Since first appearing in the United States in February, the COVID-19 virus has affected more than 3.8 million Americans and killed more than 140,000, according to the Johns Hopkins University Coronavirus Resource Center.
Early on, as the pandemic began to unfold, Congress acted quickly and decisively, passing three bills totaling more than $2.3 trillion in March alone and adding another $484 billion in April.
But it’s been three months since Congress passed that bill, and now lawmakers are struggling to shape the contents of another enormous aid package. And time is short—millions of out-of-work Americans will see their unemployment benefits cut next week. Millions more could face eviction notices when a temporary federal moratorium on evictions expires at the end of this week.
Can a bitterly divided Congress come together one more time to pass a massive aid package? And can they do it in a way that avoids picking winners and losers? All eyes will be on the capital as lawmakers face some of the most consequential decisions not only of this year, but of their careers.
Welcome to WashingtonWise Investor, an original podcast from Charles Schwab. I’m your host, Mike Townsend, and on this show, our goal is to cut through the noise and the nonsense of the nation’s capital and help investors figure out what’s really worth paying attention to.
In just a couple of minutes, I’m going to focus on the next big coronavirus aid package, but first, here are a couple of other stories I’m following right now.
This week saw positive news on the coronavirus vaccine front—early results of a vaccine under development at the University of Oxford with the pharmaceutical company AstraZeneca found that the vaccine was safe and that it produced antibodies and other defenses against the virus. But researchers cautioned that despite the promising beginning, much more study is needed. Larger-scale trials are now underway in England, South Africa, and Brazil.
The Oxford vaccine is one of 26 potential vaccines that are in the very early stages of human trials around the world, according to the New York Times vaccine tracker. Two Chinese companies have also had promising initial results in vaccine development. And last week, the American company Moderna published initial results for a vaccine it is working on.
The market reacted positively to these developments, and investors should probably expect favorable market reaction to progress on the vaccine front in the weeks and months ahead. Not only is positive news potentially good for the companies developing these vaccines, but the prospect of a vaccine is key to entire segments of the economy. Travel, for example, is a part of the economy that many analysts believe won’t really turn around until confidence about a vaccine is widespread. Restaurants and bars may not return to full capacity until a vaccine is available. Large-scale events like baseball and other sports, indoor concerts, and theater performances are also likely dependent on a vaccine. So a lot is riding on these trials.
But expect setbacks, too, and market volatility. While the latest reports on potential vaccines are positive developments, an effective vaccine that is widely available remains many months away. Investors should guard against overreacting to every development.
Elsewhere, earlier this week the Senate Banking Committee voted in favor of President Trump’s nominees to fill the two vacancies at the Federal Reserve. The Fed is supposed to have seven governors—but it currently has just five and, in fact, has not had a full slate of seven since 2013.
President Trump nominated two economists in January—Christopher Waller and Judy Shelton. Waller is a long-time economist at the St. Louis Fed, a conventional pick pretty much devoid of controversy. Shelton, on the other hand, is very controversial—she has a history of provocative statements and positions, from advocating a return to the gold standard to questioning whether central banks should be independent from politics.
At their confirmation hearing in February, Shelton faced open skepticism from at least three Republicans on the Senate Banking Committee. Since Republicans have just a one-vote margin of 13-12 on the committee, it seemed her nomination was doomed.
But over the past few months, the skeptical Republicans were won over via follow-up discussions with Shelton, and she cleared the committee on a party-line vote. Waller was easily approved at the same time. The two nominees now await the final step—a confirmation vote by the full Senate, which could occur as soon as August.
At the end of the day, the confirmation of one Fed governor with outlying views isn’t enough to sway the rest of the Fed in its decision-making around monetary policy or its oversight of the economic recovery. Some proponents have said that the Fed could benefit from a diversity of thought and perspectives in its internal debates, and Shelton might provide exactly that.
But other observers are worried that Shelton, who has been an informal adviser to President Trump, represents a trend toward politicizing the Fed, which has traditionally been strictly independent from political influence. The final Senate vote may come as soon as next month.
Finally, I’m also watching the federal budget this week, as the House plans to vote on a package that appropriates funds for Fiscal Year 2021 to several Cabinet departments, including the State Department, Agriculture, Veterans Affairs, and the Department of the Interior.
