The spread of the COVID-19 virus is having a profound effect on the financial markets. The beginning of First Quarter 2020 saw new all-time highs in the stock market, up until the later part of February when it became clear the virus was not just going to be a problem for China.
As the financial markets were trying to digest what the economic impact of the virus would be, oil prices had their biggest one day drop since the 1991 Gulf War, plunging 25% on March 9th, triggered by a price war between Saudi Arabia and Russia. Ultimately, the US stock market as measured by the S&P 500 index fell from peak to trough about 35% from February 19th to March 23rd, making it the fastest bear market in history. Subsequently, the market went up about 27% from the March 23rd low as investors try to sort out what a reopening of the economy would like.
This was not an easy quarter for investors, while we were at all-time highs in the S&P 500 index and consumer confidence just a few weeks ago, we have now intentionally shut down large parts of the global economy to try to stop the spread of the virus. There is no longer a debate on if we are going to go into a recession, it is now how deep will it be and how quickly can we turn the economy back on.
As we have outlined in previous emails and communications with our clients, you can expect the economic numbers and news on the virus to be daunting in the near term. An unprecedented exogenous shock has been met with an unprecedented policy response from governments around the world. Governments like the UK and Germany are paying a significant portion of workers’ wages during the shutdown and government backed loans are available to businesses to get them through this. In the US, on the fiscal side, a package which is worth about 10% of GDP which came in the form of the CARES Act. We will include details of that act later in the newsletter. The Federal Reserve also stepped in and provided a game-changing $3 trillion safety net for the economy and financial system. One of the research inputs we use, Jeff Saut put that in perspective: “To put that $3 TRILLION into perspective, the Congressional Research Service estimates that World War II cost the United States $4.1 Trillion in today’s dollars and a Pentagon report says the war in Afghanistan and related anti-terror campaigns in Iraq and Syria have cost the US around $1.5 Trillion over the last several years (as of 2019). That $3 Trillion+, therefore, seems to support the rhetoric that we are currently at war with an invisible enemy and emergency “wartime” measures are being taken.”
This is ultimately a health crisis that has spilled over into the economy and financial markets. A health resolution is what will get us out it. As we have stated before, there are said to be over 20 vaccines in the works and numerous other therapeutics in production to help treat the virus. In the long term, the market cares about the future earnings power of companies. The market is trying to discount what those future earnings will look like when we come through this. In the short term- the market is driven by fear and greed.
We have not made any large changes to any of our three discretionary portfolios (Global Balanced Advisor, Growth Equity Portfolio, and Diversified ETF Portfolio) as of yet. We avoided the temptation to “do something” for the sake of doing something. Keeping the emotions out of investing is what separates good long-term investors from the rest. For those that ask why we don’t “get out” and wait for things to calm down, I want to share something from Cullen Roche at Pragmatic Capital: A lot of people will tend to look at valuation metrics or other indicators and feel the need to be “all in” or “all out” of the market. This is the gambler’s approach to investing. We’re not gambling though. ¹ After all, the baseline probability with gambling is a negative total return. The smart gambler knows that the baseline assumption is a negative total return. So they have to stay out more than they stay in so that they are only in when the odds are asymmetrically in their favor.
Investing, however, is the precise opposite. The baseline probability is a positive total return. If you allocate your assets to stocks and bonds for the long-term your returns are likely to be positive as they’re connected to the growing output of the economy and profits. So, the intelligent asset allocator tries to remain exposed to stocks and bonds as much as possible knowing that the baseline probability is a positive total return. After all, we know that cash, which is the equivalent of sitting on the sidelines, is the absolute worst possible long-term investment because it is a guaranteed negative real return.” We will continue to evaluate our research and make any necessary changes to put our clients in the best position we can. Please pay special attention to the next paragraph entitled, Should I be invested in stocks at my age:
SHOULD I BE INVESTED IN STOCKS AT MY AGE?
