After enduring the largest decline the stock market has seen in a decade, many investors are wondering if 2008 is happening all over again. Turmoil in the stock market has brought back fearful emotions that many investors haven’t felt in years. Although in some ways it may feel like 2008, our present situation is actually very different.
The seeds of the great financial crisis began years before the crisis came. Headed into 2008, there were bubbles in housing and construction. Weak regulation of banking and lending left the financial system vulnerable. When the housing bubble burst, it caused unemployment in those parts of the economy and created big problems for the banking system. Many of those unemployed workers were forced to find employment in new occupations.
Heading into the current crisis, there were no obvious bubbles in the economy. Banking regulations are much stronger than they were before the great financial crisis. The banking system was in very good financial condition when the current crisis began. Once this crisis passes, the vast majority of people who are out of work today will be able to go back to their occupations.
Policymakers were slow to respond as the 2008 crisis developed. The 2008 stimulus bill was about $150 billion dollars, much less than the $1.5 trillion Congress is expected to approve this week. It took the better part of a year for policymakers to understand the size of the economy was facing.
In contrast, the policy response today has been both rapid and massive. The Federal Reserve has been quick to re-deploy many of the tools used in 2008. Unlike 2008, these programs were launched within weeks of the crisis starting, not months or years later.
The Fed is also creating innovative new tools to help parts of the economy that weren’t reached by its measures in 2008. The Main Street Business Lending Program is one example of new programs by Federal Reserve to help small businesses.
These measures are unprecedented in both their speed and scale.
What will happen in the next few weeks is uncertain, but we already know what will happen in the long run.
The US economy will survive! American businesses are rising to meet the challenge of defeating COVID-19, just as they have every previous crisis. Manufacturers are rapidly retooling to produce needed supplies and equipment. Healthcare companies are hard at work creating treatments and searching for a vaccine. We don’t know exactly how long it will take, but things will get better.
The US economy has survived far worse problems than the one we currently face. The past 150 years have seen world wars, civil war, a depression, and financial panics. There were pandemics in times when medicine was far less advanced than it is today. Students of history know that the markets and the economy recovered from those shocks, and it will recover from the current crisis.
History teaches us that at the darkest moments, things usually aren’t as bad as they seem. The markets tend to figure this out long before the news headlines turn positive. This is why investors who try to time the market usually end up selling low and buying high. Wise investors know best way to build wealth is to own great companies, and to continue to own them when others are afraid.
The markets will recover. They always have.
Matthew A Treskovich | CPA/PFS, CITP, CMA, CFP®, AEP®, MBA, CLU, ChFC, FLMI
Chief Investment Officer
Retirement planning can seem complicated. Everyone has the ability to save money in some sort of a retirement plan, either at work or as an individual. About half of Americans have access to some type of retirement plan through work. There are many different kinds of plans that employers can offer. The most common plans are the 401(k), 403(b), SEP IRA, and SIMPLE IRA. The most popular place to save for retirement is through an employer-sponsored plan. The most common retirement plan offered by businesses is the 401(k) plan.
Employer-sponsored plans are popular because retirement savings can be deducted from your paycheck. Many employers offer perks like matching contributions and profit-sharing that make saving in a 401(k) plan an even better deal. At a minimum, you should save enough to get the full match offered by your employer. For example, if your employer has a “3% match”, you should contribute at least 3% of your gross pay. Some employers have more generous matching. Employer matching is basically “free money” – don’t leave it on the table! Contribute at least enough of your pay to get the match, and if you can, you should save more in the plan.
The most you can contribute in 2020 is $19,500 if you are under age 50, or $26,000 if you are 50 or older. Saving part of your paycheck in an employer-sponsored retirement plan will also save you on taxes. Your savings in the plan are excluded from your income for tax purposes. Money your employer contributes, and earnings on your investments in the plan, are not taxed until you withdraw the money. All of these add up to big benefits for participants who save as much as possible in the plan.
