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WashingtonWise Investor: Episode 14


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Massive Stimulus Plus Unprecedented Easing Are Latest Efforts to Boost Economy

The U.S. quickly injects massive stimulus into the economy. Will it be enough to keep companies and individuals afloat?

In this episode of WashingtonWise Investor, Liz Ann Sonders—Schwab’s chief investment strategist—joins Mike Townsend to discuss how the coronavirus pandemic is impacting the U.S. economy and the government’s latest response. They dive into the how and why of both the unprecedented stimulus package from Congress and the Fed’s ambitious actions to keep financial markets operating.

Mike also covers two key provisions of the stimulus plan that are of particular interest to investors and outlines the key changes to filing taxes this year.

You can read the “Triage” article Liz Ann references here.

WashingtonWise Investor is an original podcast from Charles Schwab. If you enjoy the show, please leave a rating or review on Apple Podcasts

Click to show the transcript

MIKE TOWNSEND: As Americans hunker down across the country, working from home, overseeing their children as they enter the new world of remote learning, and getting used to “stay at home” and “shelter in place” orders, the economy continues to swoon, and the market remains extremely volatile. Policymakers in Washington, from Congress to the Federal Reserve to the regulatory agencies, are making decisions every day that affect employers, families, and the markets.

It’s an extraordinarily difficult time for investors, a time when it’s easy to feel overwhelmed by conflicting information, uncertain whose advice to follow, and paralyzed by indecision when it comes to your portfolio.

Welcome to WashingtonWise Investor, an original podcast from Charles Schwab. On this podcast, we try to cut through the noise and nonsense of Washington and help investors figure out what’s really worth paying attention to.

On this week’s episode, I am very pleased to be joined by Liz Ann Sonders, senior vice president and chief investment strategist here at Charles Schwab. Liz Ann and I will be discussing the impact of the coronavirus pandemic on the economy and the markets, the latest developments on Capitol Hill and at the Federal Reserve to combat the virus, and how investors should be thinking about the fast-changing environment.

Now, before I go any further, let me just note that I am recording this on the afternoon of Tuesday, March 24, so information included in this podcast is current as of that time. We know that some of the details are likely to be overtaken by events, so make sure you follow me on Twitter @MikeTownsendCS and visit the Schwab market volatility hub at to get the very latest updates and analysis.

So let me begin with a look at what’s making news right now.

Congress appears to be poised to pass the largest economic stimulus package in history after days of difficult and often frustrating negotiations. Now you can easily find from other sources the details about the important elements of the bill, from cash payments to middle- and low-income Americans to expanded unemployment benefits to aid for all kinds of businesses, from your local shop to the nation’s struggling airlines. But I want to focus on a couple of provisions that aren’t making the big headlines but are really important for investors, particularly those in retirement.

The first is that the legislation waives required minimum distributions—usually known as RMDs—from retirement savings accounts for 2020. Now remember that at the end of 2019, Congress changed the age at which individuals must begin taking required minimum distributions. Prior to 2020, the age was 70 ½, so anyone who was that age or older by the end of 2019 needs to be taking their RMD. For 2020 and going forward, that age changed to 72.

But the important thing about the legislation agreed to by the Senate this week is that no one, no matter your age, will have to take a required minimum distribution in 2020. This is critical because the amount of your RMD is based on the value of your account in 2019. And we all know that the market has fallen some 30% or more since the end of 2019. So taking an RMD this year means, for most people, that the withdrawal would end up being a much larger percentage of their account than was intended. Congress recognized this and waived the requirement for 2020.

The second thing I wanted to mention is that Congress also created a new rule that allows individuals to withdraw up to $100,000 from their retirement account, without penalty, for coronavirus-related expenses. Early withdrawals from retirement accounts typically come with stiff penalties. But this new rule allows individuals who test positive for the coronavirus; who have a spouse or dependent test positive; or who have been impacted financially due to being quarantined, laid off, or furloughed from their job to draw down from their retirement account if they need to.

