Looking to year-end

I know it’s a busy time. But it’s not too soon to start thinking about taxes. In prior conversations, I have discussed year-end planning. But let’s concentrate on taxes before the new year begins.

Many questions about the new administration have come my way, including questions about new tax proposals. Joe Biden’s plan is aggressive, but it may not get out of the starting gate if the Republicans hold the Senate. As you know, two early January runoffs will determine the fate of the upper chamber.

However, there is bipartisan support for what might be called The SECURE Act 2.0. Recall that the SECURE Act, which recently passed Congress, updated rules and regulations governing retirement accounts.

There are plenty of tweaks that we might see. For example, might RMDs for IRAs rise to 75? Could we see bigger catch-up provisions? Or greater flexibility for individuals 60 and older who are attempting to save for retirement?

Maybe, but let’s not jump too far into the future. Any possible changes are in the planning stage. Congress is more likely to focus on Covid relief early next year. Besides, comprehensive bills take time to wind through Congress. Instead, let’s focus on tying up loose ends as the year comes to a close.

Before we jump into year-end planning, I want to stress to you that it’s my job to partner with you. I can’t over emphasize this, and I would be happy to review your options. As with any tax matters, feel free to consult with your tax advisor.

9 tax facts and tips to save you money

1. Tax brackets and tax rates have changed. Every year, the tax brackets for taxable income are adjusted based on the rate of inflation. The following illustrates your marginal tax bracket based on taxable income for your filing status

For Single Individuals
For Married Individuals Filing Joint Returns
For Heads of Households

10%
Up – $9,875
Up – $19,750
Up – $14,100

12%
$9,876 – $40,125
$19,751 – $80,250
$14,101 – $53,700

22%
$40,126 – $85,525
$80,251 – $171,050
$53,701 – $85,500

24%
$85,526 – $163,300
$171,051 – $326,600
$85,501 – $163,300

32%
$163,301 – $207,350
$326,601 – $414,700
$163,301 – $207,350

35%
$207,351 – $518,400
$414,701 – $622,050
$207,351 – $518,400

37%
$518,401 or more
$622,051 or more
$518,401 or more

2. The increased standard deduction has simplified filing for many. The standard deduction for married filing jointly rises to $24,800 for tax year 2020, up $400 from last year.
 
For single taxpayers and married individuals filing separately, the standard deduction rises to $12,400, up $200 from 2019. For heads of households, the standard deduction will increase to $18,650, up $300.
 
The personal exemption for tax year 2020 remains at 0, as it was for 2019. The elimination of the personal exemption was a provision in the Tax Cuts and Jobs Act. (IRS)

3. You may be eligible to take a $2,000 tax credit for each child. The credit is available to parents as long as your child is younger than 17 years of age on the last day of the tax year, generally Dec 31. It begins to phase out at $200,000 of modified adjusted gross income for single filers. The amount doubles to $400,000 for married couples filing jointly.

4. Limitations on itemized deductions. If cash expenses that are eligible to be itemized fail to top the standard deduction, skip Schedule A and take the standard deduction. It’s that simple.
 
If you itemize, please be aware that state and local income taxes, property taxes, and real estate taxes are capped at $10,000. Anything above cannot be written off against income.
 
However, the IRS said it will grant a workaround for some taxpayers.
                                                                                                              
Taxpayers that use pass-through entities (PTE), including S-corporations, some limited liability companies, and partnerships may qualify depending on your state. This work-around is not available for sole proprietors and single-member LLCs

According to the American Institute of CPAs, the PTE may deduct the entity’s state and local income taxes as a tax on the business at the federal level and avoid the $10,000 cap.
                                                                                                              
State proposals would also provide that the owner may claim a credit on the owner’s state income tax return for the owner’s distributive share of the taxes paid by the PTE.
 
It’s a complex maneuver that is only allowed by a few states (NOTE: please see articles above, which list states that are included), but it can help reduce your tax liability if you qualify.
 
For charitable contributions, you may generally deduct up to 50% of your adjusted gross income, but 20% and 30% limitations apply in some cases. (IRS)
 
In 2020, the IRS allows all taxpayers to deduct the total qualified unreimbursed medical care expenses for the year that exceeds 7.5% of their adjusted gross income
 
5. Penalties have been eliminated for not maintaining minimum essential healthcare coverage, according to the Tax Cuts and Jobs Act.
 
6. Estates of decedents who die during 2020 have a basic exclusion amount of $11,580,000, up from $11,400,000 for estates of decedents who died in 2019.
 
