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March 2020 Newsletter

According to Bank of America research, it took only 22 trading days for the S&P 500 to fall 30% from its record high reached on Feb. 19.  This is the fastest drop in the history of the market.  Faster than the 1987 market crash, faster than even the 1929 Great Depression.

Daily swings in the market have been as much as 8-10%. Does it make sense that the worth of any company should fluctuate (up or down!) by millions—in some cases, billions—over a 48-hour period? Due to the widespread outbreak of the Coronavirus…and the collapse of oil prices, panic and uncertainty have hit virtually every area of the financial markets. Stocks and bonds, as well as safe havens such as municipal bonds and even gold have all been vulnerable. Already we are seeing that many hedge funds are having to unwind complex trades that they have levered up. This has undoubtedly added to the market’s volatility when these firms are “forced” to sell positions at unfavorable prices to a dearth of buyers.

Congress just finalized a fiscal package; this stimulus is in conjunction with extreme measures already taken by the Federal Reserve. In summary, these moves are without question unprecedented and the amount of liquidity that has been pledged to backstopping financial markets is nothing short of massive. The Federal Reserve learned from the financial crisis that they must act quickly and aggressively to stabilize credit markets and it certainly looks like they intend to do whatever it takes to accomplish this goal.

Emotions are running high in the markets. As well-known investor Howard Marks writes, “The markets often swing from flawless to hopeless…” In this current market, no description is more appropriate. So, we finally have the bear market that’s been predicted to come every year since the last one. Unfortunately, the fact is nobody can predict when these will start and when they will end.

There will be plenty of negative news coming: more scary virus statistics, unemployment numbers that will be sharply higher, companies all withdrawing their 2020 guidance, buyback suspensions, dividend cuts, etc. The market already knows this.

The key question as far as the next several months is is this negative news to come BETTER or WORSE than what’s already priced in to the markets?"

The markets will not wait for news to get better before starting their recovery. Think back to March 2009. The economic news continued to worsen for months after the market bottomed on 3/9/2009. 3 months later the market was up 41% off the lows, but again investors were saying that the “market was ahead of itself” because the news was still bad. Investors have to look past the immediate bad news to come.

Instead of worrying about when will the markets bottom and other things like how many new cases are reported today, we will all be better served by thinking about things like FEAR, GREED, EMOTION, and DISCIPLINE. Those 4 mental “traits” are so much more important in investing than IQ. Are you too fearful now? Were you too greedy when markets were going up? Are you getting too emotional? Are you abandoning your discipline? Even the great writer James Stewart who has always written about his disciplined process penned a great piece in the New York Times recently called “I became a disciplined investor over 40 years. The Virus broke me in 40 days.”

What We Can Do During a Market Crisis

Even during tough market conditions there are actions that we can take to put clients in a more favorable position---- either to protect from further future declines or benefit from gains in the future.
  1. Rebalance portfolios.  In a traditional allocation between stocks and bonds where an investor holds a percentage of bonds, this is a time to determine if it is time to add to stock holdings as this asset class has most likely fallen in value and now represents a smaller percentage of the ideal stock/bond allocation.  
  2. Tax-loss harvest.  Now may be a time to sell losing positions even if you feel those holdings have long-term value; by realizing the loss —either to offset gains or use as a tax-loss carryforward, the proceeds may be reinvested in other positions that are similar.  And if you are able to wait 30 days, you can re-buy the same position while still realizing the loss.
  3. Upgrade positions.  When the majority of stocks are down, it may be an opportune time to find superior positions, i.e., better funds or those individual, industry-leading companies with strong balance sheets, and replace those holdings that are less quality.
  4. Identify to clients why they own stocks.  The market can be very volatile in any given timeframe.  However, during declines, it is often important to understand what you own and why you own it.  In all likelihood, the markets will survive and the companies that make it up will provide solid investment returns over time.
  5. Relate to clients.  Relationships matter.
  6. ROTH IRA Conversions- potentially an excellent strategy in a down market.
Instead of being paralyzed with fear or overwhelmed trying to come up with predictions for the future, there are tactics we can implement to ensure that clients are in a better position to face what eventually does come.

