Across the globe, the pandemic situation seems to be improving. Many nations continue to struggle with the economic fallout, but case counts and mortality rates hint that things are getting better. In the United States, the first wave of COVID-19 is waning, and many states are looking toward reopening their economies. Public health authorities remain concerned that a second wave of the virus will emerge. Meanwhile, investors are contemplating the possible shape of the recovery. The shape of the economic recovery will depend on how willing and able consumers are to return to their old spending habits.
Employment and Consumer Spending
Prior to the COVID-19 crisis, unemployment was at 50-year lows. Widespread unemployment is an unfortunate effect of the public health measures used to contain the virus. Economic data shows that tens of millions of Americans have already filed for unemployment benefits. The unemployment rate is expected to peak at 20% or perhaps higher. Wise investors know that the employment situation is “old news” as far as the markets are concerned. It is very possible to see the market go up on news that is “less bad” than expected, even while the headlines are bleak.
In times of crisis, Americans have historically reacted by saving a bit more. Many retailers, restaurants, and most entertainment venues are now closed, increasing the savings effect dramatically. In March of 2020, the personal savings rate registered the largest one-month increase on record, and now sits at the highest level in nearly 40 years. The last time the personal savings rate was this high was November 1981. While it is possible this increase in savings is a “new normal”, it is much more likely Americans will rapidly return to their free-spending ways. Using some “walking around sense”, it is not hard to see that most places that people can shop, are full of people shopping. New Year’s Resolutions usually expire a few weeks into January. This new trend of saving will probably last about as long as it takes businesses to reopen, and then consumers will hit the stores with cash to spend.
This Recovery Brought to You by the Letters V, U, L, and W
Investors and the markets are now contemplating what shape the recovery will take. The four most likely possibilities are described as being in the shape of a V, a U, an L, or a W.
- A V-shaped recovery is still possible, but rarely in history is an economic recovery as rapid as the decline.
- A U-shaped recovery is also possible, if fear of the disease keeps consumers home and businesses closed even after restrictions are lifted.
- For much of March, the markets were concerned the recovery would take the shape of an L, a sharp decline followed by a long period of stagnation. The swift public health response, and massive relief and stimulus, make this unlikely.
- If a second wave of the virus emerges, the recovery might take the shape of a W, especially if parts of the economy need to be closed again.
The good news for investors is that government officials and businesses now have much more experience with containment than they did a few months ago. If a second wave emerges, this experience will make future containment efforts more effective and less expensive. In the meantime, sentiment among consumers and businesses alike hint that the recovery will most likely be somewhere between a V and a U.
It is too soon to tell what shape the recovery will take, but we do know that the economy and the markets will recover. We also know that old habits die hard, and US consumers are very likely to continue to spend as they have in the past. For investors in great American businesses, the future is still bright.
Matthew A Treskovich | CPA/PFS, CITP, CMA, CFP®, AEP®, MBA, CLU, ChFC, FLMI
Chief Investment Officer
Staying calm during times of crisis is nothing new to those who have worked in the public sector – in fact it is a job requirement. However, we are currently experiencing a worldwide crisis on a scale that most of us have never experienced. The Coronavirus pandemic has changed the world we live in, upending our lives as well as the global financial markets. In addition to the stress of worrying about the health of your loved ones, you have the added stress of worrying about the steep decline in the value of your investments. This is especially troubling for those who are retired or nearing retirement. The best investment strategy in times of extreme volatility is to do what you have been trained to do and remain calm, and don’t even consider changing your investments! We have learned throughout our careers that decisions based on emotion are usually poor decisions that we later regret. The market will recover in time, and though nobody knows how long that will take, history teaches us that it will recover. Don’t let fear drive you to make bad financial decisions.
Required Minimum Distributions (RMD)
The SECURE Act, which took effect on January 1st of this year, changed the age for starting RMD’s from 70-1/2 to age 72 for those who had not yet reached age 70-1/2 prior to that date. Additionally, in response to the Coronavirus crisis, our government passed the CARES Act which provides financial relief on several fronts including suspending the RMD requirement for 2020 for IRAs and defined contribution retirement plans such as 401(k), 403(b), and 457(b). This also applied to inherited IRAs! For CPS managed accounts held at Fidelity, if you are receiving periodic/recurring distributions, these will continue as scheduled unless you contact your advisor and request a change. If within the past 60 days you made a 2020 RMD, you may be able to return the RMD to your account. Talk to your advisor to see if you qualify, and this does not apply to inherited IRAs. Those with accounts held at custodians other than Fidelity should contact your advisor since each custodian is implementing these changes differently.
FRS Investment Plan Members
Required minimum distributions are waived for 2020 for Florida Retirement System Investment Plan members, so RMD payments will not be made automatically for 2020. If you were required to receive an RMD payment, and still want to receive it, you may request that by calling the Investment Plan Administrator at 1-866-446-9377, Option 4, or by logging into MyFRS.com.