Amid everything else going on with the pandemic, the more routine business of Congress has kind of fallen off the radar screen. But one of the most important jobs of Congress is the annual appropriations of funds to every federal agency and program. There are 12 appropriations bills that Congress must approve by the start of the government’s fiscal year on October 1 or risk a government shutdown.
The House vote this week on a package of several of those bills is an important first step. A second package is expected to be considered by the House next week. But the Senate has made little progress on any of the bills, and optimism that Congress will be able to pass all of the bills by the September 30 deadline is low. That would force Congress to pass a temporary measure to keep the government open and operating this fall. Neither side wants to shut down the government five weeks before Election Day, so expect that temporary agreement that funds the government at current levels, at least through the election, to be worked out in September.
On my Deeper Dive today, I want to explore what investors should be watching as the debate over the next major coronavirus aid bill unfolds—and how Congress may inadvertently be choosing winners and losers in the decisions that they make about this bill.
First, some context on what’s happened up to now. Back in March and April, a divided Congress acted with unusual speed and bipartisanship to pass four different bills, including the $2.2 trillion CARES Act, the largest piece of economic stimulus legislation ever approved by Congress. What is particularly notable is that the CARES Act was approved unanimously by both the House and the Senate—an almost unthinkable outcome in this time of bitter partisanship in Congress.
In mid-May, House Democrats passed the HEROES Act, an even larger bill with a price tag of more than $3 trillion. Unlike the previous aid bills, it was not the product of bipartisan negotiations. The bill attracted just one Republican supporter, and 14 Democrats voted against it. At the time, even House Speaker Nancy Pelosi acknowledged that the bill was a marker, a kind of starting point for negotiations with the Republican-controlled Senate and the White House.
But in the two months since the House passed that bill, there have been no negotiations between the two parties. Republicans declared the HEROES Act a non-starter, but they did not propose an alternative. At the time, many Republicans argued that the money from the CARES Act had barely even been distributed yet, and that lawmakers should wait for that money to get out into the economy before deciding whether more aid is needed.
Now, as we head into the final days of July, it’s clear to all that more aid is needed. So Congress returned this week from a two-week recess facing enormous pressure to pass another major stimulus bill.
And here’s the key: Almost everyone in Washington believes that this will be the last round of coronavirus aid before the November election. So there’s almost a frantic atmosphere in the capital about what the contents of this bill will be—of what’s in and what’s out, and the growing sense that Congress will essentially be picking who wins and who loses with the decisions it makes over the next couple of weeks. It’s like the last train leaving the station—and no one wants to be left behind.
So let’s take a closer look at three areas that I think are most important for investors to keep an eye on as this bill gets hashed out.
First is the issue of aid to state and local governments. Congress included about $150 billion in aid for states and municipalities in the CARES Act, and the Federal Reserve has launched a $500 billion program to purchase state and local debt. But more is needed.
States and municipalities have seen their budgets hammered by the pandemic, with revenue down in every state in the union. The Tax Policy Center, a Washington-based think tank, estimates that state revenue shortfalls total about $75 billion for fiscal year 2020, which ended in June in most states, and project that they will hit $125 billion in fiscal year 2021.
But here’s the real problem: 49 states—every state except Vermont—have a constitutional or statutory requirement to balance their budgets. The combination of a dramatic revenue shortfall and balanced-budget rules has forced states to make huge budget cuts at a time when government services and support are more important than ever.
California, which had a $6 billion surplus in January, saw that turn into a $54 billion deficit by the time its fiscal year ended in June. The state produced a balanced budget for Fiscal Year 2021 by, among other things, cutting nearly $3 billion from the salaries of state workers.
The story is the same around the country. An estimated 1.5 million state and local government workers saw their jobs eliminated from March to June according to the U.S. Bureau of Labor Statistics.
And it’s not just people—it’s projects. States and municipalities are shelving or pausing infrastructure projects that impact highways, subways, airports and, more.
The HEROES Act contains about $900 billion for state and local governments, but some Republicans in the Senate are wary of providing aid to states whose fiscal management was already a mess before the pandemic. Others are warming to the idea of including aid for states and municipalities in this next bill, but likely at a far lower amount than Democrats have called for.
How this debate plays out will be key for municipal bond investors. By some estimates, states will require $500 billion over the next two years to avoid major economic damage.