The annual exclusion for gifts is $15,000 for calendar year 2020, as it was in 2019.
 
7. The maximum credit allowed for adoptions for tax year 2020 is the amount of qualified adoption expenses up to $14,300, up from $14,080 for 2019.
 
8. Changes to the AMT – the alternative minimum tax. Tax reform failed to do away with the alternative minimum tax (AMT), but it snags far fewer people.
 
The AMT exemption amount for tax year 2020 is $72,900 and begins to phase out at $518,400 ($113,400 for married couples filing jointly for whom the exemption begins to phase out at $1,036,800).
 
The 2019 exemption amount was $71,700 and began to phase out at $510,300 ($111,700, for married couples filing jointly for whom the exemption began to phase out at $1,020,600)

It’s confusing, but most tax software programs run both calculations for you.
 
9. There is a 20% deduction for business owners. The new law gives “flow-through” business owners, such as sole proprietorships, LLCs, partnerships, and S-corps, a 20% deduction on income earned by the business.
 
This is a very valuable benefit to business owners who aren’t classified as C-corps and can’t benefit from 2018’s reduction in the corporate tax rate to 21% from 35%.
 
Individual taxpayers and some trusts and estates may be entitled to a deduction of up to 20% of their net qualified business income (QBI) from a trade or business, including income from a pass-through entity.
 
In general, total taxable income in 2020 must be under $163,300 for single filers or $326,600 for joint filers to qualify.
 
The deduction does not reduce earnings subject to the self-employment tax.
 
There are limitations to the new deduction and some aspects are complex. Feel free to check with your tax advisor to see how you may qualify. Most tax software programs will run the calculation, too.
 
The points above are simply a summary. You may see provisions that will benefit you. You may also see potential pitfalls. If you have any questions or concerns, let’s have a conversation.

8 Smart Planning Moves to Consider
                            
1.      Review your income or portfolio strategy. Are you reaching a milestone in your life such as retirement or a change in your personal circumstances? Has your tolerance for taking risk changed? We experienced historic volatility this year. The broad-based S&P 500 Index lost over 30% in one month. The selloff was steep and violent but short-lived.
 
As November came to close, the major market indexes had re-captured prior highs. It’s a testament to adhering to the long-term financial plan.
 
Did you take volatility in stride, or feel any uneasiness? A pandemic, a shuttering of the economy, and a swiftly falling stock market are bound to create some anxieties. But if you experienced sleepless nights or sought the safety of cash, now may be the time to re-evaluate risk and your approach.  
 
One of my goals has always been to remove the emotional component from the investment plan. You know, the one that encourages investors to load up on stocks when the market is soaring or one that prods us to sell when volatility surfaces.
 
The hard data and my own personal experience tell me that the shortest distance between an investor and his/her financial goals is adherence to well-diversified holistic financial plan.
 
2.      Rebalancing your portfolio. Despite the rollercoaster ride, overall market performance has been good this year. U.S. equities have provided a nice lift to your portfolio, but you may have too much exposure to stocks as we approach 2021.
 
If that’s the case, we may need to trim back on equity exposure. However, we may want to wait until January in non-retirement accounts so that any gains are booked in tax year 2021.
 
3.      Take stock of changes in your life and review insurance and beneficiaries. Let’s be sure you are adequately covered. At the same time, it’s a good idea to update beneficiaries if the need has arisen.
 
4.      Tax loss deadline. You have until December 31 to harvest any tax losses and/or offset any capital gains. It may be advantageous to time sales in order to maximize tax benefits this year or next. We may also want to book gains and offset with any losses.
 
But be aware that short- and long-term capital gains are taxed at different rates, and don’t run up against the wash-sale rule (IRS Publication 550) that could disallow a capital loss.
 
A wash sale occurs when you sell a security at a loss and then purchase that same security or “substantially identical” securities within 30 days, either before or after the sale date (See Schwab: A Primer on Wash Sales).
 
5.      Required minimum distributions (RMDs) are minimum amounts the owner of most retirement account must withdraw annually.
 
Please note that the CARES Act eliminated the RMD requirement in 2020. But let’s go through RMD requirements at a high level.
 
The SECURE Act made major changes to RMD rules. If you reach age 70 ½ in 2020 or later you must take your first RMD by April 1 of the year after you reach 72 (IRS: Retirement Plan and IRA Required Minimum Distributions FAQs). Some plans may provide exceptions if you are still working (IRA FAQs: Required Minimum Distributions).
 
If you reached the age of 70½ in 2019 the prior rule applies.
 