Investing Your Savings
Most 401(k) plans offer a range of investment choices, and it is up to the participants to decide how their savings will be invested. This is good for experienced investors, but many of us will need more help deciding how to invest our savings. The best 401(k) plans offer a variety of low-cost investment options, investment advice from a true fiduciary, and individual financial planning for every participant. A fiduciary is someone who is legally obligated to act in your best interest. If your 401(k) plan doesn’t include personal advice and planning provided by a fiduciary, you should seek the advice of your own advisor.
Watch Out for Fees and Expenses
The investment options in all plans are not equal! Some plans have much higher expenses than other plans. Even within a plan, different investment options can have varying expenses. Every dollar you pay in unnecessary fees and expenses reduces your long-term wealth. As with any investment, you should understand what you own, why you own it, and the fees you’re paying for that investment. The default investment options in many plans are expensive mutual funds. If you don’t select your own investment choices, you may be unpleasantly surprised.
Your employer’s 401(k) plan is often the best place to start saving for retirement. The tax benefits of contributing to a plan, tax-deferred growth on plan investments make 401(k) a great idea for savers. If they are available, employer matching contributions can make 401(k) savings even better. Save early, save often, and save as much as you can. When the time comes to live on your retirement savings, you’ll be glad you did!
Nolen B Bailey | CFP®, CRPS®, ARPC
Director | Retirement Plan Services
Every day is a roller-coaster with the COVID-19 virus – and we expect that to continue. With the news about closures growing, there will not be a shortage of negative headlines. We expect to see the positive case numbers grow as the virus spreads, and with that, we can expect some troubling economic data to emerge over the coming months. We won’t be surprised to see the unemployment rate rise led by the hospitality industry, as well as see a contraction in overall economic activity in the coming Spring months.
However, there will also be positive headlines and moments to celebrate. The federal government is coming together to put a package in place that could exceed $1 Trillion in new spending and include money for struggling Americans, as well as small businesses and corporations. While the federal government is working on this part of the problem, private American healthcare companies are being innovative and trying to create treatments, cures, and vaccines to fight this virus.
All the news headlines are affecting our personal lives and we are making changes in the way we live. By now, we are all aware of the steps we can take to slow the spread of the virus or shield ourselves against it, including washing our hands frequently and avoiding touching our faces.
These are steps we can take to protect ourselves, but the principles can be applied to our portfolios. If you are concerned that your portfolio is “sick”, call your advisor… not your neighbor. Everyone’s portfolio is different and behaves differently. At CPS, we know that times like this will occur, but we don’t always know when.
In order to prepare for stressful times, we construct portfolios comprised of strong companies that vary in business and location, and whose products are desired through economic cycles. Continue to understand why you own what you own and “wash your hands” of the fear. Above all, try to avoid touching your portfolio. Your portfolio was created to get you through these tough times, as well as the easy ones.
Our country has survived two world wars, the great depression, the tech bubble, a financial crisis, oil embargos, several different strains of the flu, and other diseases. We are confident that we will also conquer this new challenge.
Michael Scott | MBA, CFA
Senior Portfolio Analyst
Last week was the worst week for the equity markets since the 2008 financial crisis. All of the major market indexes lost more than 10% during a week where it seemed everyone wanted to sell, and no one wanted to buy stocks.
Most Floridians are familiar with the panic that happens when a hurricane is on the way. If you’ve ever visited the supermarket a few days before a major storm, the past two weeks’ panic in the financial markets should feel familiar. Most of the time, when the big storm arrives, it isn’t nearly as bad as we imagined it will be.
History of fear
Investors in the US stock market have seen dozens of traumatic events over the past 100 years. We’ve had two world wars, oil shocks, and the cold war. There have been times of civil unrest and great political disagreements. The economy has seen periods of high unemployment, high inflation, and even higher interest rates.
More recently, we’ve seen wars in the middle east and a currency crisis in Asia. After that came the tech stock bubble, and then the housing bubble which burst as the great financial crisis began. We’ve also seen dozens of minor crises, from the SARS virus to the Greek debt crisis. These events seemed terrible at the time. Some were simply speed bumps on the road to economic growth. Others did have significant real impact on the economy. During all of these events, many investors gave in to their emotions and sold stocks when they should have been looking to buy.
