In the Market & Economic Outlook, we separate the relevant from the noise, to bring you timely content that helps you on the path to and through retirement!
STATE OF THE MARKETS (S&P 500 -14.25% YTD THROUGH 4/15/2020)
The coronavirus pandemic caused the fastest bear market ever – down 32% in just four weeks. To stop the spread of the virus, government officials have shut down virtually all commerce. These drastic measures will bend the curve of the virus spreading but will almost certainly result in a deep recession, massive unemployment in the 2nd quarter, and stress on our financial system. Markets hate uncertainty and until we see additional progress with containing the virus and a plan to get Americans back to work, stocks will continue to be volatile.
The coronavirus could shut down as much as 30% to 40% of our economy in the second quarter, which represents $2.2 trillion of our $5.5 trillion quarterly revenue (GDP). The only way to plug that hole is through government spending and that’s why Congress passed the $2.2 trillion stimulus package. The Fed and policymakers have acted with breakneck speed to calm markets, shore-up liquidity issues, and protect investors. The Fed has stated that they will do “whatever it takes” to keep markets functioning. These actions are reassuring but if we have to shelter in place for much longer, additional stimulus will be needed to mitigate further damages to our economy.
4 PRUDENT STEPS TO TAKE NOW
- Own tennis balls, not tomatoes. What that means is it’s a perfect time to prune any losers, get rid of investments that are unlikely to bounce back, and do some tax-loss harvesting if appropriate. We’ve always remained focused on quality, and continue to look for opportunities with “fallen angels” that should be removed from the portfolio.
- Consider a Roth conversion. The best time to do a Roth conversion is when IRA values are down significantly. This not only lowers the tax bite on the conversion, but it also sets up the Roth to benefit from future appreciation potential.
- Maintain adequate cash. Make sure you have enough cash available to cover expenses for the next 6-9 months in case the virus lasts longer than expected. If you are currently taking portfolio withdrawals, but you have enough cash to suspend those withdrawals, we recommend stopping portfolio withdrawals until the stock market improves.
- Add to stocks a little bit at a time. If you have cash on the sidelines or if you need to increase your allocation to stocks, but you fear stocks could go even lower, consider dollar-cost-averaging in over the coming few months. This eliminates trying to time the exact market bottom – which is nearly impossible to do and brings discipline to your investing where emotions could get in the way.
Bottom Line
The coronavirus pandemic caused the fastest bear market ever – down 32% in just four weeks. Sheltering in place and social distancing will bend the curve of the virus, but it will also result in a recession, massive unemployment and economic hardship. This is a perfect time to focus on what you can control – maintaining quality in your portfolio, pruning any losers, and tax-loss harvesting. Also, consider a Roth conversion, having enough cash to cover 6-9 months of expenses, and selectively increasing stock allocations where appropriate.
Our weekly meetings are looking a little different these days but thankfully for technology, we can still connect with our True North family and see some smiling faces… Well, almost everyone’s smiling face ?.
