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.

Whatever it takes

Within our mandate, the Fed is ready to do whatever it takes to support the economy. Believe me, it will be enough.

Wait, did Fed Chief Jerome Powell really say that?

No he didn’t, but the Fed’s actions seem to have said it for him.  Given the speed and force with which the Fed has moved, he might as well have uttered those words.

In actuality, it was European Central Bank President Mario Draghi who voiced this promise. In 2012, as Spain and Italy careened towards a financial cliff Draghi gave a speech (Bloomberg News) in which he said:  “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro.” After a pause, he added firmly, “Believe me, it will be enough.”

In some respects, “whatever it takes” became Draghi’s legacy. No one remembers what he said during the rest of this speech. Just the thought of unlimited central bank firepower encouraged investors to step into Spanish and Italian government debt. Long story short: Another financial crisis was averted.

Perhaps the Fed’s rapid response has created the same confidence for American investors. Because despite the tanking economy, markets are fairly robust. Let’s take a deeper look.

The economy: Worst ever

The economy is in a free-fall.

Over a six-week period, there have been 30 million first-time claims for unemployment insurance (through April 25) (https://fred.stlouisfed.org/series/ICSA ). It’s by far the worst number of layoffs we’ve ever seen, and it is disheartening to see.

A 7.5% decline in consumer spending in March (https://fred.stlouisfed.org/series/PCE) is the biggest decline on record. Industrial production slid 5.4% in March (https://fred.stlouisfed.org/series/INDPRO# ), the worst decline since the end of World War II.

Nonfarm payrolls for April will be released May 8. It will easily exceed the prior record of two million lost jobs (https://fred.stlouisfed.org/series/PAYEMS#0 ) at the end of World War II.  

Sadly, we may see an acceleration in the economic contraction this month when April’s data roll in.

“Many standard economic statistics have yet to catch up with the reality we are experiencing,” Powell said at his end-of-April press conference. “Manufacturing output fell sharply in March and is likely to drop more rapidly (in April) as many factories have temporarily closed.”

Put simply, a health crisis has morphed into an economic crisis, with the economy contracting at depression-like speed.

“The severity of the downturn will depend on the policy actions taken at all levels of government to cushion the blow and support recovery when the crisis passes,” Powell said.

The markets:  Best monthly gains since 1987

During April, the Dow Jones Industrial Average and the S&P 500 recorded their best monthly gains since 1987 (https://www.marketwatch.com/story/after-a-blockbuster-april-for-the-dow-and-sp-500-is-sell-in-may-in-the-coronavirus-era-a-smart-strategy-2020-04-30 ). It’s an incredible disconnect between the financial economy and the real economy.

One of the recurrent themes I emphasize is that bull markets occur during economic expansions and bear markets coincide with recessions. Expansions outlast recessions, and expansions drive the economy to higher levels. And stocks follow, albeit unevenly.

The one glaring exception over the last 50 years was the 1987 market crash, which didn’t lead to an economic contraction.

The four-week 34% decline in the S&P 500 (https://fred.stlouisfed.org/series/SP500) qualifies as a bear market. Stocks imploded at a stunning pace as investors sensed the economy was running into a COVID-19 wall.

But the rally over the last month has been nothing short of astonishing given today’s dire economic environment. Year-to-date, losses in U.S. stocks have been quite modest.

How might we explain the disconnect?

The Fed’s unlimited firepower has not been enough to prevent a debilitating economic decline, but its unprecedented steps have kept an economic crisis from morphing into another financial crisis, with a massive amount of liquidity and a promise of more support aiding stocks.

Further, government stimulus of over $2.5 trillion is helping sentiment. Talk of a vaccine or treatment that would end the pandemic has been a factor. And, I believe, investors are looking to 2021, when there is the anticipation that corporate profits will turnaround.

Of course, the outlook is very uncertain. Have investors been too optimistic?

Additional government spending and support may be needed to jumpstart economic activity, as Powell alluded to in his press conference. Deficit hawks may cringe at talk of new spending and new programs haven’t been problem-free. So far, fiscal stimulus has received strong bipartisan support.

Meanwhile, the reopening of large swaths of the economy may or may not go as planned.

Another wildcard will be consumer behavior. Prior patterns are unlikely to return to pre-crisis behavior, at least right away, and social distancing at restaurants, airlines, and industries that require person-to-person interactions could limit activity and sales.

Bottom in sight?