During the panic phase of a market correction, shares of top-quality companies decline in lockstep with the rest of the market. Most investors today buy mutual funds and exchange-traded funds, not individual stocks. When fear grips the markets, these investors panic and sell their funds. The fund managers are then forced to sell their holdings, good and bad, to raise cash for redemption requests. These waves of selling create opportunities for wise investors to buy great companies when they are on sale.
If you are concerned about your investments, the first thing to do is to maintain a well-diversified portfolio. Diversification among different asset classes provides a buffer against market volatility. The second thing to do is to take a step back and look at the big picture. Despite the recent market decline, the major market indexes are still significantly higher than they were a year ago. Economic fundamentals remain strong. Unemployment is low, inflation is low, and energy is inexpensive. Both banks and consumers are both in good shape financially. Keeping the big picture in mind will help you avoid making emotional decisions when the markets are volatile.
Avoiding overreactions during a correction allows you to take advantage of volatility. Investors who remain calm can find opportunities to buy great stocks at lower prices. The best time to buy quality companies is when they are on sale, and other investors are afraid to buy them. Wise investors understand that market panic events create opportunities. The keys are to remain calm, stay diversified, look at the big picture, and invest in quality companies for the long run.
Matthew Treskovich | CPA/PFS, CITP, CMA, CFP®, AEP®, MBA, CLU, ChFC, FLMI
Chief Investment Officer
Over the past week, the stock market saw some of the heaviest selling in over two years. When the market has several days of steep declines, it can make investors very uncomfortable. The best advice for investors during market turbulence is to take a deep breath and keep things in perspective.
The financial press tells us the selloff this week was the result of the Wuhan Coronavirus. Although the Coronavirus has been in the news for the better part of two months, it didn’t seem to be impacting the market at all until a few days ago. To understand the possible impact of this virus, think about other viruses we’ve seen in the recent past.
The world has seen many epidemics over the past two decades. From SARS and the bird flu, to the swine flu and Ebola, many diseases have threatened to wreak havoc. All of these were terrible diseases, leaving thousands dead and millions more fearing a pandemic. Despite the human toll, they all passed, and the markets eventually continued to new highs. Long-term investors who had the presence of mind to remain fully invested were ultimately rewarded.
Rational investors would expect healthcare stocks to be driven higher by fears of a global pandemic. Companies that make drugs, operate hospitals, and build medical devices would all see higher sales. In fact, the healthcare sector has seen the same declines as the rest of the market. At times, especially during market selloffs, market participants behave irrationally.
Students of the market know that 5% selloffs happen about three times per year. The market averages one 10% drop per year. Even after Monday and Tuesday’s sell-off, the market was still higher than it was six months ago. Despite the 6% drop in the first two days of the week, the market closed higher on Tuesday than it was a year ago.
More importantly for long-term investors, a few days of market turbulence don’t change the economic fundamentals. Unemployment remains at historic lows. Inflation is muted, advances in technology continue, and the American consumer will keep spending money. As long as consumers continue to spend, American businesses will continue to profit, and investors will ultimately reap the rewards.
There’s always something in the news that feels like a reason to not own stocks. Last year, it was the inverted yield curve and fear of recession. The year before, it was tariffs and trade wars. Before that, Brexit, the Greek debt crisis, the global financial crisis, September 11th, and the tech wreck all gave investors excuses to sell what they owned and not buy stocks.
In every case, investors who sold because of the “bad news” lost out. Investors who held on were rewarded. A few investors bought more, when everyone else was afraid to buy, and they profited handsomely. For long term investors, the best course of action is to stay the course and not make emotional decisions.
Matthew A Treskovich | CPA/PFS, CITP, CMA, CFP®, AEP®, MBA, CLU, ChFC, FLMI
Chief Investment Officer
The stock market finished 2019 with a bang, rallying to all-time highs before the end of the year. All the major sectors of the market finished the year in positive territory. The largest gains came in the technology, communication services, and financial services sectors. Concerns over the global impact of the trade war abated as the US and China moved closer to completing a “phase one” trade agreement. The Federal Reserve indicated rates would be kept low to support economic growth.
In the absence of a major geopolitical shock, a recession in 2020 seems unlikely. Economic growth is expected to slow, but not stall. The Federal Reserve’s projections are for 2.2% GDP growth this year, and 1.9% in 2021. The Fed’s projections are dependent on both low inflation, and low interest rates.