Without the passage of a bill that includes significant funds for state and local governments, they’re likely to cut budgets even further, including employment and services. My colleague Cooper Howard, director of fixed income strategy at the Schwab Center for Financial Research, does not expect widespread defaults but recommends municipal bond investors focus on credit quality because higher-rated issuers are likely to have greater flexibility to manage through the economic disruptions caused by the crises.
The second area I’ll be watching is whether Congress makes changes to the small-business aid programs it put into place.
Congress created the Paycheck Protection Program for small businesses as part of the CARES Act. Small businesses could apply for a short-term loan, which would be forgiven if they used the bulk of those funds to keep workers on the payroll. In two rounds of funding, Congress allocated more than $650 billion to the program.
But what’s most striking about the program is that as of today there is still more than $100 billion available. But small businesses aren’t even applying for it. And there is real concern that thousands of small-business owners have just given up, closing their doors permanently rather than try to ride out the crisis.
In a recent survey of small businesses, the global consulting firm McKinsey found that nearly one-third were operating at a loss or breaking even prior to the pandemic. Those businesses just don’t have the resources available to make the changes necessary to operate in this new environment, such as putting in place new health and safety equipment. And because they were operating so close to the edge already, taking steps like limiting customer numbers or switching to take-out and delivery simply aren’t options. For those businesses, programs like the Paycheck Protection Program only postpone the inevitable.
Data on how many businesses have closed is elusive. Yelp, the online advertising platform, puts the number at 66,000. A Harvard study put the number at 110,000 just between March and May. But in many places where re-openings have been slow, it’s hard to tell until it dawns on you that that store or restaurant in your neighborhood just never re-opened its doors.
Congress and the White House recognize that small businesses are critical to the broader economy—when healthy, they create millions of jobs, promote entrepreneurship, and play an important role in the supply chain for larger companies.
Policymakers are talking about making changes to the existing programs, perhaps by adding more flexibility on how to use the funds and turning loans for the smallest businesses into outright grants.
But for many, it may already be too late. And there’s real worry that could slow the economic recovery.
The third question I’ll be watching is how the next bill treats ordinary Americans. And this category includes three interconnected issues: whether there will be an extension of enhanced unemployment benefits, whether there will be another round of direct payments to taxpayers, and whether there will be any help for Americans struggling to make rent or mortgage payments.
The CARES Act added $600 to weekly unemployment benefits, money that millions of Americans have been using as a lifeline while waiting for their workplace to reopen and their job to start up again. But this weekend will be the last check with those additional benefits. With the average weekly baseline benefit only about $333, that means that the average recipient will see a 64% decline in their benefits next month. For many people, that additional money is keeping them afloat.
Now Congress is faced with a decision about whether to extend those enhanced benefits. Democrats favor doing so. While some Republicans oppose extending the benefits, arguing that they act as a disincentive to returning to work, others are coming around to the idea of extending the enhanced benefits, though likely at a level substantially below the $600 that has been in place since late March. Expect this to be one of the toughest issues for negotiators in Washington to reach a deal on.
The second part of what I’m calling the “ordinary Americans” issue is whether low-income taxpayers will get another round of stimulus checks. The CARES Act provided $1,200 checks for every taxpayer earning $75,000 or less, plus another $500 per child.
This is one issue on which there seems to be a growing consensus. The HEROES Act, the bill passed by the House in May, includes another round of identical payments, but bumps the per-child amount up to $1,200 per child up to three children. And Republicans in the Senate appear to be supportive of another round of stimulus payments, though they may advocate lowering the income threshold to target just the lowest-income individuals.
That could be critical to providing another lifeline to out-of-work Americans.
And the third piece of this category is whether Congress does anything to forestall evictions. Under the CARES Act, there was a moratorium on evictions from properties with federally-backed loans. That comes to an end on July 25. Many states and cities have extended eviction moratoriums for longer—Boston, for example, has banned evictions from public housing through the end of the year.
Monthly surveys have found that more than 30 percent of Americans were late with or missed their housing payments in June and July. Census Bureau data indicates that 12 million adults live in households that missed their last rent payment. Experts worry about an eviction crisis that could put millions of people out of their homes and apartments in the early fall—after landlords provide 30-day notices to tenants behind on their payments.
How these issues get resolved may be the most important question of the entire debate over the next round of coronavirus aid. If Congress steps up to support struggling Americans with another round of stimulus checks and supplements unemployment benefits, that money could be used to pay rent—and stave off the coming wave of evictions. It could also be used to make needed purchases, getting that money circulating in the economy.
