Quarterly Update

In what has already been in many ways a historic year, it’s fitting that the second quarter (Q2) of 2020 would be a standout for stocks. The first quarter was one of the worst on record while the second ended as one of the best turnarounds in market history. This was a snapback from deeply oversold levels in March and, in hindsight, makes good sense. News related to the pandemic (which needs no explanation) was trending positive, economies here and abroad were reopening, and investors were pricing in a so-called “V-shaped” recovery.

Massive waves of selling shifted abruptly in late-March in the wake of historic Federal Reserve programs and fiscal stimulus from Congress. The rally was impressive, to say the least, but uneven and still not enough to bring the broad market positive for the year. Here’s a roundup of how major markets performed during Q2 and year-to-date, respectively:

  • US Large Cap Stocks – up 20%, down 3%
  • US Small Cap Stocks – up 26%, down 13%
  • US Core Bonds – up 4%, up 6%
  • Developed Foreign Markets – up 15%, down 11%
  • Emerging Markets – up 18%, down 10%

Growth stocks continued to outperform during Q2, and a handful of large companies buoyed markets for much of the quarter. At the industry level, tech hardware stocks did best, up about 37%, as employers and consumers rushed to “go virtual”. Autos also saw a boost, up 36%, with consumers taking advantage of major discounting as dealerships reopened. Both industries are up around 20% this year. Retail stocks also did well, up about 31%, after getting trounced in the first quarter.

Bonds performed well during Q2 as investors sought shelter from stock market volatility. A persistent issue during much of our recent bull market has been the general malaise of retail investors regarding stocks. Investors have for years been reporting “bearishness” while moving money into bonds even as stocks continued higher. This trend continued during Q2 and helped bonds rise about 4% during the quarter and around 6% so far this year. Federal Reserve programs, alluded to above, helped support bonds as well.

The positive performance of some stocks contrasts with broad underperformance of the energy sector during Q2. In a dramatic but thankfully short-lived event, the price of oil went negative in April for the first time in modern history. The fear at the time was that a growing supply of oil coupled with a dramatic drop in demand due to shelter-in-place orders here and around the world would leave us with nowhere to store the commodity. This, among the general craziness of the moment, led oil traders to pay others (through negative prices) to buy their oil. Fortunately, global demand picked up, cooler heads prevailed, and oil prices got back to something like normal within a few weeks. The energy sector had been so volatile due to virus fears and pricing issues that, although the sector was up 32% during Q2, it’s still down 35% for the year.

Small company stocks also had a good run during Q2 but not enough to bring the category back to even. The issue with “small caps” is that these companies historically perform well over long periods of time but are more volatile in the short-term. They are also overwhelmingly domestic, lacking the global diversification of large multinationals. So, during a time of great fear for the health of our economy, small caps quickly took it in the teeth. After getting hammered in the first quarter the category charged back by 26% in Q2 but is still down 13% year-to-date.

Economic numbers showed signs of continued improvement during Q2 with unemployment levels declining to 11% at quarter’s end. This was down from 15% but sill about 8% higher than where we began the year. We created around 5 million jobs during June, but still just a dent in the well over 40 million jobs lost. Other measures of economic activity turned positive as well. Business sentiment is improving. The Institute for Supply Management reported its index reached over 52 in June after dropping to 43 in May (scores of 50+ indicate an expanding economy). Consumers are also spending again after a few months’ hiatus. But, like the stock market’s performance, this activity is uneven and highly susceptible to changes in the virus outlook.

While Q2 ended on a high note for stocks and there is reason for optimism, our troubles are far from over. As we entered July single-day infection rates hit records around the country and the nascent reopening is being put on hold in many areas. Unfortunately, the dark cloud of uncertainty still looms as we enter the third quarter. There is likely to be more market volatility, so best be prepared for it.

Have questions? Ask me. I can help.

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The Uncertainty Principle

Uncertain - An adjective describing something unable to be relied upon; not known or definite (thanks to Google for the definition and the physicist Werner Heisenberg for the title).

Lately I’m reminded a bit of the grind coming out of the Great Recession. By late-2009 and into 2010 stocks had been rising for some months even as many Americans were suffering terribly. Unemployment had hit 10%. Foreclosure rates were climbing steadily and would ultimately peak in 2010. Trillions of dollars had been lost from the nation’s housing market. It seemed like the situation was going from worse to horrible.