For all subsequent years, including the year in which you were paid the first RMD by April 1, you must take the RMD by December 31.
 
While delaying the RMD until April 1 can cut your tax bite in the current year, please be aware that you’ll have two RMDs in the following year, which could bump you into a higher tax bracket.
 
The RMD rules apply to all employer sponsored retirement plans, including profit-sharing plans, 401(k) plans, 403(b) plans, and 457(b) plans. The RMD rules also apply to traditional IRAs and IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs.
 
They do not apply to ROTH IRAs.
 
Don’t miss the deadline or you could be subject to a steep penalty.
 
6.      Contribute to a Roth IRA or traditional IRA. A Roth gives you the potential to earn tax-free growth (not just deferred tax-free growth) and allows for federal-tax free withdrawals if certain requirements are met.
 
You may also be eligible to contribute to a traditional IRA. Contributions may be fully or partially deductible, depending on your income and circumstances. Total contributions for both accounts cannot exceed the prescribed limit.
 
There are income limits, but if you qualify, the annual contribution limit for 2019, 2020, and 2021 is $6,000, or $7,000 if you’re age 50 or older.
 
You can contribute if you (or your spouse if filing jointly) have taxable compensation.
 
For 2020 and later, there is no age limit on making regular contributions to traditional or Roth IRAs.
 
For 2019, if you’re 70 ½ or older, you can't make a regular contribution to a traditional IRA. However, you can still contribute to a Roth IRA and make rollover contributions to a Roth or traditional IRA regardless of your age (IRS: Retirement Topics - IRA Contribution Limits).
 
You can make 2020 IRA contributions until April 15, 2021 (Note: statewide holidays can impact final date).
 
7.      College savings. A limited option called the Coverdell Education Savings Account (ESA) allows for a maximum contribution of $2,000. It must be made before the beneficiary turns 18. Contributions are not tax deductible.
 
Distributions are tax free if used for qualified education expenses. But beware of income limits (IRS: Coverdell Education Savings Accounts).
 
Any individual (including the designated beneficiary) can contribute to a Coverdell ESA if the individual's modified adjusted gross income for the year is less than $110,000. For individuals filing joint returns, that amount is $220,000.
 
A 529 plan allows for much higher contribution limits, and earnings are not subject to federal tax when used for the qualified education expenses of the designated beneficiary.
 
As with the Coverdell ESA, contributions are not tax deductible.
 
8.      Charitable giving. Whether it is cash, stocks or bonds, you can donate to your favorite charity by December 31, potentially offsetting any income. 
 
Did you know that you may qualify for what’s called a “qualified charitable distribution (QCD)” if you are over 70 ½ years old?
 
A QCD is an otherwise taxable distribution from an IRA or Inherited IRA that is paid directly from the IRA to a qualified charity (Fidelity: Donating to a charity using a qualified charitable distribution (QCD)).
 
A QCD may be counted toward your RMD, up to $100,000. If you file jointly, you and your spouse can make a $100,000 QCD from your own IRAs.  This becomes even more valuable in light of tax reform as the higher standard deduction may preclude you from itemizing.
 
You might also consider a donor-advised fund. Once the donation is made, you can generally realize immediate tax benefits, but it is up to the donor when the distribution to a qualified charity may be made.
 
I trust you’ve found these planning tips to be helpful. Please feel free to reach out if you have any questions, or check in with your tax advisor.

Cruising at 30,000 feet     

November was a standout month for stocks, as illustrated by Table 2. The major US stock market indexes recorded new highs, including the smaller-company Russell 2000 Index, which had stellar month.
Table 2: Key Index Returns
 
MTD %
YTD %

Dow Jones Industrial Average
11.8
3.9

NASDAQ Composite
11.8
36.0

S&P 500 Index
10.8
12.1

Russell 2000 Index
18.3
9.1

MSCI World ex-USA**
15.2
0.7

MSCI Emerging Markets**
9.2
8.1

Bloomberg Barclays US
Aggregate Bond TR
1.0
7.4

Source: Wall Street Journal, MSCI.com, MarketWatch, Morningstar
MTD returns: Oct 30, 2020—Nov 30, 2020
YTD returns: Dec 31, 2019— Nov 30, 2020
*Annualized
**in US dollars
 
In particular, the better-known Dow Jones Industrial Average eclipsed 30,000 for the first time ever. It has been an impressive rally from March’s low, when the economy was locked down, unemployment was soaring, and the economy was contracting at its fastest rate in history.
 
The DJIA was published in 1896, according to the Library of Congress—Business References.
 