Now, just because you can do this does not mean you should do this. Tapping into these funds should be one of the last resorts. But it’s important to know that this option is available for those who need it.

The bill being finalized in Congress is massive—and these are just two provisions of hundreds that will matter. Take the time to read a good article or two that summarizes the key provisions to make sure you understand how the package can help you, your family, and your business.

One other important development in Washington was the announcement that Tax Day has officially been moved from April 15 to July 15. Now, like so many other issues, this has been a quick-developing story. First, on March 17, the IRS announced that it was pushing back the tax payment deadline to July 15—but that tax forms would still need to be filed by April 15. Just three days later, on March 20, the agency, at the direction of Treasury Secretary Steven Mnuchin, reversed itself, announcing that tax forms would not need to be filed until July 15.

Here are the key things to know about this change:

First, if you are expecting a refund, there is no reason to wait to file your taxes. File them as soon as possible, as the IRS is processing refunds as quickly as it can.

Second, if you owe taxes, well, there’s probably no reason to file before the new deadline of July 15. That’s three more months to keep that money in your pocket.

Third, and this is new information, the IRS has confirmed that the deadline for IRA contributions has changed. If you want to contribute to an IRA for 2019, your deadline is now July 15 of 2020.

And finally, it’s important to note that many states have already aligned their state filing deadline with the new federal filing deadline. But not all states have done so. It’s very important that you check with your state tax authority to make sure that you know the proper date for filing your state income tax return.

With that, let me turn to my special guest. Liz Ann Sonders is Schwab’s chief investment strategist and a regular presence on CNBC, Bloomberg, and other financial networks. Liz Ann, thanks so much for joining me.

LIZ ANN SONDERS: Oh, thank you so much. It’s always great to join you, Mike.

MIKE: Well, Liz Ann, first off, let’s talk about the massive economic stimulus bill. Normally, a stimulus bill is meant to get money in the hands of consumers who can go out and spend it—but in many places there is nothing to spend it on. Maybe “stimulus” is the wrong word for this legislation. But what does Congress hope or expect will happen?

LIZ ANN: So I think, you know, the most important point, Mike, that you made in that was that maybe “stimulus” is the wrong word to use, and I would agree with that. I actually wrote about this, among a number of other things, earlier this week in a report that I titled “Triage.” And I really think that what this version of fiscal policy and, quite frankly, adding to it what’s been done on the monetary policy side, is more about triage. It’s sort of the rescue mission. If you think about a natural disaster, the first stage where the government comes in and tries to help is more about the rescue mission, as opposed to the post-natural-disaster stimulus. And to your point, when you have much of the economy in this lockdown mode, that money that is coming to individuals, in whatever form that takes, is clearly not immediately going to go into the economy, but allow for some stability, and particularly, emotional comfort for people that just don’t know what the next step is, especially if they’ve lost their job.

MIKE: Well, you mentioned the Federal Reserve and monetary policy, and that’s really the other critical part of the government’s response to this crisis. The Fed has taken an incredible number of sweeping steps, including on Monday expanding its quantitative easing efforts to an unprecedented level. So give us a quick overview of those latest steps and what they are intended to accomplish. And I guess, how those steps complement the fiscal stimulus.

LIZ ANN: Sure. And, you know, Mike, we’d need an entire additional hour to go through everything that they have done, and the names of all of them, and the acronyms, much as we lived through during the 2008 crisis. It’s sort of an alphabet soup of programs that the Fed, at least in this case, has either brought back, you know, we’re reliving some of the acronyms from the 2008 era, as well as some new programs. I think, importantly, you touched on “unlimited,” what they announced yesterday was unlimited purchases of Treasury securities, agency mortgage-backed securities, with no particular limit. So at this stage, it’s unlimited. And that really is to support market functioning and allowing the financial system to have this kind of support.

