As the COVID-19 pandemic continues to unfold, people are anxious about a double-whammy of illness and economic impacts. Our recent special economic update webinar gave us the opportunity to share information, answer questions, and help viewers understand the context behind the numbers in the headlines. It is our job as financial advisers to step back and analyze the impact this pandemic will have, and to assist you in making good decisions that will help your finances and businesses recover over the long term.
What’s causing the most significant risk to our economy right now isn’t the coronavirus itself, but rather, the measures we’re taking to stop the spread of the virus. Many businesses across the United States have been forced to shut their doors. Some of the industries being hit the hardest are restaurants, travel, entertainment, and automotive sales.
As a result, consumer spending is down and will be for the 1st and 2nd quarter of 2020, but government spending should offset some of those weaknesses. The federal government has already agreed to spend $2 trillion to stimulate the economy, with another $4 trillion in support coming from the federal reserve. While the economy will most likely enter a recession, the stimulus bills that have passed and those that are being considered will go a long way to fill that gap.
Many are comparing our current economic situation to the recession of 2008. From our point of view, we see several encouraging differences. The U.S. consumer was in a much stronger place prior to the current crisis. In 2008, there were many structural imbalances in parts of the economy, including business sectors that were overbuilt. When that crisis passed, people were unable to return to their previous employment. Today, that’s not the case. It is our belief that most people who have been laid off or furloughed will be able to return to their profession once the public health crisis is resolved.
Overall, people are optimistic about the economic future, which is good news for investors. While significant drops in the stock market may appear frightening, history shows us that drops like this are routine and happen about once every five years. Rest assured that this downdraft is still in line with previous bear markets our country has experienced, and the market always recovers.
Personal Financial Planning
Times like these put a spotlight on the importance of having a financial plan, especially an emergency fund. For many people, those savings will carry them through this period. Fortunately for those without a sizable emergency fund, the federal government is providing aid through the CARES Act, or Coronavirus Aid Relief and Economic Security Act. The most publicized relief aid is the recovery rebate checks. Each individual taxpayer whose income falls within the limits will receive $1,200; married couples filing jointly will receive $2,400. Families with children will also receive $500 per qualifying child.
Unemployment benefits have been expanded and improved upon during this time. Applicants can receive unemployment payments for an additional 13 weeks if necessary. Unemployment is also now available for self-employed and gig-economy workers.
If you need to withdraw funds from your 401(k) or IRA, you can do so without incurring a penalty. There are also COVID-19 loans available, where you can borrow up to $100,000 from your 401(k). Loans like these were previously limited to $50,000. The government has also suspended Required Minimum Distributions (RMDs) for 2020. If you’ve already taken RMDs or have other questions about the ways your retirement accounts are affected, let’s talk.
Click here for more details on relief for individuals.
In an effort to save jobs and keep the economy running, the U.S. Small Business Administration (SBA) has created loan programs to help keep businesses afloat. Businesses with fewer than 500 employees may apply for an Economic Injury Disaster Loan (EIDL). This loan is designed to support both for-profit and non-profit companies. According to the SBA, applicants will receive a $10,000 advance 3 days after completing the application. One stipulation is that the forgivable $10,000 advance must be used for costs associated with payroll, paid leave, mortgage or lease payments, and meeting increased production costs.
The SBA Paycheck Protection Program is also available for small businesses and 501(c)(3)s with fewer than 500 employees. These loans are limited to 2 ½ times your monthly payroll costs, up to $10 million. PPP loans will be forgivable to the extent that they cover payroll costs and you retain 75% of your workforce. If you’ve already laid off workers, you can still bring them back to qualify for the PPP.
Another option is utilizing new payroll tax credits. The Employee Retention Payroll Credit gives business owners a refundable 50% payroll tax credit. However, this benefit cannot be used alongside any of the other credits or loans, so it’s worth analyzing whether the loan or tax credit would be more beneficial to your business. The SBA is also offering relief on existing 7a or 504 loans. They will make loan payments for 6 months and in addition, the lender may also defer payments for 6 months. Click here for more details on relief for businesses.
This time in our history can be scary and uncertain, but if we take a step back and look at the big picture, there are many reasons to be optimistic about the future. Stay home, stay calm, don’t touch your face, and don’t touch your portfolio.