The index first topped 100 in 1906, reached 1,000 by 1972, 10,000 by 1999, and 20,000 by 2017, according to LPL Research and data from the St. Louis Federal Reserve.
 
Landmarks have come at a faster pace given that the percentage gain to reach the next key marker declines. No one knows when we might hit 40,000, but a 33% advance is what’s needed to push the Dow to the next milestone.
 
In a broader context, what does this tell us? Stocks have a long-term upward bias, which is a piece of a well-diversified plan.
 
History repeats itself
 
Of course, markets don’t climb in a straight line. Volatility is inevitable. That goes without saying. March’s decline was short, but violent.
 
However, as we’ve repeatedly witnessed, market corrections and bear markets eventually come to an end, and major market indexes climb to new highs.
 
Catalysts during November
 
A bitter election is over. Talk of civil strife pre-election didn’t materialize. We have a degree of certainty where uncertainty once existed. The election removed a hurdle for investors, and the prospect we may have divided government also cheered investors.
 
In addition, the announcement of at least two vaccines for Covid-19 received a very warm welcome from investors.
 
Let’s back up a moment. So far, the economic recovery has been far more robust than nearly every economist has anticipated. Yet, problems remain.
 
With new vaccines, beaten-down sectors such as leisure, hospitality, travel, and the broad-based service sector have a fighting chance to recover next year.
 
Though we may see more volatility, the straightest line to your financial goals hasn’t changed. The financial plan is still your roadmap forward.
 
I hope you’ve found this review to be educational and helpful. Once again, before making any decisions that may impact your taxes, please feel free to confirm the numbers with your tax preparer.
 
Let me once again emphasize that it is my job to assist you. If you have any questions or would like to discuss any matters, please feel free to give me a call.
 
As always, I’m honored and humbled that you have given me the opportunity to serve as your financial advisor.

Achieving your financial goals doesn’t just happen by itself. It takes a plan, implementing the plan, adhering to the plan, and when necessary, adjusting the plan

Simply put, failing to plan is planning to fail. Don’t plan to fail!

According to the Department of Labor...

● Only 40% of Americans have calculated how much they need to save for retirement.
● In 2018, almost 30% of private industry workers with access to a 401(k) plan or something similar did not participate.
● The average American spends roughly 20 years in retirement

Nearly everyone will receive Social Security, but Social Security won’t pay all the bills.

1. Regularly saving is critical. Once you begin an automatic payroll deduction into a retirement account, you won’t miss it. I promise. Let me tell you a short story about my own experience. When I first started saving in my company’s 401(k), my initial goal was to put 10% of pretax income in my 401(k).

But that seemed like a mighty big chunk of cash, at least in the beginning. So, I started with 4%, raised it to 7% then bumped it up to 10%. Taking baby steps was much easier than attempting to summit the peak in one leap.

I can’t overly emphasize the importance of capturing your entire company’s match. It’s free money. Don’t leave free cash with your employer.

2. Start as early as you can. It won’t be long before my daughter graduates from college. I'm sure, for her, retirement seems light years away. That's the case for many young people. 

But we all know the magic of compounding. The savings we socked away when we were younger has paid big dividends.

​Let’s illustrate by way of example. Tom is 28 years old and plans to save $500/month or $6,000 per year until he retires at 65. With an annual return of 7% (assuming annual compounding), Tom will have amassed $962,024 when he turns 65 years old. Total contributions: $222,000.

Kate decides to put away the same amount. Kate is 22 years old and will save for 43 years. While her time to contribute is only an additional six years, her decision to start early is rewarded with a portfolio of $1,486,659. Total contributions: $258,000.

Because Kate started sooner, the additional $36,000 amounted to an additional $524,635! (Source: Investor.gov Investment Compound Calculator]] Calculations assume a tax-deferred account.)

3. What plan best fits my need? That question will depend on your personal circumstances. For many, your company’s 401(k) is tailor-made to save for retirement. This is especially true if your firm has a matching contribution. 

Whether to fund a traditional IRA or a Roth IRA depends on many factors, including your marginal tax rate today and expected rate in retirement.  

A Roth offers tax advantages if you qualify. Generally speaking, withdrawals from a Roth IRA are tax-free in retirement if you are age 59½ or older and have held the account for five years. But you won’t capture a tax deduction on contributions. 

Current tax law does not require minimum distributions, which can be a big advantage as you travel through retirement.

A Roth may also be advantageous if you do not believe your marginal tax rate will fall much in retirement or if you have outside assets that limit your need to withdraw on your retirement savings.

