A First Assessment of the Congressional Stimulus Package | Lord Abbett
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Institutional Perspectives

Lord Abbett’s own Giulio Martini argues that policies already put in place in the United States, combined with a large fiscal package, may be enough to stabilize financial markets.

The global economy continues to suffer from an unprecedented negative shock to aggregate supply and demand as countries introduce mitigation measures aimed at limiting exposure to the novel coronavirus (COVID-19). These measures have imposed severe limitations on economic activity as they seek to avoid putting people in proximate contact with each other in order to minimize potential viral infection.

The severity of the negative economic shock is amplified by its global nature and the fact that the primary impact is in the labor-intensive services sector. This denies national economies of important shock absorbers that normally moderate an economic downturn. As a result, unemployment is likely to rise sharply as global supply chains fail and business activity is curtailed in broad swaths of the economy.

The most important role for economic policy, I would argue, is to prevent the amplification of the initial blow to the economy by minimizing financial distress and demand destruction. Central banks globally have stepped in very quickly in the current crisis with aggressive monetary policy, measures to maintain liquidity in markets, and support for credit to companies.

In the United States, the Federal Reserve (Fed) and the U.S. Treasury have cooperated to create new funding facilities that are aimed at maintaining the flow of credit without demanding undue support from private sector balance sheets. The bill just passed in the Senate would potentially expand the scope for these programs substantially. Particularly important, but more difficult to execute, is their extension to small and medium-sized businesses.

In the short-run, the most important measures needed to support the economy are, in my opinion:

  • Income-replacement for workers who become unemployed; I see this as the most effective way to prevent consumer demand from falling sharply.
  • Measures to avoid layoffs by providing support to businesses would be even more effective by both supporting consumer spending and avoiding dislocations to business activity in the medium-term.
  • Direct income payments to households would help support consumer spending but may be less effective if many households opt to save the temporary boost in income as a cushion against the increased probability of job loss (precautionary saving tends to increase in an economic downturn).

The Senate and the White House have apparently agreed on a bill with the following salient features:

  • $500 billion to back loans and assistance to U.S. companies and state and local governments
  • $350 billion to aid small business
  • $150 billion in aid to hospitals and other healthcare providers
  • $1200 payment to every lower and middle income adult plus $500 for each child
  • Unemployment insurance increased by $600 per week and extended to four months

Details, terms and conditions, and other administrative features of the programs are yet to be determined, but it is clear that this fiscal package is far larger than the approximately $800 billion that was allocated to support the economy following the 2008-2009 financial crisis.

It must be approved by the House and signed into law before implementation can begin and, depending on the magnitude of the recession, may be supplemented by more support in upcoming months.

The Good News
The market volatility of recent weeks has been due to fundamental uncertainty about the timing and effectiveness of policy responses, and how deep the downturn will be. Markets have already priced in a recession. Although there is still a possibility that the current downturn could be worse than past ones, I believe policies already put in place, combined with a large fiscal package, could be enough to stabilize financial markets.

The good news – and it may be too early to over-emphasize it – is that the current downturn is a blow to income rather than a destruction of wealth, i.e. more like a temporary illness than a natural disaster, and I believe the earnings power of existing assets should be largely intact when the economy recovers. The shape of the recovery – whether it is V-shaped, U-shaped, or L-shaped – will determine how quickly asset prices can return to their recent highs.

 

This article may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.

Treasuries are debt securities issued by the U.S. government and secured by its full faith and credit. Income from Treasury securities is exempt from state and local taxes.

The opinions in the preceding commentary are as of the date of publication and are subject to change. Additionally, the opinions may not represent the opinions of the firm as a whole. The document is not intended for use as forecast, research or investment advice concerning any particular investment or the markets in general, and it is not intended to be legal advice or tax advice. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy and completeness of the information.

The information provided herein is not directed at any investor or category of investors and is provided solely as general information about our products and services and to otherwise provide general investment education. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as Lord, Abbett & Co LLC (and its affiliates, “Lord Abbett”) is not undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity with respect to the materials presented herein. If you are an individual retirement investor, contact your financial advisor or other non-Lord Abbett fiduciary about whether any given investment idea, strategy, product, or service described herein may be appropriate for your circumstances.

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