Coronavirus, CARES Act and the Markets

The month of March took us all on quite the ride. Like many of you, I had a busy month planned. I had six evening library seminars scheduled, and in addition, there were several items on my personal “to-do” list to prepare for our second daughter, due in April. Little did I know that the coronavirus was going to blow up the markets, bring the global economy to a standstill, and force our four-year-old daughter home. To give you an idea of how that last piece has gone, my daughter has decided she no longer wants to take a nap, and she has spent the past three days having a meltdown about “bunchy underwear”! There is not a brand, style, or fit that she is willing to accept. There is no reasoning with her at this point. She has decided that commando and sweatpants are her normal, and we’ve accepted them, too. Like all of you, I look forward to the day when we can transition back to our regular schedules.

On the professional side, I’ve been responding to emails, making phone calls, and holding Zoom appointments to discuss the current state of the economy. Some of these conversations have been filled with anxiety about what the future holds, while others are centered around how we might use this market downturn as a buying opportunity. This month’s article will address the most common questions that I am receiving as well as the latest stimulus bill signed into law.

What do you know about the latest stimulus package, and how does it help me as an individual?

• The CARES ACT stimulus bill signed into law last week was a significant piece of legislation. Here are a few highlights that affect individuals:

• Individuals who pay taxes will receive a one-time direct deposit of up to $1,200, and married couples $2,400, plus an additional $500 per child. The payments will be available for incomes up to $75,000 for individuals and $150,000 for married couples with phaseouts above those limits.

• S-corporation shareholders, self-employed individuals, independent contractors, and gig economy workers are now eligible for unemployment. In addition, the bill offers workers an additional $600 per week for up to 39 weeks, on top of what state programs pay.

• The bill waives the 10% early withdrawal penalty for distributions up to $100,000 for coronavirus-related purposes, retroactive to Jan. 1. Withdrawals are still taxed, but taxes are spread over three years, or the taxpayer has the three-year period to return the money to the account.

• The 401(k)-loan limit is increased from $50,000 to $100,000.

• Required Minimum Distributions are not required to be withdrawn in 2020

• Student loan payments as well as the interest accrued is deferred until Sept 30th,2020

For a more detailed and technical article on the stimulus package, I highly recommend reading Analyzing the CARES Act: From Rebate Checks to Small Business Relief for the Coronavirus Pandemic.

Are we in a recession, and if so, how long will it last?

Most economists agree that the U.S. economy is in a recession, and economic data released in the upcoming weeks will continue to cause disruption. The unemployment data released on March 26th showed that 3.3 million people filed for unemployment which was ten times more than the week prior. The numbers are likely to climb as many of the state’s unemployment offices were overwhelmed with the volume, and therefore, the 3.3 million does not reflect the true economic destruction. With consumer spending down, small businesses closing, and a significant decline in revenue for several industries, it will take a while for the economy to recover once the stay-at-home orders are lifted. President Trump announced he expects a “v-shaped” recovery, and while some individuals may also believe that to be true, I believe it is prudent to keep our expectations low until we see economic data that looks more promising.

Will I recover the money that I have lost in the past month?

Using history as our guide, we can determine that the market will recover at some point. When that recovery will begin and how long it will take is unknown. The graph below of the stock market since 1900 shows the resiliency of the U.S. market (measured by the S&P500) and highlights some of the major global events that the U.S. has overcome:

The graph illustrates that the U.S. Market has continued to grow over the long term while overcoming global crises and recessions.

What changes should we be making in our portfolio?

In most cases, this is not the best time to make significant changes to the allocation of an individual’s portfolio. The optimal time to do that would have been prior to the market downturn, as any changes now will likely result in a slower recovery of the account value when the market rebounds. This does not apply to individuals who have a need for additional cash or withdrawals beyond what was initially planned as part of a retirement plan. For these individuals, it could make sense to become more conservative to protect the portion of the account that is needed in the next three years.

Although significant changes are not typically recommended, there are times that warrant measured adjustments. For example, last week I removed clients from a municipal bond ETF that was invested mostly in airports and tollways. The bond fund had performed well for many years but given the sudden reduction in travel and transportation, it no longer made sense to remain in this investment until the transportation sector stabilizes.

Should I stop making contributions into my Brokerage Account/401k/IRA/Roth IRA until the market stabilizes?
The short answer is “no”. In fact, if cash flow is available, this is a good opportunity to increase contributions as the price of most investments is now “discounted” from a month ago.

How will this market drop affect my retirement?
For individuals who are within ten years of retirement, having a financial plan can make a significant impact on an individual’s ability to manage the anxiety that can accompany a bear market or recession. For example, I recently spoke with a client planning to retire within the next three years. They were understandably concerned that the latest market drop would affect their upcoming retirement plans. Because of the extensive planning we had done years prior, I was able to show them that even with the current drop, there was still a 100% probability of success in meeting their retirement goals. Although no individual wants to experience the loss of account value experienced in the past few weeks, it brought peace of mind knowing that the plan had already calculated this risk and, therefore, they could focus their energy elsewhere.

As always, I will continue to be available to help navigate and plan for each family and individual. Please do not hesitate to contact me with any questions or concerns.