It’s almost like … to use terms that are being used quite often these days from a health perspective, it’s almost like the ventilator for the patient. They also have the establishment of a couple of new facilities to support credit, both to larger employers as well as to smaller companies. They are establishing some facilities to support the flow of credit to both the consumer side of the economy and the business side of the economy. They’re expanding their money market liquidity facility. So there’s just a tremendous amount that they’re doing that in some cases will be in partnership with the private sector in order to keep the financial system, kind of plumbing, functioning.

It, also, is not really stimulus in a traditional sense, in that it’s likely to, on its own, lift the economy or lift the stock market, but the last thing we would want in this type of environment is for the entire financial system to shutdown akin to what happened in 2008. So it really is “shock and awe” coming out of monetary policy authorities, which is a good thing.

And in addition, some of what they’re doing is to help unclog what’s happening, the stress that’s happening in the credit markets. And a lot of that is a function of the crash in oil prices. So on top of the virus and the impact of the economy, we’ve had this sort of other exogenous factor of the OPEC price war and the crash in oil prices and the hit that that has caused to the energy sector, both on the equities side as well as the credit side.

MIKE: Let’s go back to the economic stimulus legislation and go through some of the key parts of the bill, and I’d like to get your take on the potential impact. First off, two key parts of the bill for individuals are the plan for cash payments to all citizens below $75,000 in income or $150,000 for couples and the expansion of unemployment benefits. Now obviously, this will help people in the immediate term, but are these more than just a temporary Band-Aid?

LIZ ANN: Well, again, when you provide cash to individuals, in an environment where the economy wasn’t locked down as it is in many places, it, historically, has been the case that that money finds itself into the economy fairly quickly. I think it’s likely … more likely to just buffer savings in this environment, again, especially for those that might be out of work, while they wait for unemployment insurance to kick in, while they wait to hear, assuming they’re furloughed, whether they’re getting their jobs back. So I think it will likely be stored more than spent. And even if there’s, of course, the desire the spend, as we touched on, we have both the demand side being constrained right now, but we also have the supply side being constrained right now. And I think that’s the most important factor that’s different this time versus whether it’s other crisis periods, whether it’s other natural disaster periods, which makes trying to gauge the near-term impact of this so-called stimulus on the economy.

MIKE: Well, you talked about the other side of the coin here, and the other piece of the bill that has received a lot of attention is the massive injection of loans and other support particularly for small businesses. But do these have any hope of keeping these business viable? Because perhaps the most heartbreaking of all the effects on the economy of this has been the shuttering of small businesses.

LIZ ANN: So I think there’s several pillars to this. I think for many small businesses this will be an elixir, help them survive through whatever period of containment this represents and allow them to come out the other side. But I think there’s a couple of other problems. One, we also know it may possibly allow for so-called zombie companies, which have really been prevalent, especially among the small-cap indexes when you think in market terms, but smaller businesses that by virtue of all the unprecedented monetary policy in the last cycle, and interest rates going to zero, and credit spreads being so compressed, that it allowed some companies that really didn’t have a right in terms of traditional balance sheet metrics to stay in business but kept them afloat. And they’re called zombie companies because they just haven’t had the cash flow to support ongoing operations, but have been kept afloat by debt. So hopefully, we don’t, you know, put a … kind of a prop under them for another extended period of time.

But then the third thing, and this was … earlier this week, I had a conversation with a friend of mine who works in insurance, and many of his clients are small businesses. And he said he had about a hundred conversations with his clients in small businesses, and the vast majority … he said, “If I had to guess, it was at least 80- if not 90%, said that they are uncomfortable taking on more debt. They would love to figure out a way to receive something, stimulus in whatever form, that didn’t mean they were adding to their debt loads.” So there may be some resistance by certain companies that were already uncomfortable seeing their debt go higher, you know, kind of adding to it in order to allow them to survive this period. So I don’t know that this is universally going to be given thumbs-up by small businesses.

MIKE: Well, there’s a lot of aid for bigger businesses, too. I wonder if you think there is danger in what has effectively turned into Washington picking winners and losers for the business side of the stimulus packages. You know, the airline industry gets a backstop, but another industry does not. The list of industries looking for help—from rental car companies, to public transportation like the New York City subway, to Amtrak, to the hotel industry,­ on and on­, it seems impossible to figure out who gets help and who doesn’t.

