Impact of new Executive Order to Economy and Investments

The Dow Jones Industrial Average increased over 7% last month as it inches upward trying to recover from the shock of COVID-19.  While it is slowly recovering from its record loss of -34% in late March, the Dow Jones Average has still lost over 4% since it’s peak in late February.  The Markets have been heavily supported by Government actions like the CARES Act and Payroll protection program.  These programs has provided enormous relief to families especially the unemployed as it has allowed them to pay for rent, buy groceries, and other vital needs and has kept the economy afloat.   

With the expiration of the CARES Act on July 31^st, 2020 and with it the extra $600 a week in unemployment benefits, there could be a significant negative impact to individuals, families, the Economy, and to the Markets.    With Congress unable to agree on new relief program, the Executive Branch stepped in and an Executive Order was signed this weekend that was intended to provide some relief and ease Market tension.  The plan calls for providing $300 per week in unemployment benefits.  States are asked but not required to contributed an additional $100 in weekly unemployment benefits as well.  The enhanced benefit will last until December 6^th, 2020.   In addition, the Executive Order calls for a temporary suspension of the employee portion of payroll taxes (social security and Medicare) for those individuals making less than $100,000 per year through December 31^st.   Employers will still be required to deduct their portion of payroll taxes.   Unless this deferral is forgiven, individuals will have to pay these back payroll taxes on or around January 1, 2021.  There is quite a bit of debate over the legality, cost, and actual economic benefit of a payroll tax suspension.  The main criticisms of the payroll tax deferral is that it does nothing to address the needs of the millions of unemployed people in the United States where help is needed most.  What it does do is add additional burden and cost to employers  who have to execute the program, additional taxes to employees who will have a big payroll tax bill on January 1st, and loss in needed revenue to the Social Security and Medicare Departments.

Economists and Democrats argue that the Executive Order will not be sufficient to provide the fiscal boost required to stabilize the economy and support struggling families.  This is because unemployment in the United States is still at an unsustainable high level and without a significant stimulus relief package, the financial pain that families face will ripple throughout the economy.  Initial unemployment claims this week fell below 1 million for the first time in 20 weeks.  This is well below the initial unemployment claims of nearly 7 million that was filed in late March 2020.  To put these high numbers into perspective, prior to the COVID-19 crisis, the record for initial unemployment claims was 695,000.  The concern among economists are that while the initial  jobless claims that are being filed now, while lower than weeks past, they are still unacceptably high.  Economists also worry that the initial jobless claims being filed now are due to permanent job loss and not to temporary furloughs which could mean a more lasting negative impact to our economy. If no relief program is passed in Congress and these predictions prove true, the U.S. Economy could slide back into a recession and the Markets could suffer further losses.     

I attended a number of economic webinars these last few weeks and the consensus is that the economic recovery will take much longer than the short time frame that was initially hoped for.  This is called a V-shaped recovery where there is a sharp downfall and an equally sharp upward recovery.    The global economy including the United States will probably experience more of an L-shaped recovery where the recovery is long, gradual, and more painful.   The time frame to recovery continues to be dependent on the effectiveness of Federal, State, and Local Government response to the COVID-19 crisis.  Sadly, with the U.S. leading the World in both the number of cases and deaths, clearly the U.S. response has been wholly inadequate.

From a long-term investment portfolio standpoint, we have to be continually be prepared for a bumpy ride as the Markets continue to factor in the impact of the COVID-19 crisis.  In addition, we are entering into a Presidential election cycle.  The winner of the November election will undoubtedly have an impact on the Markets and economy.  Investing for the long-term and staying diversified are two key components to our ability to stay calm during these volatile economic times.  The Dow Jones Industrial Average has lost over 4% since it’s peak in late February 2020.  A diversified index fund portfolio consisting of 50% stocks and 50% bonds has earned a positive 4% return since late February 2020.