Risks and Opportunities
The biggest risks to the economy are a sudden increase in inflation and energy prices, or a decrease in consumer confidence. Historically, most recessions were preceded or accompanied by a large spike in the price of oil. New technology has allowed the US to become the top oil-producing nation in the world. Unlike previous economic cycles, a substantial amount of global oil production now happens on US soil. This should provide the US economy with a layer of protection against energy price shocks.
The US consumer continues to be healthy. There are now more job openings in the United States than there are people seeking work. There are also signs the long-term trend of declining labor force participation has abated. Despite the tariffs and trade war, US consumers continue to carry the global economy by spending at a record pace.
On the Lookout for a Correction
In the long run, economic fundamentals drive the market. In the short run, the market can react to news about the economy in unexpected ways. During 2018, corporate earnings growth was strong, but the market finished the year lower. In 2019, earnings growth was flat, but the market posted an extremely strong performance. History shows what we should expect from the market in the long run, but short term movements of the market can be difficult to predict.
The long-term trends of the current bull market are in line with historical bull markets in the 1950’s and 1980’s.
After a strong positive year in the market, a repeat performance is unlikely. With election season around the corner, more volatility is likely. Markets average one 14% drop annually. Despite strong economic fundamentals, a significant pullback wouldn’t surprise students of market history. The market is still the best way for investors to create and grow wealth in the long run. The best advice headed into an election year may be to turn off the news and don’t make important decisions based on emotions. Take the time to make sure all aspects of your financial plan are on solid footing.
Peter C Golotko | CPA/PFS, MBA
President | Chief Executive Officer | Partner
Avoid Surprises at Tax Time: Check Your Withholding Now
The Tax Cuts and Jobs Act of 2017 reduced taxes on 80% of all Americans. The IRS has updated the forms and tables for income tax withholding to reflect the new rates. The new rates and withholding tables could mean surprises for some workers at tax time next year. It is important to understand how withholding works and what these changes mean for you.
How Income Tax Withholding Works
Most working Americans have estimated income taxes taken out of each paycheck throughout the year. Employers take a part of each employee’s paycheck and send it to the IRS. This system is called “withholding”.
When the year is over, your employer totals up the withholding for income tax and lists the amount on your Form W2. This form also has other details on your earnings, and on payroll tax payments.
Withholding from your paycheck for income taxes is based on an estimate of what your income tax bill will be. The actual amount of income tax you owe is determined when you file your personal income tax return.
Your “tax return” is the set of paperwork you send (by mail, or electronically) to the IRS showing your income, deductions, and tax payments. Your “tax refund” is the money you get back if you overpaid your taxes during the year. Personal income tax returns are usually due by April 15th of the following year.
If the amount withheld from your paychecks during the year is greater than the amount of income tax you owe, you receive a tax refund. If you didn’t pay enough tax throughout the year, you may have to pay a penalty for underpayment of estimated tax.
New Tax Law Means New Withholding Tables
The IRS provides a form called Form W4 that employees use to provide withholding instructions to their employer. Changes to this form will change the amount of tax withheld from each paycheck. The IRS also gives employers a set of tables called “withholding tables”. Employers use the withholding table, and the employee’s Form W4, to determine how much tax should be withheld from each paycheck.
The Tax Cuts and Jobs Act provides new, lower income tax rates for the majority of workers. Because most workers will have a lower income tax bill, the IRS has released new withholding tables to reflect the lower rates. Under the new tables, less tax will be withheld than last year for the same amount of earnings. For many workers, the new tables will suffice. However, some taxpayers may find that the new tables do not withhold enough estimated tax.
You can perform a quick “paycheck checkup” using the IRS withholding calculator at www.IRS.gov . Ask your tax advisor for an estimate of your 2018 taxes. If it looks like you will owe more than is being withheld, you can file an updated W4 to request extra withholding. When it comes to possible underpayment of income taxes, the sooner you start to fix it, the better!
Peter C. Golotko is president and CEO of CPS Investment Advisors. Matthew Treskovich is the Chief Investment Officer for CPS Investment Advisors.