We sent the following letter out to clients and friends of Beacon Financial Advisors today…
Market Update: Making Lemonade Out of Lemons
A lot has changed since I emailed a couple of weeks ago. I’m sure you have been bombarded by news, articles, etc., so below is just a brief summary of what has happened in the last few weeks. Also, I would like to discuss some opportunities that have arisen from this pandemic (hint: Roth conversions are a great strategy when the market is down). I hope you find this helpful!
• In January, we learned about COVID-19 (coronavirus), with the first cases appearing in China.
• Initially, markets brushed off the news; however, as the coronavirus spread outside of China, markets started selling off.
• As COVID-19 spread to Italy, South Korea, Australia and the US, countries reacted by imposing travel bans, quarantines, and shutting down businesses and schools. This caused the stock market to sell off even further.
• To add insult to injury, oil prices dropped as Saudi Arabia and Russia launched a price war.
What can you expect going forward?
The stock market will continue to be volatile until the virus is contained. We will need to see a sustained decrease in cases, a sustained decrease in deaths, or a trusted vaccination before market volatility declines.
Many businesses are closed (hopefully temporarily, but some will close permanently), resulting in higher unemployment and negative business growth in the immediate future. The US and global economies are likely headed for recession. However, if there’s a silver lining it is that the recession is expected to be short. The US economy and banking system were fundamentally sound going into this pandemic and demand for goods and services is expected to be strong once we turn the corner on this virus. Also, historically, stock indexes have returned to their previous trajectory within a few months of the peak in global new case growth.(1)
Governments and central banks have taken swift action to help reduce the economic impact of the coronavirus. Here are just a few of the legislative actions proposed/passed in the last two weeks:
• Congress passed legislation that would expand paid sick leave and unemployment benefits, increase funding for food assistance programs, and provide free testing for the coronavirus.
• The Federal Reserve slashed interest rates to near zero and said it will buy back $700 billion in Treasury and mortgage securities to provide liquidity to banks.
• Central banks worldwide have also cut interest rates (Russia is the only country that kept rates the same).
• The Treasury Department extended the tax filing and payment deadline for individuals to July 15, 2020 (previously only the payment deadline was extended, as of March 20, 2020, the filing deadline has also been extended).
• Congress is working on a $1 trillion stimulus package that will provide direct payments to Americans (details aren’t available yet), credit for industries most impacted by the virus, and loans to small businesses.
What should you be doing?
I hate to sound like a broken record player, but if you have a balanced portfolio that matches your risk tolerance, time frame and goals, the best course of action is to stay the course. We are long-term investors, and the market is expected to recover from this, just like it did after 1987, the 9/11 attacks, the 2008 recession and other downturns.
I know it’s tempting to sell in volatile times, but studies show if you sell at or near the bottom, you could miss out on the recovery. Some of the best days of the market are at the beginning of a recovery, and as swift as this decline was, the move back up could be just as swift, making it difficult to time correctly. Selling now could lock in losses and permanently undermine your portfolio’s ability to recover.
Opportunities – Yes, there are opportunities in this market!
I believe the decline in the stock market can provide investment and tax planning opportunities for some people. Here are four planning opportunities to consider:
• Consider doing Roth conversions. When you convert traditional IRAs to Roth, you are taxed on the amount converted at ordinary income tax rates. As a result, it makes sense to do Roth conversions when the market is down. Why? This allows you to convert more shares when values are down at less tax cost. You should also consider doing Roth conversions if your income is down, as you may be in a lower tax bracket.
• Contribute to a Roth 401K or Roth IRA instead of a traditional 401K/IRA. If you expect your income to be lower this year as a result of the coronavirus, you might benefit from switching some or all of your contributions to Roth instead of traditional. Or, if you don’t normally qualify for Roth IRA contributions, but your income drops below the limits, now might be a good time to open a Roth IRA.
• Refinance your mortgage or tap into your home equity. With the Federal Reserve cutting interest rates, mortgage rates are also going down. If you can reduce your rate by 0.75% and you plan on being in your home for at least five years, this could be a great opportunity to reduce your mortgage payment or the time to pay off your mortgage (consider a 15-year mortgage instead of 30-years if you can comfortably handle the payment). If you are planning on making any home improvements, a home equity loan might be a good alternative to using savings or a credit card to pay for that bathroom or kitchen remodel.
• Buy stocks on sale. If you have cash available to invest (that is not needed in the next few years), consider buying stocks while they are on sale. No-one knows when the bottom will be, but stocks are on sale compared to a few months ago. Also, if you aren’t contributing the maximum to your 401K and IRAs, consider bumping up your contribution to buy more shares while prices are low.
I hope this was helpful. If you would like to discuss tax planning or your review your portfolio, please contact me to schedule a review meeting. Also, I know these are stressful times, so feel free to reach out to me if you have any questions or concerns.
(1) Source: Charles Schwab, FactSet, based on returns of the MSCI World Index from 01/01/1970 through 2/28/2020, including the following global outbreaks: HIV/AIDS (1981), pneumonic plague (1994), SARS (2003), H5N1 avian flu (2006), dengue fever (2006), H1N1 swine flu (2009), cholera (2010), MERS (2013), Ebola (2014, 2018), measles (2014, 2019) and Zika (2016). Past performance is no guarantee of future results.