Please note: This update was prepared on Friday, April 24, 2020, before the market’s close.
Even as relevant batches of late March and April economic data are beginning to reveal the devastation the pandemic has unleashed, hopes of infection and death rates flattening have propelled stockA financial instrument giving the holder a proportion of the ownership and earnings of a company. markets higher.
The conjunction of rising stock prices and economic data pointing to a deep recession might seem contradictory. But it’s not. For all their recent gains, stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company. remain 20% or so below their all-time highs and prices for corporate bondsA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. have fallen further than comparable Treasury bonds. So we’re not out of the woods yet.
Still, the investment markets are discounting mechanisms, looking ahead rather than behind. And while investors are pricing in a little less uncertainty over the pandemic’s impact as well as expectations for an end to the worst of the crisis in the months to come, we think we have a long and winding recovery road ahead of us.
Hope is, famously, not a plan—and we continue to believe that until we’ve got solid medical data showing improvement, any recovery for the economy or the markets will remain on shaky ground. The pattern of traders buying on hope and selling on fear remains the dominant momentum trend.
Through Thursday, the Dow Jones Industrial Average and the broader S&P 500 index were down 17.0% and 12.9% for the year, respectively. The MSCI EAFE index, a measure of developed international stock markets, is down 20.7%. As of Thursday, the yieldYield is a measure of the income on an investment in relation to the price. There are several ways to measure yield. The current yield of a security is the income over the past year (either dividends or coupon payments) divided by the current price. on the Bloomberg Barclays U.S. Aggregate BondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. index was steady at 1.40%, also its mark last week. On a total return basis, the U.S. bondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. market has gained 4.9% for the year.
As if the first global pandemic of our lifetimes wasn’t “unique” enough, investors were taken by surprise when oil’s price slid into negative territory last week for the first time in history.
Several factors contributed. The oil markets have taken a hit on both the supply and the demand sides. At the same time that the global economy shuttered, reducing demand for oil, Saudi Arabia and Russia engaged in a price war and rapidly ramped up production. The speed with which demand fell and supply rose led to a perfect storm for a steep price decline.
The lack of demand and increased supply meant that refiners, tankers, holding facilities, pipelines and the like simply ran out of room to store oil. When you can’t store it, well, you have to pay someone else to deal with it.
But even those fundamental facts don’t fully explain why prices fell below zero. Oil prices are established in the futures markets, where contracts for future delivery are bought and sold. While contracts for oil to be delivered in May went negative, contracts further into the future did not fall to zero. It was merely the current (what they call the “front month”) contract that went negative. (ExxonMobil stock, for example, didn’t even lose 5% on the day oil prices went negative.)
The coronavirus pandemic is influencing various markets in ways we couldn’t anticipate but that make rational sense in hindsight. We may not like the dislocations that are occurring but they do reflect fundamental economic principles and will, we believe, be cured by smart and robust fiscal and monetary policy decisions.
Webinar: Separating Pandemic Noise From Investment Signals
The past few months have been historic. The coronavirus pandemic shoved our slow-growth economy into recession, putting an end to the 11-year stock bull market—from a human, economic and investment viewpoint, the virus’ spread has taken a swift and steep toll.
On Wednesday, in our live, interactive quarterly webinar, we shared our views on the markets’ response to this unprecedented event and our expectations for the months ahead. We’ve posted a replay on our website, which you can view at your convenience by clicking here.
Account Manager Diana Linn moderated a wide-ranging discussion with members of our investment team. Chairman Dan Wiener and Director of Research Jeff DeMaso offered their thoughts on the value of diversification in weathering this crisis, discussed how this bear market compares to others and what to look for when it comes to recovery.
In our question-and-answer section, Chief Investment Officer Jim Lowell, Vice President Charlie Toole and EquityThe amount of money that would be returned to shareholders if a company’s assets were sold off and all its debt repaid. Analyst Kate Austin answered questions about the strength of the market’s recent rebound, bear market psychology, what to make of TV media coverage of the crisis and how the downturn has impacted dividend stocks, among other topics.