I used the word “uncertainty” a ton back then when talking with clients. I recall on more than a few occasions speaking to groups and getting pushback on how a vague term could possibly play such a large role in the stock and bond markets, and even our daily lives. Some couldn’t believe that human psychology impacts everything from the shopping habits of everyday consumers to investment decisions being made in Fortune 500 boardrooms.

But it’s true. When we feel certain we’re optimistic and can plan. We invest for the future and feel confident in our actions. Uncertainty, however, and rising amounts of it, undermines all aspects of our daily lives and economy. It makes us anxious and fretful. So, the word gets used a lot these days because maybe it best describes our current predicament. There are so many unknowns and much of what we’d ordinarily rely upon, no matter how mundane, seems to be in flux.  

Even though I feel like I’m squinting to see the light at the end of the tunnel, hope springs eternal. During the darkest days of ’09 and ‘10 that I mentioned above, tiny so-called “green shoots” were popping up everywhere within the economy. There was still lots of pain, of course, but ironically the recession had already technically ended (in June 2009, as a matter of fact – it’s always defined afterward) and the economy would soon come roaring back.

Here are two quick pieces from JPMorgan regarding recent market volatility and the health of the banking system. Both address questions being bandied about in the media and some of you, so I wanted to share these perspectives.

Please click below to continue reading…

Continue reading

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Retiring Early?

This is a stressful time in many ways for many people. The nature of work may be changing, and a lot of folks don’t have a clear idea on what the future will look like. A job may have been lost or might be at risk. It could be a coronavirus-induced temporary lay-off that winds up being permanent. Or maybe it’s simply that the current environment is making it harder to think about going back to the grind.

While we shouldn’t make major decisions out of fear, all this uncertainty can be difficult to bear. The Wall Street Journal recently reported that about 80% of Americans feel like the country is spinning out of control, so it’s natural to feel uncertain about retirement as well.

Research shows that almost half of folks retire earlier than planned, often because they’re forced into the decision by getting downsized, or health problems make it too challenging to work as they did before. If you’re thinking about (or being forced into) retiring early, here are some financial planning considerations:

Look at your income sources.

You can start drawing Social Security anytime between age 62 and 70, so that’s an obvious first place to look for income. About 1/3rd of retirees claim their benefits at 62 and roughly 60% start taking benefits prior to their full retirement age (FRA, currently somewhere between 66 to 67 for most folks).

The problem with starting before FRA is that your benefits get reduced for life, perhaps by as much as 32% (an 8% hit per year). And if you’re married the reduction isn’t just for your life, but your surviving spouse’s life as well. Ideally, you’d wait at least until FRA, but longer is better because under current law your benefit grows by 8% per year up until age 70.

Instead, the best place to look for income early in retirement is probably your investment portfolio. You’ve been saving money in your 401(k), IRA, and brokerage accounts for decades, so it cuts against the grain to start drawing it before Social Security. As counterintuitive as this sounds your investments, at least on average, aren’t likely to outperform the 8% reduction/bump from Social Security. They might have in the past, but our best guess is that they won’t in the future. Maybe it’s more like 5-6% for a balanced portfolio. Essentially, we want to try to maintain the 8%-earning asset (Social Security) as long as possible, ideally until age 70.  

What are you currently spending?

If you haven’t been tracking your spending now is the time to start. Lots of folks retire without understanding their current cash flow and find themselves coming up short. You’ll want to take a sober look at your spending and decide what can be cut if necessary. Maybe you can shave off a chunk each month to help fund your early retirement. Maybe nothing can be cut. Either way it’s critical planning information that you really don’t want to guess at.

There are apps to help with this of course, but I favor pouring over bank and credit card statements. I feel closer to the information that way. Six months of statements is a good start. Just be sure to look at enough so that you feel it represents reality.

What about healthcare?

Assuming you’re retiring before enrolling in Medicare at age 65, you’ll likely need to pay for your own health insurance until then. You’ve probably already guessed that it’s expensive, but you’ll want to find out how expensive.

Your soon-to-be former employer will likely allow you to stay on their health plan if you pay full price. This lasts at least 18 months and is part of the government’s COBRA legislation from years ago. COBRA might not be your best option, however. You might qualify for government subsidies or simply choose to enroll in a more modest plan. Either way, you’ll want to do so within 30 days (or 60 in some cases) to avoid a lapse in coverage.

