Optimists See Pandemic Peaking Soon - Adviser Investments

Optimists See Pandemic Peaking Soon

April 13, 2020

Please note: This update was prepared on Thursday, April 9, 2020, prior to the market’s close.

It hasn’t happened yet, but epidemiological projections that the growth in COVID-19 cases and fatalities may be reaching a peak boosted investors’ and traders’ spirits—stocks are up more than 10% this week through Wednesday and they are moving higher once again as we write.

It’s clear that investors are looking past the immediate headlines, as another 6.6 million people filed for unemployment claims last week and the prior week’s record-high 6.6 million claims were revised significantly higher. Over the last three weeks, about 10% of the U.S. labor force went from employed to jobless.

Clearly, we are not out of the economic woods yet, and it’s a foregone conclusion that the U.S. economy entered a recession in March. Still, the Federal Reserve’s announcement that, in addition to earlier monetary programs to ease the pain, it is planning to buy junk bonds and lend to states gave further confidence to market participants.

Through Wednesday, the Dow Jones Industrial Average and the broader S&P 500 index were down 17.3% and 14.4% for the year, respectively. The MSCI EAFE index, a measure of developed international stock markets, is down 21.8%. As of Wednesday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index had fallen to 1.57% from 1.58% last week. On a total return basis, the U.S. bond market has gained 3.4% for the year.  

A Bull Market Return?

Some pundits are declaring that we’ve already seen the end of the pandemic bear market and that a new bull market for stocks has charged in. But have we really? As noted above, both the Dow and the S&P are still showing double-digit declines year-to-date. Taking the bearish side, The Wall Street Journal claimed that this week’s rally would mean we’d just experienced the shortest bear market on record but that such a short bear would be an “anomaly,” and hence, “the worst isn’t likely over for the equities market.” Bull market? Bear market? We aren’t going to wade into what is primarily a semantic argument, and while we expect stocks to recover, we don’t think it’s going to be easy street from here on out. Plus, given that we’ve only experienced a dozen or so bear markets over the past century, the data set is pretty small to be calling the current rebound an “anomaly.” As you may have guessed, we take such “bear” and “bull” market calls with a large grain of salt. You should too.

Hope Is Welcome, Facts Matter More

Stock markets tend to move in advance of hard facts. Recent tumbles came before it was clear the coronavirus outbreak had reached pandemic levels and gains have come well before it is clear that the pandemic is under control. If we are near a peak in COVID-19 mortality here in the U.S., then we may be putting a floor into the bear market. Of course, it’s possible that this thinking is premature, and that floor is in fact a trapdoor. The current estimates of what a peak looks like could be revised, the probability of a second wave is still elevated (not just here, but globally), and most importantly, without a vaccine, we cannot return to normal. Business and leisure travel, manufacturing and transportation, education and childcare, as well as businesses large and small will be constrained until we have a much clearer view of where we stand, where we’re headed and how quickly we’ll get there. Still, any progress is better than no progress. And we are confident that progress is and will continue to be made on all fronts: Medical, economic and market. With more market volatility likely to come, investors need to stay focused on matching their holdings to their goals and risk comfort levels—no matter how the press labels the day’s or week’s market moves.

Special Podcast: The Bond Market and Fed Intervention

Last month’s stock market rollercoaster got most of the headline ink, but March was also a pretty wild month for the bond market. Investors saw record-low yields—even negative yields on short-term Treasury bonds—and the differences in yields between Treasurys and other types of bonds reached their highest levels since the 2008 credit crisis. What are bond investors to make of the Federal Reserve cutting interest rates to zero and launching a series of market-friendly financial rescue programs? In the latest edition of The Adviser You Can Talk To Podcast, Adviser Investments’ Director of Research Jeff DeMaso and Senior Vice President, Fixed Income Chris Keith joined up for a timely discussion about March’s bond market dislocation and bonds’ role in portfolios. Topics covered include:

  • How the Fed’s actions impact bond investments
  • What prompted widespread selling of municipal bonds
  • Where bond traders are seeing opportunity
  • Do bonds now look better over the long run than stocks?

It can be jarring to see dramatic moves in the markets for what many consider a conservative asset class like bonds. The markets have since calmed, yet our advice remains the same. We strongly believe that bonds remain an essential component of many portfolios. Please click here to listen. Given the speed with which events seem to be unfolding this year, we’ll be updating our podcast and blog page more frequently to keep you informed on the latest developments and our response.

