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Observations & Insights (6/5/2020) Thumbnail

Observations & Insights (6/5/2020)

The stock market continued to post gains this week with the focus continuing to be on businesses reopening, however areas of concern remain...

  • Paycheck Protection Program: The House and Senate passed legislation this week that made several changes to rules regarding forgiveness of the Paycheck Protection Program loans, sending it to the President's desk for approval. The new rules include: businesses having more time to spend the funds (24 weeks instead of 8 weeks), more can be spent on non-payroll (40% instead of 25%), any amounts not forgiven have the potential to be paid back over 5 years instead of 2 years, and several other items. 
  • The economy and the stock market have generally moved in the same direction over time, though rarely in lock-step. The gulf between current headlines for Wall Street (best 50-day rally ever for the S&P 500) and Main Street (one-in-four American workers have now filed for jobless benefits) seems more extraordinary than normal. The stock market is famously forward looking and some of the recent market recovery can be attributed to economic data shifting from worse than expected to better than expected even if overall levels of activity remain subdued.
  • Employment: May Non-farm Payrolls was positive 2.5 million (vs -8.5M Briefing.com consensus), while unemployment registers 13.3% (vs. Briefing.com consensus 19.9%). May Average Hourly Earnings +6.7%, also crushing consensus, while 2.7M workers came back from temporary layoffs. Employment in food services and drinking places rose by 1.4 million, accounting for about half of the total gain. Certainly, there is some noise in the data, but this is an overwhelmingly positive report, and a big beat.
  • Household Income in April: The goal of the $2 trillion CARES Act was to cushion the economic blow to small businesses, households, and the unemployed resulting from COVID-19 lockdowns. Policymakers seem to have reached their goal with real per capita disposable income growth spiking in April (+12.94%). The sharp increase in personal income from government transfers more than offset the loss of wages and the large increase in the savings rate gives consumers the funds needed to purchase goods and services as the economy rebounds (government transfers accounted for 30% of personal income in April). However, the big question for investors is whether this will continue. If Congress fails to act on another round of stimulus checks, we could see a big drop in income and possibly spending in 3rd Quarter under the assumption that employment has not fully recovered.
  • Following a rebound in US manufacturing PMI data, global investors pricing in a strong rebound in economic activity got some good news this morning when PMI data from the euro area confirmed hat the region is starting to recover. Add to that the prospect of continued talks over a massive new stimulus package for Germany and expectations of new purchases from the European Central Bank tomorrow. More PMI data from the US is out this morning, and is expected to show some improvement.

Planning Idea for the Week

  • Debt: 
    • Last week, 30-year fixed mortgage rates touched new lows, hitting 3.15%. It is a great time to think about refinancing your mortgage. We would be happy to discuss how this planning idea can help with your specific financial situation.
    • Intra-family lending: This strategy is simple enough: One family member makes a loan to another. In order to avoid the transfer from being treated as a gift, there must be a genuine obligation of repayment (ideally with a written and enforceable agreement) and there must be interest charged on that obligation at a reasonable rate. The concept is especially beneficial in today’s low interest rate environment. To avoid an Intra-Family Note being regarded as a gift from the lender to the borrower, the arrangement must reflect a reasonable interest rate. The rates fluctuate with economic conditions. Each month, the IRS publishes its Applicable Federal Rate (AFR) for short-term (less than 3 year), mid-term (3 to 9 years), and long-term (more than 9 year) Notes. To the extent a Note does not bear interest at the applicable AFR, there is a deemed gift. Typically, the Note’s interest rate is set in the month the Note is made and locked in for the life of the Note, although it is possible for the rate to be renegotiated, e.g., if interest rates fall, as they have lately.

Ideas for exercising at home...

  • Three short workout videos from The New York Times will get your heart pumping and give you a full-body workout without a trip to the gym
  • Planet Fitness Workouts: YouTube offers workout videos from this popular gym
  • Nike Training Club: Free app provides workouts for everything from bodyweight-only sessions, invigorating yoga classes, targeted training programs, and full-equipment home workouts for all fitness levels

Good News From Around the World

We hope that you have a wonderful and safe weekend. Please do not hesitate to reach out with any questions at 907-677-8300. Please feel free to forward this article to family members or friends as you see fit.

From our families to yours, The Planning Group of the Northwest

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