LIZ ANN: It’s not only difficult at this stage to figure out where to draw the dividing line of critical industries that need to be saved, but also what … if they’re true bailouts, are there contingencies associated with that? Are there requirements? You know, a lot being discussed as to whether then if you receive some money you can’t turn around and put it into buybacks or even, in some cases, dividends. How you decide who gets the money, who doesn’t get the money. What we know is that when you’re in an environment like this where decisions have to be made very, very quickly under a tremendous amount of pressure, almost inevitably, when you have intervention like this, whether it’s from the government, whether it’s from monetary policy authorities, and we’ve … like you know, we’ve lived this for the last 10 years, once the dust settles, even if and about programs that ultimately could be deemed having been successful, things like TARP, still end up having a tremendous amount of controversy associated with them, and industries that continue to be under pressure. Just think about broader financial services industry and the banking industry really got painted with a very negative brush for a decade. And so I think there are going to be ramifications of whatever decisions are made, not least being, to your point, that there’s going to have to be decisions of kind of who gets the help and who doesn’t. And I think there will be outcry, maybe diminished in the near-term because people are more focused on their own health and their own particular circumstances, but down the road that is something that we are going to face for sure.

MIKE: Well, Liz Ann, let’s talk about the market reaction to the stimulus. So far for each round of the stimulus, there’s not been a sustained positive reaction from the markets, though news that Congress was close to a deal sparked a rally on March 24. Is there anything in the new bill that might change that, or is the idea that it will be the combined effect of all the stimulus that will cause a change? Or maybe market reaction has very little to do with what Congress does or doesn’t do, and instead it’s just about waiting for the “flattening of the curve” in terms of fighting the virus?

LIZ ANN: That’s been our thinking, that all of the help that’s being provided on the monetary side, on the fiscal side, is just that—it’s help. I think the situation would probably be worse if we were not seeing that, but our assumption is that until you see a flattening of the curve, and it may not necessarily be where we wait … where we wait until the U.S. actually sees a flattening of the curve, but many of the countries that have been ahead of us. We already saw it in China; we’ve started to see it in South Korea. I think, in particular, if we see some improvement in Italy … and the recent news is, at least on the margin, a little bit better. Given the stock market is a discounting mechanism, typically, it looks ahead, maybe you don’t have to get to the point where definitively you look at a flattening of the case curve in the United States, but enough indication outside of the U.S. in regions and countries that were ahead of us in this, but not only a flattening of the curve, but how quickly their people get back to work? Do you see a pickup in business activity? And clearly, we can start in areas like China and South Korea to see how that is progressing. You add it all into the mix, and it wouldn’t surprise me to see the stock market recovery come before you see the recovery in the actual economic data.

And it’s really the opposite of what happened on the way down. We saw the virus was the big news and we started to get a sense of the impact of that; second, it impacted the financial markets; and now, it’s just starting to impact the economy, and I would say the same order of things will likely be on the upside.

But importantly, Mike, what I think we may also be in the midst of is … it’s kind of a more existential thing, where we may be seeing what is often called the demise of the “Fed Put.” Meaning that we’ve been in this era for really about a decade, where not just in the United States but globally, that as long as central banks were easy with policy, whether it’s keeping rates low, lowering interest rates, doing some form of quantitative easing, whatever the facility or the program was, that’s really all that markets needed. It was Fed is easing… even if it was like last fall when the Fed simply was buying Treasury bills in order to unclog the repo market, the narrative was the Fed is easing—stocks go up. We may be exiting that environment where this narrative of as long as central banks are easing, risk assets go higher. And that is a maybe, you know, a more secular shift that we’re seeing now that really has little to do with the virus specifically.

MIKE: Well, Liz Ann, unemployment claims are skyrocketing—can you put in context for us what’s happened over the last few weeks? Where do you think that number eventually goes? And what are the implications of such high unemployment?

