February and March were certainly months that most of us will never forget. Almost no one living today was alive during the 1918 Flu Pandemic (Spanish Flu), which was one of the worst pandemics from a mortality standpoint in our country until COVID-19. So this is truly a once in a lifetime event for just about everyone. I’ve not heard of anyone in our Cornerstone family who has been afflicted by the coronavirus, and I hope that’s true for you and your family.
Our investment strategies are designed to closely match the risk tolerance that you are comfortable with. This implies that, based on past history, your investment results should fall within a given range of returns 95% of the time. Anything outside of that range is possible, but rare. We call it “black swan” event. The time period from February 19-March 22 – just over a month – saw the S&P 500 index drop about 35%. This was, without a doubt, a black swan event!
Since then (as of April 12), the market has recovered about ½ of the original drop. That’s very encouraging! We now know more about the pandemic and the numbers regarding new COVID-19 cases appear to be improving. I believe this has led investors to dip their toes back into the market, looking for bargains.
But there are still a lot of unknowns out there today. They are more on the economic side than the health side. We have no idea what the economy will look like for the rest of the year. How many unemployed people will be hired back? How many businesses will thrive and how many will fail? Will people immediately go back to restaurants, movie theaters, games, and other events? The answers to these and similar questions will help determine how the stock and bond markets perform.
What should you expect going forward? We hope that we’ve seen the low in the market. But my belief is that we will not have a “V” shaped recovery that quickly pops back up to where it was in mid-February. More likely the markets will move up and down as new information on the economy becomes available. And a nice quick recovery becomes less likely the longer the economy is shut down.
So making sure your risk tolerance is appropriate is now more important than ever. Several of our models have raised varying degrees of cash in the last few weeks, while some have not and are still fully invested. Only time will tell which will be the most effective but no matter what you believe the future holds, there are many strategies available to you. The 50%+ decline of 2008-2009 prepared us to some extent for today as we developed a toolkit of models and strategies for a broad range of risk appetites. Feel free to reach out to us if you want to explore more of these strategies.
In the meantime, the recently-passed CARES Act has provisions that many of us can benefit from. They include (courtesy of Forbes):
- Direct payments: Americans who pay taxes will receive a one-time direct deposit of up to $1,200, and married couples will receive $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.
- The program provides $250 billion for an extended unemployment insurance program and expands eligibility and offers workers an additional $600 per week for four months, on top of what state programs pay. It also extends unemployment insurance benefits through Dec. 31 for eligible workers. The deal applies to the self-employed, independent contractors and gig economy workers.
- Payroll taxes: The measure allows employers to delay the payment of their portion of 2020 payroll taxes until 2021 and 2022.
- Use of retirement funds: 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 roll it back over.
- 401(k) Loans: The loan limit is increased from $50,000 to $100,000
- RMDs suspended: Required Minimum Distributions from IRAs and 401(k) plans are suspended for 2020. A planning tip: if you also have a Roth IRA, you can take your normal RMD amount and convert it into your Roth IRA if you don’t need the money. This wasn’t possible in the past.
- Refinancing mortgages: Interest rates have dropped, making the refinancing of a mortgage potentially something that can save you considerable dollars.
- Roth Conversions: The market drop has provided an opportunity for some to convert traditional IRA dollars to Roth IRAs for less income tax if the IRA account value is lower due to the drop in the stock market.
- Consider a charitable IRA rollover. If you’re 70 1/2 or older this year, you can give up to $100,000 directly from your IRA to charity in what’s known as a charitable IRA rollover, or a charitable qualified distribution. Normally it counts towards your RMD. If you give to charity and like most taxpayers take the standard deduction, the charitable IRA rollover still leaves you ahead—even though you don’t have to take the RMD.
We pray you and your family remain healthy and hopefully we’ll all be out and about soon!