We spent many hours at the end of 2019 looking at all the potential risks in the economy and markets and nowhere did we find a global pandemic caused by a bat in China. This quarter was the worst performing 1st quarter in history with the S&P 500 down 35% on March 23rd, before rallying to close the quarter down 20%. It took only 18 trading days to go from the greatest market in history to a bear market. There was no discrimination in the decline as nearly all companies suffered significant declines, regardless of their health and growth prospects. Unless we are going into a depression, we believe that much of the bad news has now been priced into stocks. However, a market bottom is typically a process and not an event. The coming months will tell us more about this recovery as the duration will dictate its shape: V, U or L.
As a follow up to our overview of The CARES Act sent last week, the third Federal stimulus bill in response to COVID-19, I wanted to provide you with a quick update on additional guidance recently issued on the two key SBA loan programs available to business owners: the Payroll Protection Program (this is the program that will issue forgivable loans and every business owner should know about) and Economic Injury Disaster Loans.
The Payroll Protection Program (“PPP”)
- Signed into law on Friday, these are SBA loans administered by banks. $350 billion of loans will be issued.
- Businesses with < 500 employees, as well as self-employed individuals, can apply for a loan of up to 2.5x their average monthly payroll costs. Payroll costs include wages, health insurance, and retirement plan contributions, capped at an annual salary of $100,000 per employee. For example, if your business average monthly payroll is $50,000 the maximum loan is $125,000.
- If the loan is used for certain expenses (payroll costs, rent, utilities, etc.) during the 8 weeks following the origination of the loan, and as long as there is not a reduction in the number of employees or a greater than 25% reduction in wages paid, the borrower is eligible for complete loan forgiveness. This is a tax-free grant.
- The application was just released yesterday, a copy is attached for your review, and we understand that banks will start processing most loans this Friday (April 3rd) and next Friday (April 10th) for any self-employed individuals or independent contractors.
- There are two things that we recommend you do at this time:
- Calculate your average monthly payroll costs for the 12 months from April 2019 through March 2020 (you will likely need to substantiate this with payroll returns filed over that time period, so you should have those ready as well), and
- Contact your CURRENT business bank/banker. As mentioned, these forgivable loans will be administered by banks, and we have heard that bankers intend to take care of their existing customers first. Many lenders who have not done SBA loans in the past will start processing PPP loans. Each bank will have its own list of required documents that you will need to provide.
If we can help with the average monthly payroll calculations, or working through the requirements of maintaining your pre-COVID-19 payroll and/or reinstating terminated employees to meet this test, please let us know.
Economic Injury Disaster Loans (“EIDL”)
- These loans are administered by the SBA directly, not banks (Online Application: https://disasterloan.sba.gov/ela/).
- Businesses with < 500 employees, as well as self-employed individuals, can apply for loans of up to $2 million. Interest rates will be low, and terms will be 15 to 30 years.
- Eligible businesses may receive an advance of up to $10,000 within 3 days of submitting a loan application.
- Advances made prior to loan approval do not need to be repaid, even if the loan application is denied.
- Businesses will likely be able to receive a much larger loan under the EIDL compared to the PPP, to be used for a variety of operating expenses over a longer time period, but these loans are not forgivable.
As additional guidance is issued we will continue to keep you updated.
Yesterday evening, the Senate passed an updated version of the Coronavirus Aid, Relief and Economic Security (CARES) Act (Stimulus Phase III). The bill is intended to be a third round of federal government support for individuals and businesses and is the product of negotiations between Democrats and Republicans for a bipartisan response to the crisis. Please note that at this time it has not been enacted into law but is expected to be by Friday, March 27th.
We are fielding a number of questions from our business owner clients, who have already been significantly impacted by COVID-19, regarding their options for access to short- and long-term liquidity to minimize business disruption. If this applies to you, please feel free to read ahead to the “business” section of this letter.
In response to the COVID-19 pandemic, Treasury Secretary Steven Mnuchin announced yesterday that individuals can defer April 15th tax payments up to $1 million, and Corporations can defer up to $10 million of tax payments, for 90 days. Please note that many details remain unclear with respect to this relief, and no official written policy has been released yet, but we expect additional guidance from the IRS in the coming days and will provide details once available. For now, here is an overview of what to expect:
- Tax payments due April 15th can be deferred until July 15th without incurring any interest or penalties. This extension is available for all individual taxpayers who owe < $1 million for 2019.
- This 90-day extension of time to pay will likely also apply to 1st and 2nd quarter 2020 estimated tax payments due April 15th and June 15th respectively.
- Mnuchin’s statement did not extend the tax filing due date, so all taxpayers must still file their tax returns or request extensions (Form 4868 automatically extends the filing deadline to October 15th) by April 15th.
- For anyone that anticipates a refund for 2019 taxes, as usual we recommend you go ahead and file by April 15th, if not sooner, to have that money refunded.
“We encourage those Americans who can file their taxes to continue to file their taxes by April 15,” Mnuchin said, especially encouraging people who will be getting tax refunds to do so. “Just file your taxes,” he said, and “you will automatically not get charged interest and penalties” on payments made within the 90-day deferral period.
We are following the Families First Coronavirus Response Act (FFCRA) closely, which will address relief in the form of tax credits and/or cash payments to businesses and employees affected by COVID-19 and will send an update once there is an agreement. For our business owners, we are also closely monitoring federal and state incentives (including low interest loans, grants, unemployment for employees, etc.) and will send details and guidelines once available.
As we briefly highlighted a few weeks ago, as the equity markets began to sell-off, we continue to monitor the economic turmoil and remain confident that global markets will recover from the economic uncertainty that we are facing with COVID-19 (Coronavirus). As we have told clients in the past, volatility and economic/political uncertainty is very normal in financial markets and it’s important to not overreact and panic. It is very normal for investors to feel like this time is different as we go through a correction. While the circumstances driving each are always different, one thing we know is that we eventually emerge, and over time, the markets continue to move higher.
Of course, we are closely following all the headlines and like everyone else don’t know how long this will persist; but what we do know is that the underlying US economy appears strong and the financial system is well-capitalized. We are still in the early stages of truly understanding the full economic, financial and social impact to our economy and globally. There is no doubt at this point that global GDP will slow, but we remind clients that the market is forward looking and already pricing this in to some extent. That said, the possibility of more downside is very real, and the bottoming process may take a while.
We are closely monitoring client portfolios and will adjust as new information becomes available, but we are not in the business of timing markets and calling tops/bottoms. Each of our clients are allocated based upon the plan that we set in place for them and we do not believe it’s a time to deviate from that by either dialing up risk or by bringing it down significantly. With the range of outcomes being so vast, we feel it best to stay the course. It’s not time to sell but it’s also not a time to ditch your bonds and cash for stocks.
We are hard at work trying to identify how we can use this downturn to our advantage: tax loss harvesting, buying great companies at steep discounts, & shedding exposure to areas of the economy that we view as being unstable, such as Energy. You have heard us harp on the importance of diversification and periods like we are currently experiencing are a reminder of why it is vitally important. Our bonds and other diversifying strategies have performed quite well over the last few weeks.
As always, we are here to answer any questions and be a resource. Please feel free to reach out at any time.
Canal Capital Management