LIZ ANN: So we’ve been for an extended period of time seeing unemployment claims down in the low 200s, but now we’re seeing pretty significant spikes probably in the high 200s range. There are estimates, and I … you know, we don’t do economic modeling across individual economic indicators. So even in a normal environment, I’m not publishing weekly estimates for what claims are going to do. It’s incorporated into my broader thinking about what’s going on in the economy and the market, but there’s no publishing of precise estimates. But I can tell you that there really isn’t a consensus right now for where claims are likely to spike to, but as I put in my “Triage” report earlier this week, across the firms that have published estimates, their economics departments, and I think we have so far, ISI, B of A, Merrill Lynch, I believe Goldman Sachs, have estimates in the next few weeks of that 200,000-and-change jumping to somewhere between 2½ and 4 million. Now, to put that in the context of history, in the multiple decades of data that we have on weekly unemployment claims, the highest jump we ever saw was just under 700,000, and that was at the end of the second of the back-to-back recessions that we had in the early 1980s. So talk about … if you did it in a chart, it would literally be off the charts, even if you looked at a 50-year history of unemployment claims.

Now, I think those are pure guesses. It is impossible for anybody to truly know the scope of this. The key, though, is how long-lasting it is. There are companies that can furlough workers. Those workers have access to unemployment insurance, but they may also have a promise to get their job back or at least a hope that they get their job back. So, again, with a lot of this economic data, the hope is that the pain, which is going to be of a magnitude, in some cases, even beyond what we experienced in the Great Depression, will be quite short-lived. That’s what we all want to knock wood on.

MIKE: And do you think that is true, Liz Ann, for sort of the broader economic data? You know you see analysts out there saying we’ll have a steeply, and potentially very negative, GDP for Q2 but anticipate that things will turn quickly, maybe in Q3, but more talking now like it will be Q4 before things really turn around. Based on what you know right now, what are you anticipating for a turnaround for the overall economy?

LIZ ANN: I would say when … maybe we’re not going to get truly an all-clear sign, but when we start to see the incidence of viruses flatten out and we’ve kind of got those with the illness contained and things are opening back up, I still think that hoping for a true V-shaped recovery may be a stretch. And I’ll use the word again, “existential.” I think we have to think longer term about whether just the nature of our economy is changing. When I think about how work has now moved to remote—whether it’s work from home, I think we’re really rethinking that. We know that lot of folks in the younger generation have been kind of pushing for this, and many of the industries that are newer industries have had a different mindset around remote work. And if you think about environmental challenges, I think that shift, though clearly not to an environment where everybody is working from home, but I think we may be shifting in the thinking around how work gets done. I think there will be a lot of pent-up demand for certain things; certain industries might see V-shaped recoveries, but then other areas—maybe even within travel, whether it’s cruises—probably won’t look like a V-shaped recovery. So I think you’re going to have some V-shape, you’re going to have some U-shape, hopefully not a lot of L-shaped, you know, recoveries, if you want to call it that, where you just don’t get much of a lift at all, but I really think once … once we start to analyze the longer-term impacts of this, we’re going to see some secular shifts that began with this virus.

MIKE: Liz Ann, something that you have spent a lot of time thinking and talking about over the years is the impact of the deficit and the national debt. Now Congress is in the process of passing multiple bills—even the bill that is going through this week is unlikely to be the last—so we’re talking well over $2-$3 trillion in spending, and I don’t think anyone thinks Congress should be doing anything different. But have you thought at all about the implications of that on the federal deficit, on how debt drags on the economy? Is this just another case of the government saying, well, rates are so low that they are basically borrowing for nothing? What are the implications of all this in the longer term?