IRS Stimulus Payments
You may qualify for a stimulus payment of up to $1,200 (or $2,400 for married couples) authorized by the CARES Act. Direct deposit payments started going out April 9th, and should start arriving in taxpayer accounts by April 14th. Paper checks will take a bit longer, maybe as late as September for some taxpayers. Lower income taxpayers will receive their checks first. Qualification for the stimulus payments are based upon your 2019 tax return, or if you haven’t filed it yet, your 2018 return. The method of payment is also based on the method you received your refund on that return. But what if were not required to file a return for 2018 or 2019? Non-filers who receive Social Security retirement, disability (SSDI), or survivor benefits, or receive Railroad Retirement and Survivor Benefits, don’t need to do anything– the IRS will send your stimulus check by the same method. However, non-filers who receive one of these benefits and have a qualifying child under age 17, can apply for an extra $500 per child. Those who are not required to file a tax return, and do not receive the above listed government benefits, to file for the stimulus payment.
Tax Filing Deadline
As part of the CARES Act, the IRS extended the deadline to file and pay your 2019 income tax until July 15th, 2020. The deadline to make 2019 IRA and HSA contributions is also extended until July 15th, 2020.
Waived Early Distribution Penalty
For those adversely affected by COVID-19, the 10% early distribution penalty is waived on distributions of up to $100,000 (total) from most workplace retirement plans and IRAs. Also, you can choose to pay the federal income tax on the distribution over a 3-year period. However, you should talk to your advisor prior to taking early distributions.
Rick Bernard | MBA
Right now, our world is consumed with the impacts that COVID-19 is having on our health and our economy. So many have lost their jobs and are struggling to make ends meet. You may have experienced a financial hit in recent weeks, and it could mean that you need to reevaluate your own budget. In this time of financial uncertainty, it can be empowering to take control over your finances. Taking action now will relieve stress levels and will set you up for success in the future.
- Building Your Emergency Savings Fund
This season of uncertainty is why an emergency fund is critical. Having three to six months of living expenses is recommended, but if you aren’t there yet, now is the time to make a plan.
You may need to scale back on the non-critical spending, especially if you are currently out of work. You may find that continuing to cut this type of spending out of your budget, even after you are back to work, will help you reach your emergency savings goals quickly and efficiently.
Call your mortgage institution, student loan provider, credit card companies or even your utility services to ask if they can extend your payments. This can prove to be a powerful option. Pushing the pause button will allow you to build up your emergency savings.
- Consider Refinancing Your Loans.
Now, more than ever, may be a good time to look at refinancing your loans. The Federal Reserve lowered interest rates to 0%. When this happens, you may be able to lock in lower payments over 10, 15, or even 30 years due to lower interest rates. If you can find a lender that has low closing costs, the option of refinancing may benefit you. If you need help finding a lender, contact your advisor.
If you have credit card debt, now might be the time to look into consolidating them, if the interest rate is lower than what you are currently paying. Another option is to look for credit cards offering a 0% interest rate to roll over the balance and pay it down more aggressively. You would want to make sure that the rate is set for its entirety and not just a few months. After paying off the card, make it a point to avoid using it. The spending habits are what you want to get control over, so that you don’t find yourself in the same boat again.
- Look for Other Sources of Income
While there are companies that cannot keep their doors open due to the virus, there are many well known organizations that are ramping up hiring. Here is a list of 30 major US Companies currently hiring. If you can pick up some extra work on the side, it can help boost your savings even faster.
- Stay Connected
Actively connecting with people is a great way to collaborate and build relationships. It’s also good for your mental health to stay connected whether that be phone calls or virtual meetings. Look for groups on social media that share in the same interests as you. Follow and comment on posts and like photos that you find interesting. Call or video chat your friends or family. Share your own story and start conversations to get people to share their ideas. Create a space where you can share your skills, values or experiences.
- Do Not Touch Your Investment Balances
It is always recommended to invest consistently, and many people are doing this by contributing to their retirement plans at work. Right now, checking your investment balances daily will send your emotions on a roller coaster ride. There is no successful science to “timing” the market. Instead think of “time in” the market as your strategy. With the markets fluctuating the way that they have the last few weeks, you’re taking advantage of the opportunities to buy more. Think of it this way, when are you more likely to spend money at a department store? When there is a sale or when everything you want is full price? Right now, you are getting the sale price!
The impact of this virus is different for all of us; it looks different and it feels different. Taking control of your finances can be an emotional lifesaver, and we hope that these tips can help to alleviate any stress you are feeling. Most importantly, here at CPS, we hope that you and your family are staying safe and healthy. We’re in this together.
Tamara L Fales
Retirement Plan Advisor
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