Quarterly Reflections - April 2020

Life can only be understood backwards, but it must be lived forwards. ~ Søren Kierkegaard, Danish philosopher (1813-1855)

On the economy

What an extraordinary time we are collectively experiencing around the globe. Our abrupt “staycation” has left most fraught with anxiety amidst distractions of new work realities, home schooling, home projects and binge watching. Meanwhile the news outside piles up.

Upon this writing, the Optimism Index for small businesses, which are arguably the most fragile sector of our economy and 45% of the U.S. GDP, has just collapsed by the most on record. Unemployment is spiking across a broad swath of industries and across income strata, joining blue and white-collar employees with gig workers in filing for benefits. Stimulus relief and a de-quarantining date cannot come soon enough.

Just how quickly confidence, and regular life, resumes will depend on how well all 330 million of us practice social distancing, how soon coronavirus tests will be available to all, whether the government’s help is meaningful enough to families and businesses, and how willingly Americans will go back to daily routines when we understand that the danger has passed. No answers are obvious or easily deduced. It is what ants must experience when pondering the world.

It is tempting to look east and track the virus’ progress around the world in order to assess our own probable outcomes.

In China, where data is notoriously deceptive, we know that the economy has taken a large hit from the outbreak. It will continue to be weak as most of the country’s manufacturing plants idle, awaiting the returned health of their global customers. Otherwise China seems to have achieved virus-containment through a technologically advanced authoritarian surveillance. We now watch them closely as they open up their cities again to see how it plays out.

On another note, not too surprisingly, consider the added wrench that China manufactures much of the world’s necessary healthcare devices; we depend on their recovery for these products.

In Germany, testing and tracking of the virus was early, precise and widespread. The first case in the U.S. was within days of Germany’s first case, yet their healthcare response was so different than ours that even with an economy in every way as shuttered as ours right now, a phased return to “normalcy” could come soon.

India, the world’s 5th largest economy, is on a different trajectory. The government announced a shutdown for the 1.3 billion inhabitants on March 25th. Because the virus dangers had been downplayed by officials, Indians were caught off-guard, unprepared, and lacking a general understanding of the dangers of Covid-19. India faces a heartbreaking medical disaster in the making. Couple their inadequate healthcare system capabilities with immensely crowded cities and the best virus defense of social separation becomes impossible. India’s growing role in critical business and supply chains means that their success, or lack thereof, will impact the rest of the world.

We are fortunate to have been a country that was on solid economic footing coming into current events. Numerous reports confirm that Americans held jobs with growing income, including disposable income, heading into this event. Perhaps prodded by ugly reports about low savings resources available to many during the government shutdown in January 2019, even personal savings rates were ticking up. However, many millions still risk tipping into an economic black hole.

Quick-acting state and local governments have joined the federal government in offering financial relief packages. It is now critical that this money moves as fast as possible to distressed businesses and individuals. Potential recipients are making decisions today as to whether to pay rent, shutter shops and furlough employees. It is not too pithy to say that time is of the utmost importance. Success here is where our economic future and fortunes will be decided.

On the markets

In that incredible March period when a gallon of hand-sanitizer cost $70 and 42 gallons (a barrel) of crude oil cost $25, you knew the world had shifted perspective in a radical way. Valuations be damned, nothing but our health was imperative.

The oil price standoff between Saudi Arabia and Russia flared up in early March and brought oil prices crashing down. It greatly exacerbated market volatility that was already starting to roil. Their behavior reminds one of Dr Seuss’ North-going Zax and South-going Zax that chose a standoff over compromise. Egos are immense amongst all of the oil producers and meaningful production cuts in the US and the OPEC+ coalition are required to contend with the current steep decline in world use. Cheap oil that no one can consume right now is quickly filling up in containers, pipes and on tankers floating in the ocean; 70% of holding reserves are full. Reality insists that the Zaxs find a way to move.

In the midst of falling equity prices around the world, flight-to-quality took hold and investors loaded up on treasury bonds, cash and gold. Short-term treasury yields turned negative for the first time in four years – meaning investors were willing to park their money for a return of less than 100% on their principal. There was a massive sell-off in high yield “junk” bonds, which often trade with the vitality of a stock. Then as panic subdued towards the end of March, investors found their appetite for corporate issues from MasterCard, Comcast, Nike, McDonald’s and Home Depot, despite low coupon rates.

And then - the stocks. Stock markets have experienced painful declines and valuation distortions many times in history and have recovered. To borrow from Leo Tolstoy’s Anna Karenina, every unhappy family, or market in this case, is unhappy in its own way. How this unhappy market recovers is a subject of great debate that includes the letters L, U and V.

The “V” shaped recovery makes everyone feel the best, as its quick decline-quick recovery allows investors to move on. As much as it’s wished for in every downturn, a “V” almost never happens in the markets. A rally is underway at the moment, yet it ignores the growing unemployment lines and muddy perspective on future earnings, however temporary these stresses may ultimately be. Perhaps investors just saw too many companies on sale to resist any longer.

The “L” and “U” represent the more likely graphical letters that we may be able to squint and see represented on a chart of the major indices. Jurrien Timmer of Fidelity Investments is looking for a swoosh. A swoosh or hockey stick would imply a bounce around the bottoms that we have been seeing in the markets – which is roughly 19,000 on the Dow Jones and 2,200 on the S&P 500. Then a longer, less steep uphill climb will begin to set in. Ultimately, credible and clear guidance from corporations will be the only news that will give confidence in a sustainable rebound.

In the meantime, we can use individual company unhappy stories for reminders that misfortune can render long-term positive outcomes. Consider those who have survived surprise scandals, management mistakes or security breaches, only to have arisen stronger for the experience.

