Monthly Markets Memo - June 23, 2020

World Money Small.jpgby Dan Zalipski, CFA 

The S&P 500 is within reach of breaking even for the year as states begin to lift restrictions and reopen their economies.  Economic data is beginning to surprise to the upside and investors are increasingly convinced the worst of this pandemic shock is over.  There are concerns the market may be getting ahead of itself as a significant amount of uncertainty remains.

At the time of this writing, 21 million people remain unemployed, countless companies have withdrawn earnings guidance, and small businesses remain nervous about their survival.  The recovery in the market has been impressive, but it is likely ignoring an important segment of the U.S. economy.  Small businesses are not well represented in the market but are key to the economy’s recovery.  A spike in small businesses permanently shutting down has the potential to derail both the markets and the economic recovery.

Small businesses, those with 500 or fewer employees, account for roughly half of U.S. employment.  They represent half of the country’s GDP, and 40% of all business revenue throughout the country.  Two-thirds of those laid-off or furloughed during the pandemic can be attributed to small businesses.  Many of these businesses could survive a ‘normal’ recession where revenue declines can be offset by savings.  This recession is far from normal, and most of these businesses would not make it without assistance from the government.

Enter the Paycheck Protection Program, or PPP.  The PPP provided small businesses with forgivable loans if most of the money (75%) was used for payroll during the subsequent eight weeks.  The program had a rough start, the cash quickly ran out and some of the hardest hit small businesses were being passed over.  Congress quickly addressed these issues, replenishing the funds and placing new criteria on who is eligible to apply.  Further adjustments were made to the program to provide more flexibility to borrowers, such as lowering the percentage of funds that must be used for payroll from 75% to 60%.

The PPP has done its job helping small businesses stay afloat during the shutdowns.  As local economies begin to reopen businesses are worried that customers will be slow to return.  Nearly half of small businesses surveyed by the National Federation of Independent Business cite concerns about getting customers back, with almost 60% indicating they do not expect activity to get back to pre-pandemic levels until 2021.

Fortunately, reopening is off to a relatively good start.  Yes, we have seen Covid case counts increase in various states, but that was to be expected as economic activity resumed.  What was surprising, was the May jobs report and retail spending data.  Analysts were expecting jobs to decline by millions of jobs in the month.  The market surged at the unexpected increase in payrolls by 2.5 million jobs.  The retail spending data also surprised the upside, soaring 17.7% month over month against an estimate of an 8.4% increase.  Finally, in a show of support for the economy, Treasury Secretary Steve Mnuchin acknowledged additional stimulus may be necessary as the economy continues to recover.  How and what that may look like is still up for debate, but support for small businesses is expected to continue.                       

“I definitely think we are going to need another bipartisan legislation to put more money into the economy.”  Treasury Secretary Steven Mnuchin



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