Yet market action suggests some type of economic bottom is in sight. Think of it like this: The level and the direction of stocks is the equivalent of the collective wisdom of millions of small and large investors.

They are not simply opinions, but real people and institutions that buy and sell equities, effectively putting their money where their mouth is, as they say.

No one has a crystal ball. No one can tell you where stocks might be at the end of the year. There are too many unknown variables. Those who make forecasts are simply offering opinions.

I understand the uncertainty facing all of us. We are grappling with an economic and a health care crisis. It’s something none of us have ever faced.

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

Most of us remember the financial crisis of 2008. The economy was quickly contracting, several financial institutions received bailouts, layoffs increased, and the stock market plunged.

But we weren't grappling with fear tied to a health crisis then. We could go to the movies, eat at a restaurant, travel, or enjoy live sport events. The roots of today’s crisis are different, and we are in the midst of both an economic and health crisis. Activities outside the home have been greatly reduced. It’s unsettling for everyone.

As we are all aware, the speed of the decline in stocks has been swift. Since the February 19 peak, the S&P 500 Index shed 34%, plummeting to its most recent low on March 23 (St. Louis Federal Reserve data).

The pace of the sell-off can be traced to the enormous amount of uncertainty tied to shutting down major portions of the economy. What will its ultimate impact be? The brightest minds continue to debate this.

I routinely counsel against trying to time the market. Many analysts are experts at their craft, but they don’t have a crystal ball into the future either.

Your own individually crafted financial plan remains our guide, as the plan is rooted in the precept that the U.S. and global economy expands over time…and with it, so do equities.

We don’t know what might happen next year, but the long-term historical trend has been favorable. Let’s continue to keep our long-term financial goals in mind, even during these trying times.

A bounce off the bottom

Since last month’s low, the S&P 500 Index rallied 25% through April 9. Technically, a 20% rally from the market’s bottom constitutes a new bull market–technically. As of April 9, the S&P 500 Index was a modest 16% below its February 19 peak (St. Louis Fed data). The recovery has been cautiously encouraging, and I believe there are three variables that can be cited.

First, the federal government passed the CARES Act. The bill includes over $2 trillion in spending, generous jobless benefits, loans and grants to businesses, stimulus checks, and more. It offers a much more aggressive response than in 2008.
 
Second, the Federal Reserve has aggressively responded. Pre-crisis, there were questions whether the Fed had the necessary tools in its tool kit, given that interest rates were already low. Apparently, they do.

With much greater speed than in 2008, the Fed has launched numerous programs aimed at propping up the economy... from big business to Main Street.

The two-pronged attack has not been executed flawlessly, but it has cautiously encouraged investors to dip their toes back into stocks. While the economic outlook remains fluid, investors are trying to discern some form of an economic recovery in the second half of the year.

Third, there are signs the virus may be peaking. An April 12 headline in Bloomberg News offered a cautiously upbeat headline: “CDC Says U.S. Near Peak; 70 Vaccines in Pipeline.”  With signs that new cases may be peaking, talk is surfacing over how to best reopen shuttered industries.

Q2 will be ugly

The St. Louis Federal Reserve estimates that GDP, the largest measure of economic activity, could contract at an annualized pace of 50% in Q2. That’s unprecedented. Yet, forecasts vary widely. In reality, we don’t know how steep the downturn may be during the April-June period.

In just a three-week period, the number of first time claims for jobless benefits totaled an astounding 17 million (Dept. of Labor). For perspective, during the 18-month long 2007-09 recession (as defined by the NBER), first-time claims totaled 9.6 million.

A sharp contraction in the economy in Q2 is expected, and layoffs are the first, bitter fruits of that contraction.
However–and I believe this is important–the discouraging number of layoffs was brushed aside by investors. The familiar Dow Jones Industrial Average added 2,107 points over the three days (respective Thursdays) when the massive number of new claims was released (St. Louis Fed).

It’s not that bad news for Main Street is a reason for Wall Street to celebrate; far from it.

We are in uncharted economic territory, and the future is quite opaque. But the rally in stocks is an attempt by investors to sniff out an economic bottom and eventual economic recovery.

Remember, no one rings a bell that sounds the all-clear signal. Collectively, markets attempt to price in future events. I would expect large daily swings, both to the upside and downside, to continue amid the uncertainty.

We don’t know if we’ll see an uptick in new cases this summer when the economy reopens. We don’t know if an effective treatment will be developed or how quickly a vaccine might come online.