Once you determine your options, you’ll want to give this information to your humble financial planner for inclusion in your plan. Then you’ll mark your calendar for age 65 and Medicare enrollment, an event that almost always offers a sizeable savings.

Ponder how long you’ll be out of work.

While obviously tough to know for sure, it’s important to ask yourself how long this retirement phase could last. Will it mean no more work forever? Or, maybe you plan to go back to work part-time after taking a breather? Planning on absolutely zero income for the rest of your life is much more expensive than planning to have income at some future point. People often go back to work in some capacity and doing so later in life can help “pay” for retiring earlier than planned. Don’t limit your options by thinking you’ll never earn money again.

Stress-test your retirement plan.

All the above and more gets added to your plan and then the whole thing gets stress-tested multiple ways. Then we tweak it some more and test it again. Doing so let’s us understand how likely your new plan is to be successful. It also helps answer questions regarding when to start Social Security, the importance of going back to work at some point and what you need to earn, how well your investments need to perform, and so forth. It takes work but it’s doable.

The bottom line is that even with all the uncertainty we’re experiencing, you may have more flexibility than you realize if you plan well.

Have questions? Ask me. I can help.

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An Updated Pass for 2020 RMDs

Managing taxes is completely boring to most people. This is understandable because the tax code is immensely complicated, there are frequent changes, and the language used is, well, anything but exciting. That said, the adage of “it’s not what you make, it’s what you keep”, is important to remember when saving for and living in retirement. To me this means not paying a penny more in tax than you have to.

As we end another wild quarter today, let’s look at an important change that could be an opportunity for some: RMD forgiveness in 2020.

Congress passed the CARES Act relief package during March in response to the coronavirus. Among its many provisions was one allowing folks to skip taking a Required Minimum Distribution (RMD) from their IRA during 2020. I think the idea was not to force folks age 72 and older to withdraw from accounts that were likely losing money. This was also geared toward older savers who are forced to withdraw from their IRA each year even though they may not necessarily need the money to spend. Maybe they have other savings and would prefer to leave their IRAs alone as much as possible.

Under the CARES Act Congress said that if you had already taken an RMD you could pay it back within 60 days. And if you hadn’t yet taken one you could skip it. RMDs are taxed as ordinary income in the year taken, so not being forced to take one means less tax to pay, maybe keeping you in a lower tax bracket, and potentially other positive ramifications.

This was great news except that Congress, in its infinite wisdom, started this as of February 1st, meaning RMDs taken during January wouldn’t qualify and would still be taxable. Congress also left out non-spousal beneficiaries who are required to take RMDs. This seemed unfair at the time, but the thinking was maybe Congress would come back and fix this problem later, as often happens after some time has passed and errors are noticed.

Well, last week the IRS beat them to it. The tax authority released guidance allowing all 2020 RMDs to be paid back by August 31st, regardless of who took them and when. It’s unclear what authority the IRS has to make this change, which seems to rewrite the law and is Congress’s job, but I don’t know if anyone will complain.

So, last week’s IRS update was meant to level the playing field for folks who can, one way or another, do without their RMD this year. If that’s not you, you don’t need to consider this at all.

But if it is you, it’s a good idea to reevaluate your RMD for 2020. Have you already taken one but can afford to pay it back? If you haven’t taken an RMD yet, do you financially need to do so? Avoiding it this year could save thousands in taxes while leaving your retirement savings to hopefully grow a little longer. This is tax management made simple, at least for this year.

Have questions? Ask me. I can help.

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What to Make of the Stock Market

Covid-19, social unrest, an urgent national conversation about systemic racism. None of these issues seem to go along with surging stock prices. Even though stocks fell last week, how is it possible for the stock market to rise so fast given all that seems to be going wrong in the world? What are realistic expectations for stocks going forward? Let’s spend a few minutes addressing these questions.

Among all the news lately you might have missed how the government agency that tracks recessions announced that a recession began in late-February. I don’t think this comes as news to anyone, but it’s good to know when these things start and stop. What seemed strange at the time was how the announcement coincided with major stock indexes like the S&P 500 getting back to even for the year. I’m going from memory, but stocks were up on the date of the announcement as well. It just added to the weirdness factor of stocks rising in the face of so many negative headlines.

