Hello, clients and friends of Integrity Wealth Advisors. We hope these days find you safe and healthy. Our office has remained open as an “essential service” as we have desired to be available to clients for questions and requests. Our heart goes out to those that have contracted the virus and families that have lost loved ones. We acknowledge that while this newsletter discusses things such as global economies and investment markets, these items are secondary to the physical loss and financial damage experienced by many.
A year that started with so much promise, although not without some concerns, has instead turned into a year that will experience the first recession for the US in over a decade. We will briefly review market returns, the US economy, actions taken by the Federal Reserve and Congress, and what we can do now.
The table below provides returns for the major asset classes around the globe as of 3/31/20. It also includes returns for the month of April through the 21st to reflect the turnaround that has occurred since quarter-end.
While the year-to-date returns through the end of the quarter have been painful, the equity markets have been on an upward trajectory since they bottomed on 3/23/20. We are hopeful the direction continues upward. The only asset class to be positive in every time period listed above is US High Quality Bonds (Treasuries, Agencies and investment-grade Corporates). It has proven yet again its consistency and benefit during a large stock market pullback.
The fourth quarter of 2019 saw Gross Domestic Product (GDP) in the US increase at an annualized rate of 2.1%. January 2020 data looked encouraging even as concern around the COVID-19 virus began to grow. Many stock indexes (primarily US) set all-time highs in mid-February. Then on March 6th, an oil price war escalated when Russia refused to agree to reductions proposed by OPEC, driving oil prices downward. The reality of the virus began to set in as Italy announced on March 9th a national quarantine followed by the World Health Organization (WHO) declaring the virus outbreak a pandemic on March 11th. Soon thereafter the US began to shut down economic activity. We have experienced a rapid decline in global economics. A number of historical records and unprecedented actions have occurred in a short amount of time and in a wide variety of areas to include travel bans, border closings, filings for unemployment benefits, pullbacks in retail sales and manufacturing, stimulus packages, and business and school closings. The swift actions by the Federal Reserve and Congress have helped stem the tide. Let’s expand on what they have done so far. The following lists are not exhaustive.
Actions Taken By The Federal Reserve and Congress
- Reduction of the Fed Funds Rate: A reduction in the Fed Funds rate to near zero should reduce loan rates and provided a sign that the Fed will do all it can to backstop the global economy.
- Removal of bank reserve requirements: The intent is to support lending to households and businesses.
- Quantitative easing: This is a commitment to minimum purchases of Treasuries and mortgage-backed securities for the purpose of increasing liquidity in the financial system and reducing interest rates.
- Creation of a variety of “facilities”: The list includes the Primary Market Corporate Credit Facility, Secondary Market Corporate Credit Facility, Term Asset-Backed Securities Loan Facility, and several more. All are designed to increase the flow of credit to households, municipalities and businesses.
Data from federalreserve.gov
- Payroll Protection Program (PPP): Small businesses may secure SBA loans, some or all of which are forgivable depending on how many employees are retained and if the money is used to pay for specific expenses such as payroll or rent. Integrity Bank issued $13.7 million of these PPP loans in the first round of the program.
- Deferral of Employer Payroll Taxes: Employers can defer paying 50% of their portion of Social Security taxes until 12/31/21 and the remaining 50% until 12/31/22.
- Employee Retention Credit: Eligible employers can receive a refundable tax credit for each full-time employee retained between March 13th and December 31st 2020.
- Increased Limitation on Charitable Contributions for 2020: Corporations’ charitable deduction limitation has been increased from 10% to 25% of taxable income for 2020.
- Checks for Qualifying Individuals: Eligible individuals (there are income limitations) have received or will receive a tax credit paid in advance for the 2020 tax year.
- Penalty and Tax Waiver For Certain Early Retirement Distributions: Individuals under the age of 59 ½ can withdraw up to $100,000 from retirement accounts without the normal 10% penalty if they have been adversely affected by the virus. If repaid within three years, there will be no federal income tax consequences.
- Suspension of Required Minimum Distributions (RMDs): RMDs are suspended for 2020 including those from beneficiary IRAs.
- Charitable Gift Deduction: Individuals that do not itemize deductions on their tax return can deduct up to $300 for 2020 cash gifts to eligible charities (does not include donor-advised funds).
- Increase to Charitable Contribution Limit: Individuals that itemize deductions can deduct 2020 cash gifts made to eligible charities up to 100% of their Adjusted Gross Income (AGI) for the year.
- Unemployment Insurance Increase: Unemployment insurance benefits have been increased to allow people to receive an additional $600 per week for up to four months.
- Extended Deadlines for Tax Filings and 2019 Contributions: The deadline for both the April 15th tax filing and 2019 contributions to IRAs, Health Savings Accounts and Coverdell Education Savings Accounts has been extended to July 15, 2020.
Data from MossAdams.com and Taxfoundation.org – Based on CARES Act legislation signed into law on March 27, 2020
What We Can Do Now
The extraordinary financial actions taken by Congress and the Federal Reserve as well as the quarantine provisions enacted in the US are unprecedented. Similar actions are being taken by central banks and governments around the world. While there will never be 100% agreement on the why’s, how’s, and how long’s, we believe that swift actions were necessary and have set us up for recovery. So what can we do now?
- Health – As our office remains open, our team is being mindful of physical distancing and conscientious of those that may be more or less cautious than us.
- Finances – Done thoroughly and correctly, financial plans will include a stress test of your financial situation to analyze the impact of poor stock market returns. Ask your advisor to create or update your plan and include the various provisions of the CARES Act applicable to your specific situation.
- Portfolios – Don’t fear times like this in the markets but take advantage of the market pullback with your investments. We have been doing this in our clients’ portfolios and will continue to do so. While negative returns can be painful, they are a normal and (we would argue) an essential occurrence in the risk markets.
We do not know what the future holds but we are confident that “this too will pass”. There will most likely be some version of a “new normal”. Portions of the business world and economy may revert to prior form while other portions could be permanently altered. Nevertheless, we are optimistic and are planning and investing accordingly. If you find yourself nervous and tempted to make financial decisions that may not be in your best long-term interests, please be sure to call one of our advisors. To quote Ron Blue – “Don’t make a short-term decision that contradicts your long-term strategy”. We care about you and are here when you need us.
We hope that all of you are healthy and able to enjoy the warming weather and the new life that comes with spring.
Integrity Wealth Advisors