4. How much will I need at retirement? Again, much will depend on your individual circumstances. Your retirement expenses and lifestyle will dictate your portfolio needs.

An old rule of thumb that you’ll need 70% of pre-retirement income may not suffice for many. For example, will you still be paying on a mortgage after you retire? Or, do you plan to downsize, which may reduce or eliminate monthly mortgage outlays?

One approach some folks consider is the 4% rule. It’s relatively simple. Withdraw 4% of your total investments in the first year and adjust each year for inflation. Keep in mind, however, that this is a rigid rule. It assumes a 30-year time horizon and minimizes the risk of running out of money.

Depending on Social Security and any pension you may have, a more generous “allowance” from your savings may work too.

5. How do I find the right mix of investments? What worked when you were 30 years old probably isn’t appropriate today.

While my advice will vary from investor to investor, Ican offer broad guidelines. Furthermore, retirement may be broken into different stages, which may require adjustments to the plan.

Some investors decide its best to take a very conservative approach. You know, “I can’t lose what I’ve accumulated because I don’t have time to recoup losses.” But that has its drawbacks. For starters, you don’t want to outlast your money. Equities, which have historically offered more robust returns, may still be an important part of an investment strategy. 

Others may be swept up by what might be called “the current of the day.” Stocks have surged, which may encourage investors to load up on risk. However, a comprehensive financial plan helps remove the emotional component that can creep into decisions.

6. I’ve saved all my life. How do I begin withdrawing from my savings? It’s a complete shift in the paradigm. No longer are you socking away a percentage of each paycheck. Instead, you are living off your savings.

First, if you are required to take a minimum distribution from a tax deferred account, take it. 

Next, consider interest, dividends and capital gains distributions from taxable investments, which continues to tax shelter assets in retirement accounts.

If additional funds are needed, consider withdrawals from your IRA or other tax-deferred accounts. If you are in high tax bracket, you may consider pulling from your Roth. Those in a lower tax bracket could leave the Roth alone and take funds from their traditional IRA

Bottom line

Let me reiterate that many of these principles are simply guidelines. One size does not fit all. Plans we suggest are tailored to one’s specific needs and goals. If you have any questions, I would be happy share our recommendations. I'm simply a phone call or email away!

I trust you’ve found this review to be helpful and educational. 

I share a variety of issues with you, and I have an open-door policy. If you have questions or concerns, let’s have a conversation. That’s what I’m here for.

As always, I’m honored and humbled that you have given me the opportunity to serve as your financial advisor.

Election 2020 – a nail-biter

For the nation, 2020 has been one of the most difficult years in memory. We are grappling with Covid and its fallout, economic upheaval, riots, looting, wildfires, hurricanes, a presidential election, and a polarized electorate.

Despite this year’s difficulties, a strong economic recovery, record low interest rates, and an aggressive stance by the Federal Reserve have helped the major market indexes rebound from March’s steep sell-off.

But where do we go from here? What’s in store over the next four years? If we view the future through the lens of public or tax policy, visibility is extremely limited. Who will reside in the White House has yet to be determined.

If we narrow our scope and review the landscape through the lens of the investor and the market, I believe we can look to history for guidance and at least obtain some degree of clarity.

First, let me say this. No one has a crystal ball. Any stock market forecast that you may hear from analysts is simply an educated guess. They may get lucky for the right or the wrong reason. Or analysts might miss the mark by a wide margin. As we already know, even the smartest folks in the room don’t know the future.

Besides, we already know that consistently timing the market is nearly impossible.

However, over a longer period, we recognize that stocks have historically had an upward bias.

“Since 1932, the S&P 500 Index has gained an aggregate of 710% under Democratic presidents and 375% under Republican presidents. But staying invested the entire time would have earned 47,000%,” according to the Schwab Center for Financial Research

What’s that mean? If you shunned stocks when either a Republican or Democrat was president, you missed out on the lion’s share of the market’s gain.

If we take the last 12 years into consideration, a similar pattern emerges. Those who pulled out of stocks after the 2008 election because they were discouraged by the results lost out on a significant stock market rally over the ensuing eight-year period.

Anyone discouraged by the 2016 results also failed to participate in a significant stock market rally.

A disputed election could create short-term uncertainty. Yet, emotional decisions made outside the boundaries of a well-crafted financial plan have rarely been profitable over a longer period.

Longer term, the economic environment, Federal Reserve policy and interest rates, corporate profits, and inflation trends have historically had the biggest impact on the broader market.