Coronavirus Aid, Relief, and Economic Security (CARES) Act

In response to the economic damage caused by the Coronavirus, Congress has passed a massive emergency fiscal stimulus package in the amount of $2 trillion. Within this legislation, there are benefits aimed to assist many entities including, individuals, businesses, healthcare providers and even state and local governments.

Here are a few elements of the bill that pertain to retirement distributions that are “Coronavirus-Related”:
  • For retirees, Required Minimum Distributions (RMD’s) are suspended for 2020;
  • For individuals under 59 ½, the 10% penalty is waived;
  • Eligible rollover distributions from employer-sponsored retirement plans are exempt from mandatory Federal withholding requirements;
  • Distributions will be taxed, but the taxes can be taken all in year one or repaid over 3-year period;
  • Early distributions can be repaid into retirement accounts over a period of three years; (If so, no taxes will be need to be paid, or, if they have already paid on the income, individuals can amend their tax returns.)
In addition, the amount of loans that individuals can take from 401k plans has been increased to the lower of $100,000 or 100% of the account balance. Repayment for new or existing loans due in 2020 can be delayed for one year.

It appears the “spirit” of the CARES Act is broad and its intent is to help people access funds which may help them bridge this difficult time. As a note, for those that are considering to take out retirement funds (early), they should understand the importance of retirement money---as long-term investments, and, in certain instances, may want to consider other funds before accessing these accounts.

Again, we are focusing our efforts on things like this act and planning opportunities. For example, maybe suspending an MRD and doing a ROTH conversion is a good idea? It all depends on each clients’ unique situation.

Strategies When Markets Become Volatile

Markets are largely psychological and can be very emotional for most people, especially those who are in or nearing retirement. When the markets are going down, it is very difficult to imagine things improving, especially since during most serious declines there is some type of impetus causing the downturn; examples from the past include, the Gulf War, dot-com bubble, the mortgage crisis, Asian Flu, etc. And at the time, there is maximum attention and concern over this event which only serves to amplify the situation, possibly clouding investor judgment. But here are some ways that those in retirement can combat big swings in the market.

First, it is important to maintain a portfolio that will keep up with inflation over time. We feel the best way to accomplish this is through holding blue-chip companies/dividend stocks whose businesses will increase earnings as they raise prices on their own products/services and who have a history of raising their dividends over time. The bond market (while it must be part of a retirement portfolio), offers no inflation protection. And one key long-term risk (we have enough to worry about now), is will all of the massive amounts of money being created cause a spike in inflation?

Next, try taking a dynamic approach to withdrawing funds from retirement accounts in order to limit spending during weak markets, while taking out more during good times. For example, if you decide to take out 4% during a good market, but the market falls the next year, that same withdrawal amount will represent a higher percentage of the portfolio the next year. Try to cut spending during those years, allowing the portfolio to regain value. This is a strategy we are in favor of and implement when/where possible. For example, last year we encouraged retired clients to spend a little more and enjoy their retirement as 2019 of course was a nice year in the markets. And obviously, at least at this point, this year’s conversations with clients are around tightening the belts a little if possible. We know we will get back to the years where they can spend more again. Besides, it’s doubtful anyone is looking to do any extra traveling any time soon.

Lastly, spend down from the more profitable positions. This can be done through a re-allocation where certain positions, for example, stocks, may have outperformed bonds in a certain period or in years like 2020, vice versa.

The Coronavirus is the exact definition of a “black-swan event” which happen periodically. Hopefully, if history is any guide, we won’t see another one for quite some time. But as a society, we should be able to get through it and recover from where we are today.

It has certainly been an exhausting last month or so for any financial advisory firm. We are working hard to guide and inform our clients. We’ve communicated as much as possible, although trying hard not to overwhelm clients who are already inundated with news reports daily, if not hourly, in this current environment. However, if anyone does have a question or concern, please do not hesitate to call or email at any time.

Stay safe and healthy everyone and we look forward to getting past this and getting all of our lives back to normal.

All the best,