End of the Beginning?

Friday, March 27, 2020

By: Christopher Cline

"Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning."

Winston Churchill said this in 1942, after the British began driving German troops out of Egypt. The battle of El Alamein marked a turning point in World War II; as Churchill later wrote, "Before Alamein we never had a victory. After Alamein we never had a defeat."

Politicians have lately taken to calling themselves “wartime” leaders as they deal with the pandemic. This comparison is, for the most part, horribly overblown: there is no world leader of the caliber of a Roosevelt or Churchill. But in one respect the analogy seems appropriate. Congress has passed, and the President has signed into law, a massive $2 trillion stimulus bill (known as the Coronavirus Aid, Relief, and Economic Security Act (or “CARES Act”), comparable in size only to wartime spending. They did so quickly, unanimously and in a bipartisan manner in keeping with the scope of the problem.

As reported in The Wall Street Journal, the spending package includes:

  • $301 billion in direct payments to households.
  • $250 billion for unemployment insurance.
    • Workers covered will include “gig” workers and independent contractors.
    • Benefits will be extended from 26 weeks to 39 weeks.
    • For the first four months, benefits will increase by up to $600 per week.
  • $349 billion in small business loans. If used for payroll, and if no employees are laid off, loans may be forgiven.
  • $500 billion in loans to corporations, states and municipalities.
  • $32 billion in grants to passenger and cargo air carriers.
  • $150 billion in direct aid to states.
  • $221 billion in tax benefits for business.
  • $340 billion in supplemental spending (including $117 billion for hospitals and veterans’ care).

On Thursday, Federal Reserve Chairman Jerome Powell appeared on a national morning news show to emphasize the Fed’s aggressive support of the U.S. economy. So both the Fed (on monetary policy) and Congress (on fiscal policy) are taking big, bold steps to address the economic harm this virus has caused and will cause.

That boldness is needed, because Chairman Powell also pointed out that the US economy could be already nearing or in recession. Technically, a “recession” is defined as a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters. In other words, it is usually a “lagging” measure; by the time it has been formally identified, it already has happened. In this case, however, with unemployment benefits claims surging to 3.28 million last week and with state-wide lockdowns grinding the economy to a halt, it is easy to call now.

The markets began responding positively to even the prospect of the stimulus package. As of the close of market Thursday, the Dow Jones Industrial Average finished up 21% from its Monday low, its strongest three-day percentage increase since 1931, shrugging off the horrendous unemployment figures.

Some CARES Act Details.

With regard to the payments to individuals, people are eligible for checks up to $1,200 and married couples filing jointly are eligible for checks up to $2,400, with an extra $500 for each child. The higher a person’s income, the less money he or she will receive, with an absolute cutoff for individuals earning more than $99,000 and couples with income above $198,000. Even people with no income and those on Social Security will receive payments.

The $350 billion small business loan program could be more problematic. The loans will be available to companies with fewer than 500 employees, including independent contractors. It will be administered by the Small Business Administration, a federal agency that was responsible for distributing only $28 billion in all of 2019. The small business sector employs almost half of the private workforce in the U.S., and has been among the hardest hit by lockdowns. Treasury Secretary Steven Mnuchin on Wednesday said banks should be able to issue small business loans by the end of next week. The loans, which are guaranteed by federal government, will be forgiven if the borrowing business uses the funds for payroll costs, mortgage interest, rent and utility payments, and if it retains its employees.

But there are concerns that the help won’t come fast enough. “There is little in the stimulus compromise that will help small businesses in the immediate future,” said John Arensmeyer, president and chief executive officer of Small Business Majority (quoted in a post by Bloomberg Research). “When a crisis strikes there are multiple phases, and we are still in the emergency phase. Right now, small businesses need cash fast to stay afloat.”

Investment Implications.

In light of the stimulus and the market movements of the past week, many investors are wondering if it’s time to get back into the market. A report from Reuters suggests that Credit Suisse, BlackRock and J.P. Morgan all are considering the right time to invest in stocks. “The unprecedented actions represent the type of decisive policy response we have been calling for – and set the scene for an eventual economic recovery,” Jean Boivin, head of the BlackRock Investment Institute, said on Thursday. The world’s top asset manager said the market sell-off had created significant value for long-term investors and told clients it now favored “rebalancing into risk assets.” BlackRock said it preferred U.S. equity markets due to the strength of Washington’s policy response and the quality of the market.

Many investors are still trying to work out the right time to re-enter markets. At least one model from JPMorgan shows the correct time is now, based on a view that a recession would be short--lived.

At Riverview, we are not ready to say that it is time to invest heavily in stocks (indeed, we do not believe in “overweighting” or “underweighting” any segment of the market). However, it may be a very good time to rebalance portfolios and consider “tax–loss harvesting.” Such tools allow an investor to buy depressed assets at depressed prices, a hallmark of solid investing.


We have a long way to go yet before getting back to business as usual. We don’t know when infection rates will peak and then decline, nor do we know how long small businesses will have to struggle. What we do know is that, while almost none of us endured the Great Depression, we are now living through a second great economic upheaval in less than 15 years. In one month, we have seen market declines greater than any in recent history over the same time.

And yet we should take some comfort in the fact that the first phase of this crisis is over. We have identified the enemy and begun to mobilize against it. We have, for a week at least, put aside partisan differences and taken bold steps to help those who are struggling. It is, at least, the end of the beginning.



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