The Vantagepoint Market Perspective: Jobs, Executive Orders, and the Markets

08/11/2020

 

The latest report on the employment front brought a dose of positive news about the economy’s ability to claw its way out of the hole caused by the COVID-19-inspired shutdowns. But while the job increases are certainly positive, the markets continue to keep their eyes trained on federal stimulus efforts.

The Labor Market

Friday’s employment report showed the economy added 1.76 million jobs in July as parts of the country reopened, albeit in a limited manner. Many of the new jobs were among leisure-hospitality and retail businesses, which suffered the brunt of the job losses earlier in the crisis.

Those gains followed increases of 4.79 million jobs in June and 2.73 million jobs on May. And while that chipped away at the 22.16 million jobs lost in April and March, it certainly did not replace even half of the jobs gap. Still, these recent gains represent a solid step in the right direction.

The unemployment rate, which is based on a different survey, dropped to 10.2% in July from 11.1% in June. But it’s worth noting that it’s still above the highest rate we experienced during the depths of the 2008-2009 financial crisis, when in October 2009 unemployment stood at 10.0%.

In addition, as it has in previous months, the Bureau of Labor Statistics noted measurement issues continue. And that may have resulted in the misclassification of some layoffs as temporary, when they were in fact permanent. As a result, July’s unemployment rate may actually have been about 1% higher than reported.

As the layoffs that many people initially thought were temporary become permanent, it’s becoming tougher to argue that these jobs will be coming back anytime soon, particularly amid the widespread shutdowns of privately owned businesses and downsizing among firms of all stripes.

The wave of mandated COVID-19 closures and the layoffs they spawned started in late February, which means we’re currently in week 22 since the initial impact of the pandemic. In many states, the typical unemployment benefit runs for 26 weeks, which means some unemployed workers may be nearing the end of their state benefits in the weeks and months to come.

Federal Stimulus Impasse

This is likely the reason that the market took Friday’s positive employment report in stride. Instead, traders continued to monitor the White House’s and Congress’ failed attempts to come to an agreement on a stimulus package. As of the end of last week, both political parties seemed nowhere near a consensus, with a wide gulf remaining between the White House and Congressional Democrats. At present, only the House of Representatives has passed a bill, with Senate Republicans ceding their negotiating power due to their own divisions on the parameters of any stimulus proposal.

Over the weekend, President Trump stepped in, issuing a series of executive orders that attempt to:

  • Extend the additional federal unemployment benefits initially provided by the CARES Act (which come on top of regular state unemployment benefits), though at a reduced rate of $400 a week. Of that $400, $300 would be paid by the federal government, while states would be required to pay the remaining $100 in order to participate at all.

At the federal level, the money would come from the Department of Homeland Security’s Disaster Relief Fund and would run until December 6, 2020, or until money designated for these benefits from that fund is exhausted. The executive order notes that states can pay for their share via their remaining funds provided by the CARES Act, although some states have already spent (or plan to spend) their portion of that money on other relief efforts and may face other fiscal limitations, given the significant impact to state and municipal budgets from the pandemic.

  • Defer an employee’s payment of the 2% Social Security tax each paycheck (for those who make less than $104,000 a year) from September 1 until the end of the year. At this point, the executive order would not absolve people of their tax obligations, so it remains to be seen whether that obligation would ultimately be forgiven or if workers will be on the hook for it during next April’s tax season. It’s also unclear how or if employers will implement the deferral.
  • Direct federal agencies to consider measures to prevent residential evictions in properties under certain conditions. This CARES Act provision, which expired July 24, had banned such evictions. Still, it’s unclear how or if federal agencies will act on this executive order.

In addition, simply preventing evictions has downstream effects because the landlord is still responsible for property taxes and mortgage payments, as well as the insurance, maintenance, and repair costs of the rental units they own. A simple rent moratorium for tenants does not alleviate those expenses.

  • Defer the repayment of student loans until 2021. This gives borrowers a break from repayment without the accrual of additional interest on those loans. It’s likely the one area of the current stimulus efforts that both political parties can agree on. However, while it will be a welcome relief for many of these borrowers, it’s not a cure-all for what ails the economy.