But the reality is that Congress can’t fix everything in this next bill—there will be segments of the economy that don’t get the aid they are hoping for. That means the consequences of the decisions lawmakers do make will be enormous. Expect this all to play out in negotiations over the next couple of weeks, with both the House and the Senate poised to delay the start of their annual August recess until a deal is done.
It’s doubtful a compromise will be reached before the enhanced unemployment benefits lapse, but I remain confident that lawmakers will approve a major bill in early August.
On my Election 2020 update, a new national poll from ABC News and the Washington Post shows former Vice President Joe Biden leading President Trump by 15 points in the presidential race. It’s the second poll in a week to show Biden with a lead of that size; several other polls have put the margin at 8 to 11 points. But that’s a substantial lead.
But of course we don’t choose our president by popular vote. We choose our president by the Electoral College, which once again will be determined by a handful of battleground states, no more than a dozen.
Polling in many of those battleground states shows Biden with a lead. But relatively few state polls have been taken yet, so there is not a lot to go on. I tend not to take state polls very seriously until after Labor Day, as that seems to be when voters start to really tune into the race.
The other important part of the election is the battle for control of the Senate. Polling there shows that incumbent Republicans are on the defensive in seven states where the party currently holds a seat—Arizona, Colorado, Georgia, Iowa, Maine, Montana, and North Carolina. Meanwhile, Democrats are behind in just one race where they hold the seat, in Alabama. Democrats need to net just three seats to win the majority if Biden wins the White House, since the vice president would break a 50-50 tie in the Senate. Right now, they are probably favored to do so.
But three months is a long time in politics. A lot can and will happen that could change the dynamics of the race. Many veteran Democrats are cautioning against over-optimism, mindful that polls last time around showed Hillary Clinton with a lead right up until the very end, when she lost the race.
I’m also watching the ever-evolving plans for the party conventions. The Democratic convention is now a little more than four weeks away from its August 17 start date, with the Republican convention slated for a week after that. But it’s becoming clear that the conventions won’t be anything like conventions of the past.
One recent report indicated that the Democrats, who once expected to host 50,000 delegates, supporters, and members of the media in Milwaukee for their convention, now believe that as few as 300 people may actually be at the convention site in person. All delegates have been told to stay home, business will be conducted remotely, and the evening spectacles will be a combination of live and pre-recorded speeches and performances. For Milwaukee, which spent more than a year developing plans for hosting tens of thousands of visitors who would spend money in their hotels and restaurants and bars and retailers around the city, well, it’s another devastating economic blow.
Republicans, who moved parts of their convention from Charlotte to Jacksonville, now find themselves in a state that has become a hotspot for the virus. They are looking at outdoor venues for President Trump’s acceptance speech, but it’s unclear whether an audience will come even if people are invited.
Some analysts are speculating that all this may mean the end of political conventions as we know them. Conventions have been decreasing in importance for two decades. Now we will find out whether people will pay attention to a convention that features speeches pre-recorded in the speaker’s kitchen. It is hard to imagine that even the best speech at this summer’s virtual conventions will garner much enthusiasm without a crowd in attendance to whip into a frenzy.
Or maybe the opposite will happen—maybe people will pay more attention to the substance of what’s being said, rather than the stagecraft and the performance. In just a few weeks, we’ll get a chance to find out.
Finally, as I mentioned earlier, Congress soon will head into its annual end-of-summer break and won’t return until after Labor Day—so we’re going to take a break as well.
Today’s episode marks the end of our first year of WashingtonWise Investor. I don’t think anyone anticipated the changes our world has seen since we started this podcast last fall. But it’s clear that many more changes are on the horizon—and we’re committed to keeping you informed about them.
Thanks so much to everyone who tuned in to our first year. I’m grateful for your support and your feedback.
We’ll be back on September 17. We’re already hard at work planning episodes to help investors sort through all the craziness. Kathy Jones will join me this fall to talk about the impact of the pandemic on the bond market. Randy Frederick will be back to talk about which sectors are faring the best and how to identify investing opportunities among companies that are poised to rebound fastest as the economy emerges from the crisis. And Liz Ann Sonders will join me after the election to discuss the market reaction to the outcome. And that’s just a sampling of what we have in store for you this fall.
Please take a moment now to subscribe so you don’t miss our return in September. And if you like what you’ve heard, 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 schwab.com/washingtonwise, 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 keep investing wisely.