LIZ ANN: And, Mike, you and I have spent a lot of time talking about this informally, and even on your podcast in the past. This was already, I think, a big problem before the impact of the virus. But I was always very quick to point out that I didn’t view this sort of high and rising burden of debt driven by running what, until the virus, was already, you know, a trillion-dollar-per-year, if not more, budget deficit. So remember long-term debt is a cumulative effect of running budget deficits. And we were already looking at pretty egregious numbers before this, which are now going to be going sky-high. But I’ve been quick to tell people that I don’t view it as a moment-in-time crisis, but more of a simmering crisis over time. And to your point in the question, Mike, one of the implications of carrying a high burden of debt, especially one that continues to increase, especially if debt is increasing at a faster pace than the economy is growing, is it puts downward pressure on economic growth. And this is not just a U.S. phenomenon. This is not a recent phenomenon. This is a global phenomenon, and this is a longstanding phenomenon. All one has to do is look at Japan and how weak their economic growth has been for 20 or 30 years because of this high and rising burden of debt. Unfortunately, that story just grows in magnitude as we go from here with what’s going to be added to the deficit, and, in turn, the debt.

I think one of the implications may be that down the road, there’ll be less criticism about what we are doing to combat the virus and the virus’s impact on the economy through the containment, but what was done prior. The fact that, very unique in this cycle, was that we saw massive fiscal stimulus through the budget, through tax cuts, at a time that was unique relative to history. Normally, you see that kick in when you’re trying to pull an economy out of recession, but we did it during a growth phase in the economy, and now we’re adding to that burden. So again, I think maybe the sharpest criticism may not be on what we’re doing right now, but what we did prior to this.

MIKE: Well Liz Ann, as we wrap up, we need to set our sights on what we as investors can do. You often talk about how panic is not a plan and that we all need a real financial plan and we need to stick to it. But when things are this out of control, it’s hard to keep that in mind. So what insights do you have to help investors weather this difficult period?

LIZ ANN: So it really does vary, but as I often say with regard to investing, that investing should never be about a moment in time—meaning, if I’m making all-or-nothing decisions, if I’m thinking in terms of “should I get in, should I get out,” which infers that you’re making all-or-nothing decisions—that’s no way to approach investing. It should be a process over time, a disciplined process over time. Quite frankly, when you look at the history of bear markets, of recessions, particularly when they come in conjunction with one another, like appears to be the case this time, bottoms, however they’re formed, tend to be processes over time, not moments in time. We don’t know ultimately what the severity of this is going to be. They often also don’t ring bells. They don’t ring bells at the top. They don’t ring bells at the bottom. It was fairly subtle things you could point to back in the March 2009 timeframe. There wasn’t some massive announcement on March 9 that was an all-clear sign. So you also have to understand that you’re not necessarily going to get a definitive signal when you’re near the bottom. But if you’re disciplined around things like diversification, and, particularly, rebalancing, where if you’re getting bigger swings in the market, more volatility, your opportunity to rebalance a bit more frequently may also give you a bit of an edge. Because, if you think about it, rebalancing forces us to do what we know we’re really supposed to, which is buy low, sell high, or maybe, more important, would be to, say, trim high, you know, add low, not all or nothing.

And it’s hard—it’s hard to maintain that discipline, but if you’re doing both when the market is swinging on the upside and everybody is loving it, that’s the environment you should have been paring back some of the momentum areas. And if you kind of get into that mindset, it’s about as close a thing as you get to a free lunch. Because I don’t have the ability to pinpoint bottoms any better than anybody else, but trying to stick with that discipline, forcing yourself to do it when it doesn’t feel good, both on the upside and the downside, I think, again, closest thing you get to a free lunch in this business.

MIKE: Oh, difficult advice but great advice. Thank you so much for joining me, Liz Ann.

LIZ ANN: My pleasure. Thank you, Mike.

MIKE: That’s all for this episode of WashingtonWise Investor. Please take a moment to subscribe so you don’t miss an episode. And if you like what you’ve heard, please leave us a rating or a review on Apple podcasts or your favorite listening app—those ratings and reviews really do matter.

For important disclosures, see the show notes or, where you can also find a transcript.

I’m Mike Townsend, and this has been WashingtonWise Investor. Wherever you are, stay safe, stay healthy and, most importantly, stay home, and keep investing wisely.

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