As we’ve discussed before the stock market isn’t the economy. It can seem like it is because the changing values of major indexes like the Dow and NASDAQ are quoted in the news every business day. Instead, it’s a place (in the most general sense of the word) where investors buy and sell company stock based on expectations about the health of the economy and how public companies will perform over time. I emphasize public because only about 1% of our country’s businesses are publicly held and traded on stock exchanges, according to the National Bureau of Economic Research (the same agency that calls recessions, by the way). Even though the percentage is small, it’s a diverse list of thousands of businesses that employ roughly 1/3rd of the country. So, while these companies are obviously not the real economy all by themselves, their performance in the stock market serves as a good temperature check on how things are going in the business world.

But the stock market is still just a market filled with buyers and sellers (and a lot of computer algorithms, of course) who are normally rational and look past the day’s non-financial headlines. This might sound unfeeling, but if you think about it that’s exactly how it should sound. While markets are prone to bouts of manic depression and irrational exuberance, they are still based on dollars and cents fundamentals and always, eventually, come back to them. When investors have what they think is good information, they put their rational hats on and their confidence shows up as relatively stable, rising prices for stocks. But when investors start losing confidence in their information, well, that’s when the wheels start coming off.

Case in point is our current situation. Stock prices briefly made it back to even year-to-date two weeks ago after a massive run from the lows of mid-March. Investors during this period were feeling a tailwind from Federal Reserve policy, the huge stimulus bill and, at least in May, positive developments in coronavirus numbers. Add in some better-then-expected news about the economy and investors were pricing in a V-shaped recovery, assuming that we’d be back to normal by year’s end. And we were already assumed to be in a recession, which was why making it official was such a nonevent.

But then states like Texas and Arizona started reporting upticks in virus cases as June began. This rekindled fears of a second round of shutdowns later this year, which obviously would be bad for everyone. Investors quickly realized they had gotten ahead of themselves in the recent rally and began taking profits last week. This sent stock prices down by the largest amount since the dark days of March.

These recent weeks are instructive regarding what to expect going forward. As we discussed previously, recovering from the self-induced coma we’ve put ourselves in is likely to look more like a jagged Nike Swoosh than a V shape. Housing, for example, is doing quite well nationally since interest rates are extremely low. This helps homeowners feel wealthier, allowing them to be mobile and spend more money. This in turn helps fuel our consumption-based economy but does little, of course, for someone who doesn’t own a home or have a solid job. Restaurant owners in Texas, for example, have the opportunity of being open but are still experiencing a 45% decline in reservations compared to this time last year, according to the booking website OpenTable. How long can a business survive in conditions like that? There are tons of mixed messages like these coming from all over our economy. This is likely to last awhile and perpetuate uncertainty.

Because of this we, as investors in the stock and bond markets, should expect more short-term market declines as we climb up the Swoosh, so to speak. Hopefully, they won’t be anything close to what we experienced in February and March. Those were historic moves. But couple the uncertainties of our current situation with the historic reality that secondary drops typically follow major market declines, and we’d be silly not to expect a bumpy road ahead.

Have questions? Ask me. I can help.

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Challenging Times Indeed

Greetings from your humble financial planner. While everything is still steady as she goes here at Ridgeview Financial Planning, we all sure have a lot to be concerned about these days. But as I trust is also the case for you, I have hope that before too long we’ll all be feeling a sense of normalcy and optimism again.

With all that’s going on out there in the world, and even in our hometown, it simply doesn’t feel right spending this week’s blog diving into planning and investing topics. I plan to be back next week with our regularly scheduled programming.

Until then, I wish you and yours the best during these challenging times.

If you’re interested in the meantime, here’s a link to a good article from Schwab’s Chief Investment Strategist, Liz Ann Sonders. Liz Ann touches on the market’s seeming disconnect with Main Street and provides a general outlook for stocks. I’d summarize as follows: The stock market is not the economy, so it often behaves differently. The stock market also doesn’t care very much about civil unrest or social issues unless and until it impacts corporate earnings. Stocks are a little overextended given how much prices have come up following their coronavirus lows in late-March. As I suggested recently, a short-term pullback should be expected.


Take care out there.

Have questions? Ask me. I can help.

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