisions have been made.
This is, for sure, a challenging time to be a long-term investor. It can be hard to see how this ends well, but the U.S. economy has emerged stronger after every single past challenge it has faced. There is no reason to think this time is any different. It was heartening to see that China closed their last emergency tent hospital in Wuhan earlier this week. The images of the medical professionals emerging from the hospital and tossing their face masks in the trash were very powerful. It’s helpful to keep in mind that this triumphant event occurred just nine weeks after the first World Health Organization reports came out about, “a mysterious cluster of pneumonia cases of unknown origin,” in Wuhan. If our citizens respond appropriately to the virus here, there is no reason we cannot be in a similar situation in a couple of months here.
Keep the faith. We’re getting through this, and we will succeed as we always have. Many clients have called to discuss these events and we welcome your calls too.