Keeping perspective

The country will remain divided after the final tally is known. But let’s not forget that the U.S. remains the world’s largest economy; it has the deepest and most transparent capital markets, and innovation isn’t likely to end.

We will face challenges in the days and years ahead. We have always faced challenges. But we are resilient, and I continue to be optimistic.

I trust you’ve found this review to be helpful and educational. If you have questions or concerns, let’s have a conversation. That’s what I’m here for. As always, I’m honored and humbled that you have given me the opportunity to serve as your financial advisor.

Last month, I entitled June’s post “The Approaching Light Before the Dawn.” Much of the economic data at that time was extremely negative, with record declines in employment (U.S. BLS employment data) and consumer spending (U.S. BEA). The speed of the decline had no modern precedent.

With government-imposed lockdowns and business closures, companies furloughed employees at a furious and painful pace. It is difficult to express in words, but it has been disheartening to see friends and family members sidelined from the workforce.

We are now in a recession, according to the National Bureau of Economic Research. The NBER is the official arbiter of recessions and expansions. The prior expansion, which began in 2009, officially peaked in February, having lasted a record 128 months.

In making its determination, the NBER concluded, “The unprecedented magnitude of the decline in employment and production…warrants the designation of this episode as a recession, even if it turns out to be briefer than earlier contractions.”

The shortest recession on record lasted just six months and occurred in 1980. Second place: a seven-month recession in 1918-19, which was tied to the Spanish flu pandemic. There are five recessions that lasted eight months, including the 1957-58 recession that coincided the Asian flu pandemic.

While the economy is much different today, the recovery from the short, but steep 1957-58 recession was robust (St. Louis Federal Reserve).

That brings us back to last month’s title, “The Approaching Light Before the Dawn.”

Given surprisingly strong data in May, April may mark the bottom of the economic cycle. If so, it will be the shortest recession on record. Let’s also acknowledge that the speed and depth of the decline have no modern parallels.

 The U.S. gained 4.8 million jobs in June (better than expected). Meanwhile, the unemployment rate headed lower to 11.1% form 13.3% in the month prior.

Consumer spending, which fell a record 6.6% in March and a record 12.6% in April, rebounded by a record 8.2% in May (St. Louis Federal Reserve). Pent-up demand, stimulus checks, generous unemployment benefits, a rise in employment, and reopened businesses supported sales.

Consumer confidence is also improving per the Conference Board’s Consumer Confidence Index. It remains well below pre-coronavirus levels, but rising confidence and re-openings are supportive of economic activity.

Still, not all is rosy. And a strong recovery is not assured, as visibility remains incredibly limited.

Layoffs, as measured by first-time jobless claims (Department of Labor), are slowing but remain at unusually high levels. The weekly layoff numbers have been more than double what we saw at the peak of the 2007-09 recession.

Forecasting in today’s environment

In his testimony before House committee on June 30, Fed Chief Powell said, “Many businesses are opening their doors, hiring is picking up, and spending is increasing. Employment moved higher, and consumer spending rebounded strongly in May. We have entered an important new phase and have done so sooner than expected.”

But he also recognized the need to keep the virus in check. “The path forward for the economy is extraordinarily uncertain and will depend in large part on our success in containing the virus. A full recovery is unlikely until people are confident that it is safe to reengage in a broad range of activities,” Powell added.

We are seeing a spike in Covid-19 cases in many states, which is creating a new round of uncertainty. It has fueled choppier day-to-day activity in the market. Yet, at least so far, the bull market seems to be coexisting with the rise in cases. 

Despite higher infection rates, deaths continue to trend lower. This reduces fear somewhat and in turn reduces odds of new lockdowns.

U.S. Treasury Secretary Steven Mnuchin took a more optimistic tone in his testimony with Powell. “The Blue Chip Report is forecasting that our GDP will grow by 17% annualized in the third quarter, and by 9% in the fourth quarter,” which follows what is expected to be record contraction in Q2. Mnuchin also expects significant progress on the employment front.

V-, U-, L- or W-shaped recovery

Economists give economic recoveries what might be called a letter grade when discussing possible paths. It’s not the traditional A through F scale. Instead, the letter intuitively describes the shape of the recovery.

A V-shaped recovery would be ideal, as it would represent a robust bounce. Might we get a V? Data in May was unexpectedly strong and cautiously encouraging. However, even during what we might consider more normal times, forecasting is difficult. Today, there’s no playbook and no framework to model outcomes.

I could give you several reasons to see a strong rebound unfolding. I could also give you several reasons why a sluggish recovery might take place.

The strong rebound in stocks since the late-March low is astounding, especially given the economic damage. It suggests the collective wisdom of investors is more optimistic.