And, for that matter, we don’t know how quickly most folks will venture back into restaurants, airplanes or the public square.

Final thoughts & hope

I don’t want to downplay the havoc created by COVID-19. We are living in a world that nobody could possibly have envisioned a few months ago. The impact caused by the virus has disrupted life around the globe. You may have friends and loved ones who are dealing with this disease. It’s challenging.

Yet, unexpected blessings have surfaced. People are reaching out to family and friends via texting and emails. Some are even connecting the old-fashioned way–by phone.

Families are closer than ever. Activities and jobs around the country have been suspended but not ended. And I am confident we will see an economic recovery take root and the pandemic will subside.

We are a resilient people. Together we will get through this tough time, and we will be stronger for it.

​It has been a difficult month for investors. Since the February 19th peak, the S&P 500 Index has shed 34% to its most recent low (St. Louis Federal Reserve). That’s roughly in line with the average bear market pullback (LPL Research), with bear markets being defined by at least a 20% sell-off.

However, the rapid decline in the major stock market indexes has been unsettling. The 34% drop occurred in just over one month. It’s unprecedented.

But what we are seeing in the economy is without precedent, too. There is an enormous amount of uncertainty. Many industries that require person-to-person interactions are being shut down. And many of the service-related companies that remain open have seen a significant drop in traffic.

Since there is no modern precedent on which to model economic forecasts, the second-quarter projections for GDP have been incredibly wide. If we connect the dots, the economic uncertainty has translated into earnings uncertainty which in turn has translated into incredibly volatile markets.

A government-induced economic coma

In order to slow the spread of the pandemic, the government has encouraged social distancing, and several states have ordered lockdowns or strict shelter-in-place mandates. You may go outside to exercise or head to the grocery store, but there is a ban on social gatherings, which would spread the virus.

While social distancing will slow the spread of COVID-19, the economic impact has been unparalleled. In a way, the government is putting key sectors of the economy in a coma, as it hopes to stem the spread of the virus. When health and safety dictate, the goal is to bring the ‘patient’ out of the coma.

But policymakers aren’t expecting the economy to bounce back on its own. If shutdowns are encouraged or enforced, policy is being put into place to revive the patient when the time comes.

The government response to soften the expected economic blow has been extraordinary and goes well beyond what we saw during the 2008 financial crisis.

The Federal Reserve has not only dropped the fed funds rate to zero, but it has implemented several programs designed to support Treasury bonds, investment-grade corporate bonds, commercial paper (short-term IOUs issued by the largest corporations), money market funds, mortgage-backed securities and municipals.

Further, a new program designed to support small- and medium-sized businesses will be forthcoming.

During the financial crisis, the Fed’s focus was on Wall Street and critical credit markets. Today, the scope of support extends well beyond Wall Street and into Main Street.

Meanwhile, Congress has passed and the President has signed a $2 trillion stimulus bill.

In addition to mitigating some of the damage from surging layoffs, the Federal Reserve and the Federal government are trying to put a foundation in place that will support a robust economic recovery.

Will it work? Much depends on the duration and severity of the recession and the path of the virus.

Road to recovery

I see four steps that are important.
1. A massive response by the Federal government and the Federal Reserve. I think we can check that box. While continued volatility is likely, a modest rebound from March’s low was fueled by the Fed and the $2 trillion stimulus plan.

Other pieces of the recovery puzzle include:
2. A peak in new U.S. cases and subsequent decline.
3. An effective treatment and vaccine.
4. Clarity on the economic data. What will be the steepness and duration of the recession?
No one rings a bell that sounds the all-clear signal. Collectively, markets attempt to price in future events. Given the wide range of outcomes, volatility has been the rule of the day.

But stocks will likely bottom before the economy rebounds.

Thoughts

I spend an enormous amount of time discussing the importance of your financial plan. It is our roadmap in good times and bad.

It is based on a simple premise: stocks rise more than they fall, and stocks rise more than they fall because historically, the U.S. economy has expanded over time.

I understand that what is happening is unprecedented. We are in the midst of an economic and health care crisis. Both breed fear and uncertainty. 

But I am confident this pandemic eventually will pass, and I am confident that the underlying fundamentals of the U.S. economy remain strong. Resilience and ingenuity are part of the DNA that make up America. We will persevere and we will recover.

If you have questions, concerns, fears, and doubt; I get that. I do. And remember, my line is open. I’m here to help.