The combination of the uncertainty surrounding the executive orders and the bi-partisan questions about whether they are constitutional leaves a great deal of unknown territory ahead for a market that has been counting on a robust stimulus package.

As of this writing, the executive branch is attempting to get both chambers of Congress to return to the negotiating table to pass a stimulus package. But with Congress’ traditional August recess looming, it seems highly unlikely that meaningful negotiations will quickly resume.

Enter the Federal Reserve

In addition to market participants, the current stalemate has also caught the attention of certain members of the Federal Reserve. On Sunday, Charles Evans, president of the Federal Reserve Bank of Chicago told CBS’ “Face the Nation” that another round of fiscal policy stimulus is “incredibly important” to help support the economy during the current COVID-19-caused downturn.

Evans also referenced Friday’s New York Times op-ed co-authored by his colleague, Neel Kashkari, president of the Federal Reserve Bank of Minneapolis. That piece called for another lockdown to help contain the spread of COVID-19. Evans said that while a four- to six-week hard lockdown might help control the pandemic, he doubted whether government officials would implement it.

Still, the fact that officials from the Federal Reserve — which has utilized every monetary stimulus effort at its disposal, including some newly invented ones, in an attempt to stabilize the markets — are venturing into political territory is highly significant. It underscores their concern about the economy and the virus’ impact on it, along with the lack of a Congressional agreement about the best way to provide additional fiscal policies that support relief efforts.

Our View

We do not believe it’s likely our country will enter a hard lockdown prior to the November election given the nature of the U.S. political cycle. And that means that the pressure is likely to build for Congress to pass a new more wide-ranging stimulus bill, which hopefully includes some desperately needed relief for local and state governments.

Sadly, since it’s an election year, from a political standpoint, it remains to be seen whether the White House and Congress will step up to the plate and deliver. Indeed, political calculations about the 2024 presidential election may already be influencing political positioning and decision making among some members of Congress.

The markets are, at this point, quite familiar with political disfunction that still ultimately results in legislation, have clearly discounted an outcome without a new stimulus bill, as evidenced by an ongoing rally that approaches all-time highs. If, however, no additional fiscal stimulus is forthcoming because the White House and Congressional Democrats decide their own political interests are best served by simply pointing fingers and blaming the other party, both the real economy and the markets may confront substantial disruption as we head into the fall.

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Please note that this content was created as of the date indicated and reflects the authors’ opinions. These opinions are subject to change, without notice, due to market conditions or other factors.

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When Funds are marketed to institutional clients by our Defined Contribution Investment Only (DCIO) team, the Funds are offered by ICMA-RC Services, LLC (RC Services), an SEC registered broker-dealer and FINRA member firm. RC Services is a wholly owned subsidiary of ICMA-RC and is an affiliate of VantageTrust Company, LLC and Vantagepoint Investment Advisers, LLC. Learn more at www.vantagepointfunds.org.

Disclosures:

This website is for institutional use only and is not intended for individual investors or the general public.

This information is intended for institutional use only and is not intended for individual investors or the general public.

Please note that this content was created as of the date indicated and reflects the authors’ opinions. These opinions are subject to change, without notice, due to market conditions or other factors.
This is not intended as a solicitation nor does it constitute investment, tax, or legal advice. Reference to any fund or asset class is not a recommendation to buy, sell, or hold that fund or asset class. Neither ICMA-RC nor its subsidiaries are responsible for any investment action taken as a result of the information provided herein or the interpretation of such information. Investors should carefully consider their own investment goals, risk tolerance, and liquidity needs before making an investment decision.

When Funds are marketed to institutional clients by our Defined Contribution Investment Only (DCIO) team, the Funds are offered by ICMA-RC Services, LLC (RC Services), an SEC registered broker-dealer and FINRA member firm. RC Services is a wholly-owned subsidiary of ICMA-RC and is an affiliate of VantageTrust Company, LLC and Vantagepoint Investment Advisers, LLC. Learn more at www.vantagepointfunds.org.