Fed support, rock bottom interest rates, the reopening trade, and stronger economic data have helped. I also believe investors are looking past this year’s hit to corporate profits and are expecting an upturn in 2021. 

The jump in daily cases has created some renewed volatility, and it bears watching, but it has yet to knock the bulls off course.

Ultimately, the path of the virus will play the biggest role in how the economic outlook unfolds.

Some folks are itching to get back to normal, while others remain on guard against the disease and are taking a more cautious approach. It may take time for some businesses to fully recovery. Some never will.

Last month I said, “Don’t expect a return to a pre-Covid jobless rate anytime soon. But investors are betting that an economic bottom is in sight.”

Try to look past continued volatility. However, based on recent economic reports, I think we may have hit that bottom in April.

​As always, I’m honored and humbled that you have given me the opportunity to serve as your financial advisor.

Since the economic crisis began, I have shifted my focus towards financial planning pieces that incorporate the COVID-19 crisis and its impact on your finances.

This month, I want to look at various ways you might shore up your finances in today’s uncertain world.

If you are single, take control of your situation. If you are a couple, sit down with your partner and craft a plan. It’s important that both of you are on the same page. These are guidelines, and I'm here to assist if you have any questions.

1. Now is the time to build up an emergency reserve of at least three to six months. You don’t know what the future may bring and savings will help you weather a job loss, if it were to occur.  

If you have been laid off, the federal government is providing an additional $600/week in unemployment benefits.
 
Some are earning more unemployed than when they were working! If you are in this situation, use the extra cash to build up your savings.

Start saving

If you met the income criteria, you received a stimulus check of up to $1,200 from the federal government ($2,400 if you are a couple). Now it’s time to eliminate unnecessary expenditures. Lockdowns have made the task easier.  

Yes, I understand that forced closures have had devastating economic impact. However, outlays on gasoline, Uber, car repairs, entertainment, eating out, and much more have been curtailed. Build up your rainy day fund.

2. Do you have a mortgage? If so, record low rates could save you hundreds of dollars every month. Review the numbers and determine if refinancing makes sense.  

3. Are you making monthly payments on federally backed student loans? Through September 30, 2020, payments for student loans owned by the federal government are suspended and the interest rate is zero.  

No action is required by you. If someone contacts you and can stop payments provided you pay a fee, hang up the phone or ignore the email. This is a scam.
 
Your deferred payments will allow you the opportunity to build up your savings. Or, if your finances are solid, any monthly payments will go entirely towards principal, enabling you to pay off your loans sooner than anticipated.

4. Consider college refunds and your 529 plan. With lockdowns, dorm closures, cancelled meal plans, and online learning, you may be due a refund from your college. If you used 529 funds, your refund becomes a taxable distribution and is tagged with a 10% penalty.

Normally, you have 60 days from the date of the refund to redeposit the funds without liability. Today, the period has been extended.
 
If the 60-day period ends on or after April 1, 2020 and before July 15, 2020, the redeposit can be made any time before July 15, 2020 or 60 days after the refund date, whichever is longer.

5. Do you need financial assistance? Contrary to popular opinion, banks don’t want to get tough with borrowers. A bank’s business model is based on repayment of loans, not foreclosures. In today’s environment, many banks are willing to work with you, but you must reach out to them. The same holds true for utilities and other monthly services.

Mortgage forbearance programs may be available for those who have lost jobs due to the pandemic. Be sure terms being offered are reasonable. Again, reach out for assistance. Simply stopping payments will quickly get you into trouble.

Next steps

Please recognize that you are not in this alone. I'm here to assist you as you formulate a plan.

The steps above offer a broad overview. Taking action is critical. It’s half the battle. Be proactive, not reactive. You may find you are in a much better position than you realized, which will relieve an enormous amount of stress.

I hope you’ve found this review to be helpful and educational.
 
If you have any questions or would like to discuss any matters, please feel free to give me a call.
 
As always, I’m honored and humbled that you have given me the opportunity to serve as your financial advisor.

Let’s take a moment to briefly outline the situation using hard data.

The unemployment rate soared to a post-depression high of 14.7% in April, while the survey of businesses by the U.S. Bureau of Labor Statistics revealed a loss of 20.5 million jobs in April, the worst monthly reading since records began in 1939.

In a single month, nearly all of the jobs created after the financial crisis disappeared, at least temporarily.

April’s 11.2% drop in industrial production, a metric the Federal Reserve has tracked since 1919 – is the biggest monthly decline on record. Furthermore, consumer spending in April fell 13.6%; the biggest decline ever recorded (U.S. BEA, data back to 1959).