As events continue to unfold, we’ll be updating our podcast and blog page regularly to keep you informed of the latest economic and investment market developments and our response.
Financial Planning Focus:
CARES Act Provides Direct Payments to Taxpayers
Continuing to unpack the CARES Act, we will be reviewing one of the most-talked-about parts of the relief package—the provision to send direct payments to taxpayers either by direct deposit or by paper check.
Here are four things to know about how this part of the bill is working:
- Eligibility: Congress has authorized one-time payments of up to $1,200 per individual taxpayer, along with an additional $500 for each child under 17 they claim as a dependent. “Up to” is, however, a key phrase. Taxpayers whose adjusted gross income (AGI) was less than a certain threshold will be entitled to the full benefit ($75,000 for single filers, $112,500 for those filing as heads of households or $150,000 for married couples filing jointly). Payment amounts are gradually reduced at higher levels of income until they phase out altogether for higher earners.
Here’s how to estimate how much you are eligible for: Start with the full payment—$1,200 as an individual or $2,400 for a married couple filing jointly. Then, for every $100 in income above the threshold, your payment is reduced by $5. If you earn more than $99,000 as a single filer (or $198,000 as a couple), you won’t be receiving a check.
- Not Taxable: The money is considered an “advance refundable tax credit.” In English, it’s a refund on taxes to be paid in 2020—similar to measures passed by Congress in response to the 2001 and 2008 recessions. Since you haven’t paid your 2020 taxes yet, the IRS will be using your 2019 return to determine whether you’re eligible and for how much. If you haven’t filed for 2019 yet, the IRS will rely on your 2018 return instead.
- Keep the Extended Filing Deadline in Mind: The extended filing deadline of July 15 and the new advance credit may impact your tax strategy. If you’d be eligible for a payment based on your 2018 income but ineligible based on your 2019 income, you may wish to delay filing your 2019 return until after the payments are made—the CARES Act does not contain a provision to recoup any over-payment. If your 2019 income was below the threshold while your 2018 was above, consider filing as quickly as possible to receive the funds.
- Visit IRS.gov: Some taxpayers have already begun to receive their direct payments. If you have not, or if you are unsure whether you’re eligible to receive a payment, visit the IRS’ “Get My Payment” page. After entering some personal information, the website will tell you whether you are eligible and the status of your payment. You’ll also be able to confirm if the IRS has your bank account information on file. (We recommend providing the IRS with your bank account information if you can do so, as paper checks will be slower than direct deposits.) Once you enter your information, the IRS says you should receive a direct deposit within several days if you’re deemed eligible. Not all payments have been processed yet—if the system doesn’t have your information, continue to check back once per day.
As always, if you have any questions about your specific situation and whether you are eligible to receive a payment, please contact your wealth management team. We will be happy to assist.
Adviser Investments’ Market Takeaways
Calm and clarity have been sorely lacking when it comes to market news recently—that’s why we’ve begin providing Today’s Market Takeaways, short videos in which one of our investment team analyzes what the market’s telling us. We think you’ll find our rational response to the market’s machinations a welcome respite from the often overbearing headlines and TV chyrons. Click here to see today’s clip, featuring Equity Research Analyst Kate Austin.
Since the economic reports next week will reflect March and April activity, it will likely be insufficient to give us a truly clear picture of the economy. Still, the more April data we get, the better we’ll be able to begin to assess the economic toll of COVID-19.
We’ll get March data on durable goods orders, construction spending and personal income, spending and savings. The ISM’s reports on manufacturing and the service sector, as well as data on car sales, consumer sentiment and confidence, will reflect April activity. Perhaps most crucially, next week the FOMC meets for two days and will announce any policy changes on Wednesday when Federal Reserve Chair Jerome Powell hosts a press conference.
As always, please visit www.adviserinvestments.com for our timely and ongoing investment commentary. In the meantime, all of us at Adviser Investments wish you a safe, sound and prosperous investment future.