If an individual retires at age sixty-five and executes a “lump sum” rollover into an IRA account, that individual is the owner of the IRA account. The spouse typically is the primary beneficiary and the children, or the estate are listed as contingent beneficiaries. IRA assets as well as assets designated for retirement income are generally considered “long-term assets”. For example, in the event of the owner’s death (IRA account and or accounts designated for retirement purposes), the surviving spouse will become the new owner of the assets; and typically, the assets will be passed to the children or the estate upon the death of the second spouse. As you know, we recommend a maximum 6% annual withdrawal amount from your retirement accounts, based on the account value on January 1, each year. The best way to receive withdrawals with the least impact to the account is to average the withdrawals over twelve months. The biggest fear for someone that is retired, is that they don’t want to outlive their retirement accounts and monies designated for retirement. Although investing in stocks can be painful at times; long-term, stocks give investors the best chance NOT to outlive their retirement assets. At La Ferla Group, we keep at least 5% in cash in our Global Balanced Advisor, so that we don’t have to liquidate stocks in a down market to satisfy the annual 6% maximum withdrawal recommendation. Therefore, to answer the questions “should I be invested in stocks at my age?”, we would answer accordingly. For illustrative purposes, let’s assume a client retires at age sixty-five, on January 1, 1985. Over the next thirty-five years, to and including December 31, 2019, the Standard & Poor’s 500 Index (S&P 500), the Bloomberg Barclays U.S. Aggregate Government/Credit Bond Index (BBGC), and the 90-Day U.S. Treasury Bill Index (90-Day T-Bill) averaged respectively 11.47%, 6.90%, and 3.41%. Past performance is no guarantee of future performance. We believe at La Ferla Group, the greatest risk to your long-term portfolio, is to be invested in cash, not stocks.
Here are the key points to the CARES Act we think our clients should be aware of.
- Required Minimum Distributions (RMDs) are suspended for 2020. If you currently take withdrawals on a monthly basis to satisfy your RMD, you could cancel some, or skip withdrawals altogether to allow the funds to continue to grow tax deferred.
- IRA and 401(K) distributions up to $100,000 can avoid the 10% early withdrawal penalty for those below age 59 ½. The tax will still be owed but can paid over 3 years and taxpayers are able to contribute the withdrawals back into the retirement account within three years, without impacting other contribution.
- Direct payments from the Government – Individuals will get a one-time payment of up to $1,200 per person ($2,400 per couple) and $500 per child. It will start to phase out for individuals at $75,000 and $150,000 for those married filing jointly.
- Temporary suspension of payments for Federal Student loans until September 30th, 2020. Interest will not accrue. You could continue to make payments directly to principal or redirect those payments elsewhere if needed.
- The law requires all private insurance plans to cover COVID-19 treatments and vaccines and required that COVID-19 testing be included for free.
- Federal Government has expanded Unemployment insurance in addition to what the states already give. There will be an additional $600 per week increase in benefits for up to four months, including self-employed and independent contractors.
We thank you for your continued trust and confidence in us as we manage our client portfolios through this unprecedented crisis.
The information contained herein was obtained from sources considered reliable. However, its accuracy or completeness cannot be guaranteed. Neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.
La Ferla Group does not provide legal or tax advice. You must consult with your legal or tax advisor regarding your personal circumstances.
Contact La Ferla Group if you have any questions; if your financial situation, individual needs or investment objectives have changed; or if you would like to impose or change any investment restrictions on your account(s).
La Ferla Group LLC (“La Ferla Group”) is a federally registered investment adviser with its principal place of business in the State of New York. Registration does not imply a certain level of skill or training. This brochure is limited to the dissemination of general information pertaining to its investment advisory and management services. For information pertaining to the registration status of La Ferla Group, please contact La Ferla Group or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov). FOR ADDITIONAL INFORMATION ABOUT LA FERLA GROUP, INCLUDING FEES AND SERVICES, SEND FOR OUR DISCLOSURE BROCHURE AS SET FORTH ON FORM ADV FROM LA FERLA GROUP USING THE CONTACT INFORMATION HEREIN. PLEASE READ THE DISCLOSURE BROCHURE CAREFULLY BEFORE YOU INVEST OR SEND MONEY.
Regis R. Dillon, CFA, CFP® Chief Investment Officer