Record layoffs continue, with the number of first-time claims for unemployment insurance topping 40 million over a 10-week period ending May 23 (Dept. of Labor/St. Louis Federal Reserve). Put another way, nearly one in four working Americans have experienced a job loss.

If there is any good news, it is that the number of first-time filings has been declining, and the number of individuals who file on a regular basis in order to receive jobless benefits is about half the number of first-time filings.

This would suggest that paycheck protection loans are kicking in, and reopenings are encouraging businesses to recall furloughed workers. Still, May’s employment report will likely show another rise in the jobless rate.

Let’s back up for a moment.

In April, I noted that, “In just a three-week period, the number of first-time claims for jobless benefits totaled an astounding 17 million. For perspective, during the 18-month-long 2007-2009 recessions…first-time claims totaled 9.6 million.”

Yet, “The Dow Jones Industrial Average added 2,107 points over the three Thursdays the massive number of new claims were released (St. Louis Fed).”

Since then (April 9), the Dow has added 1,664 points, or 7.0% (St. Louis Federal Reserve). It is up 36.5% since its near-term March 23 bottom.

The broader-based S&P 500 Index eclipsed 3,000 by the end of May and has rebounded 36.1% (St. Louis Federal Reserve) from its March 23 low.

Meanwhile the tech-heavy NASDAQ Composite has added 38.3%, is back above 9,000, and is nearing its all-time high (Yahoo Finance).

Simply put, economic activity is falling with depression-like speed, but the major averages are in the midst of an impressive rally.

Here’s one more piece of performance data.

During the financial crisis, the S&P 500 Index lost nearly 57% from its October 2007 peak to the bottom in March 2009 (St. Louis Federal Reserve). This year, in about one month, the S&P 500 Index shed 34% before hitting a near-term bottom on March 23.

The adage “stocks climb a wall of worry” has never been more appropriate amid economic devastation and an outlook that remains incredibly murky.

A closer look at the Wall Street/Main Street disconnect

A combination of factors has fueled the rally since late March.

The response by the Federal Reserve has far outpaced its 2008 response, which has lent a tremendous amount of support to stocks. The same can be said of government fiscal stimulus.

Investors are also keeping close tabs on state re-openings, which will reemploy furloughed workers, help stabilize the economy, and set the stage for a possible economic rebound later in the summer. Talk of vaccines has also helped.

You see, investors don’t simply look at today’s data, which in many cases is backward-looking. Instead, they are forward-looking as they attempt to price in economic activity, the level of interest rates, corporate profits, and more over the next 6-12 months.

An approaching dawn

If we look at what is called “high-frequency economic data” (daily or weekly reports), we are beginning to see signs of stability.

Daily gasoline usage has rebounded (Energy Information Administration), daily travel through TSA checkpoints is up (TSA), hotel occupancy is off the bottom, and the same can be said of weekly box office receipts (Box Office Mojo).

In addition, the weekly U.S. MBA’s Purchase Index (home loan applications) registered its fifth-best reading over the last year (as of May 22, U.S. Mortgage Bankers’ Association/Investing.com), suggesting that low interest rates and some confidence that the U.S. economy is set to recover are lending support to housing.

Of course, these are highly unconventional measures of economic activity and are industry-specific. Outside the Purchase Index, each remains well below previous highs, but the turnaround suggests we may be seeing some light at the end of a very dark tunnel.

Collective wisdom

Any given level of a major stock market index represents the collective wisdom of tens of millions of stock market investors. It is not simply an opinion, but an opinion with money behind it.

When stocks were in a free fall in March, investors were anticipating a devastating blow to the economy. Tragically, the data did not disappoint.

Has the rally been too much, too quickly?

Even in the best of times, economic forecasting can be difficult. Today, the outlook is clouded with a much greater degree of uncertainty.

1. Will the virus lay down over the summer?
2. How will reopenings proceed?
3.How quickly can a readily available vaccine and treatment be developed?
4. What might happen to COVID-19 next fall and winter?
5. How quickly will consumers venture back in public and resume prior spending patterns?

​These are difficult questions to answer.

Don’t expect a return to a pre-COVID jobless rate anytime soon. But investors are betting that an economic bottom is in sight.

I understand the uncertainty facing all of us. We are grappling with an economic and a health care crisis, not to mention recent civil unrest.

We've addressed various issues and I have an open-door policy. If you have questions or concerns, let’s have a conversation. That’s what I’m here for.