There are valuable lessons to be learned from Target, with their disastrous Canadian foray and credit card data breach, or Chipotle and the norovirus spread.

Starbucks struggled mightily in the 2008 downturn. With stores competing within view of each other, Howard Schultz famously returned to reign in excesses, improve the store layouts and ignite connections between employees and customers. By 2010 the company started paying a dividend and has been much stronger for the experience.

Not long ago Volkswagen was forced to set aside tens of billions of dollars for lawsuits and damages after an emission scandal completely of their own making. Shares plunged 18% in 2018 before recovering 25% in 2019.

These companies were otherwise fit before their crises struck. Companies with strong balance sheets, products and management have odds greatly in their favor for survival once we emerge from our malaise.

No matter the letter that will define our recovery, the next few years will favor the more discriminate and thorough investor. If for the past 10 years, one could essentially buy most anything and end up somewhere between good and great, that will not be the case going forward. Remember that not everything that is cheap has demonstrable value.

On personal finance

Beyond the obvious that everything around us is both personal and financial, some highlighting of 2020’s CARES Act provisions and thoughts on estate planning seem opportune.

The Coronavirus Aid, Relief and Economic Security Act has many provisions that are both temporary in nature and compelling in their efforts to help Americans now. This focus is on the personal and retirement side of the act. For business relief, visit the US Chamber of Commerce website.

2019 Taxes

• The due date for filing Federal income tax returns has been postponed to July 15th. Most states will also honor this date.

• The deadline for making 2019 IRA and Health Savings Account contributions has also been moved to July 15th.

• 529s have different tax rules and contribution deadlines so check with each plan for guidelines.

Charitable Contributions

• Allows an above-the-line deduction up to $300 on cash contributions to qualified charities is available to taxpayers who claim the standard deduction.

• Individuals can deduct any cash contributions made to qualified charities, up to 100% of their adjusted gross income (AGI). Deductions for cash donations were previously limited to 60% of the taxpayer's AGI.

IRA withdrawals

• Required minimum distributions (RMD) from some retirement accounts for 2020 have been waived. One may still take an RMD or pay it back within 60 days if it has already been distributed for 2020.

• Individuals may take a “coronavirus-related distribution” from IRAs up to $100,000 between January 1st and before December 31st of 2020. Note that the individual must “self-certify” that they are taking the distribution due to a COVID-19 related financial stress.

• Early (pre age 59 ½) distributions from retirement accounts may have the 10% early distribution penalty and mandatory 20% Federal tax withholdings waived. Income taxes on the distribution can be paid over three years OR one can repay the distribution back within three years.

Student Loans

• All federally held federal (and federally held) student loans are automatically temporarily suspended and interest will not accrue through September 30th.

• Those who can still pay their loans should, if they have no other high-interest debt and have an adequate (3-6 months) in emergency cash savings. Contact your loan provider to opt out.

Estate plan lawyers are quite busy right now as there is nothing like worry over health and longevity to spur conversations perhaps long avoided. To help streamline your affairs, these are the critical documents you should have in advance of any illness or incapacity.

Financial Power of Attorney

A Financial Power of Attorney allows the agent to pay bills, write checks, make deposits, sell or purchase assets or sign any tax returns. Choose someone you know and trust, who is also diligent and logistically nearby.

Health Care Power of Attorney

Similar to an FPOA, a Health Care Power of Attorney covers health care decisions. Again, choose someone who knows you, your personal outlook on your health and is local to you.

Advanced Health Care Power of Attorney

An Advanced Health Care Power of Attorney compliments the HCPOA but addresses specific end-of-life treatment and options. If nothing else, this deserves some serious thought and conversation with your loved ones before the decision is out of your hands. (This is also called a Living Will.)

HIPAA Waiver

An HIPAA Waiver is a back-up document that will allow your agents and/or your family members to access your medical records so they can speak with your health care providers in case of a medical emergency or incapacity.

Last Will and Testament

Without a proper will in place, your home state will provide a plan for you. Do not leave the distribution of your assets to the government and the courts. Instead, get a will so that you may direct the distribution of your property and assets, have your choice of an executor and appoint a guardian(s) to watch over your minor children.

Living Trust - Revocable

A revocable living trust is a legal contract that you make with yourself to create an entity to hold your assets. It is a more expensive legal document but is incredibly thorough and flexible. You can update your trust at any time and set it up for generations into the future. You choose a successor trustee who will step in and manage your affairs without government or court involvement. It also gives privacy to details of your estate, since it avoids the public probate process.

In closing for now, let us be reminded of the unexpected silver linings of a world in slower motion such as clearer skies, fewer traffic accidents and crime, more amorous zoo animals, less noise and light pollution although, alas, no dolphins in Venetian canals as had been reported.

The actions we take each and every day by keeping mostly to ourselves and lending a gloved hand to aid a neighbor or a food bank can have profound consequences, like never before in our history. Please be safe and stay healthy!

Disclosure

Statements on financial markets and economics are based on current market conditions and subject to change without notice. Due to the rapidly changing nature of financial markets, all information, views, opinions and estimates may quickly become outdated and are subject to change or correction. We provide information from reliable sources but should not be assumed accurate or complete.

Investment Advisory Services offered through Integrated Advisors Network LLC (IAN), a Registered Investment Advisor. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Consult your financial professional before making any investment decision.

This information is designed to provide general information on the subjects covered. It is not, however, intended to provide specific legal or tax advice and cannot be used to avoid tax penalties or to promote, market, or recommend any tax plan or arrangement. Please note that Serene Point Advisors and its affiliates do not give legal or tax advice. You are encouraged to consult your tax advisor or attorney.