All You Need Is Bonds?

You may have seen some headlines in recent weeks declaring that, with the collapse of the 11-year bull market for stocks, a new asset class has emerged as a long-term winner. Or rather, an old asset class: Bonds. This single chart shows the brutal math: Starting in 1999 (just ahead of the dot-com crash) and through March 2020, investment-grade bonds have outperformed stocks.

Note: Chart shows hypothetical growth of $100 invested in Vanguard 500 Index (“Stocks”) and Vanguard Total Bond Market Index (“Bonds”) with dividends reinvested from 12/99–3/20. Sources: Adviser Investments, Vanguard.

So, should investors rush to throw away their antacids and their equities and simply retreat to the safety of an all-bond portfolio? Not at all. The chart above looks at just a single 20-plus-year stretch in time—and a very particular one at that, beginning just before the first of two major stock sell-offs and ending just after a third! A broader view of history provides a better lesson. In the next chart, we show rolling 20-year returns for stocks, bonds and cash (that is, every 20-year period, moving forward a month at a time) starting at the end of 1969. Over the 364 such periods depicted, for each asset class, bonds only beat stocks twice. In other words, stocks outperformed bonds more than 99% of the time over 20-year stretches—and not by a small margin.

Note: Chart shows rolling 20-year annualized returns for the following indexes and funds over the periods specified through 3/20. Stocks: S&P 500 index total return 12/69–8/76, then Vanguard 500 Index. Bonds: U.S. Treasury 10-Year Constant maturity 12/69–12/86, then Vanguard Total Bond Market Index. Cash: U.S. 1-Month T-Bill 12/69–6/75, then Vanguard Prime Money Market.
Sources: Adviser Investments, Vanguard, IA Morningstar.

Both 20-year periods when bonds beat stocks ended with two of the worst stock market crashes since the Great Depression. So yes, bonds do occasionally come out ahead over the long run. But they are not wealth-builders. The best strategy of all is one that allows you to smoothly transition among cash, bonds, and stock in times of volatility, seeking stability in times of stock market distress while the engine of long-term growth purring when the economy’s ready to rev up. That’s what our strategies aim to do.

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Financial Planning Focus:

RMDs and the CARES Act

For many retirees, this may be the best news yet out of the current economic and market dislocations. Congress has passed a bill that says you don’t have to take required minimum distributions (RMDs) in 2020. In the $2-trillion CARES Act, Congress waived the RMDs that retirees typically must withdraw from their retirement accounts like 401(k)s and IRAs. We gave you an overview of the new law last week, but today we wanted provide more details on its ramifications for RMDs—because as always, there’s a lot more to it than the headlines will tell you.

  1. Suspension of RMDs in 2020: The CARES Act eliminates RMDs from all qualified retirement accounts for all of 2020. This can have an extra benefit if you’ve just begun taking RMDs. If you turned 70 ½ in 2019 and waited to take your 2019 RMD until early this year, you may be able to effectively eliminate your RMDs for both 2019 and 2020, by returning the first and waiving the second.
  2. RMD Return Policy for 2020: What if you’ve already taken your RMD for the year? If you took it in the last 60 days, you can transfer an amount equal to the RMD into the account that you took the money from. The IRS will consider this a form of “rollover,” and it will be subject to the usual rollover rules. However, remember that you’re only allowed one rollover a year. If you’ve already rolled over funds in the past 12 months, you won’t be able to return the RMD. And if you’ve taken RMDs from multiple retirement accounts, you can choose to return funds to only one of them. If you don’t need the money for your living expenses, we recommend rolling the money back in. Not only will you save on income taxes for the year, but you will also allow your money in the account to continue growing for another year tax-deferred.
  3. Inherited IRAs: If you’re the beneficiary of an IRA, the rules are a little different. Both spousal and non-spousal beneficiaries can choose to waive their 2020 RMD if they haven’t taken it yet. But if you’ve already taken your RMD from an inherited IRA, you unfortunately can’t roll it back into the inherited account under the rules listed above. Spousal beneficiaries are able to rollover their RMD funds into their own retirement account, however. Non-spousal beneficiaries are simply out of luck.
  4. QCDs Still Available: Many retirees use qualified charitable distributions (QCDs) to lower their taxable income. While the CARES Act has suspended RMDs for the year, you can still make a QCD to a charity of your choice as long as you are at least 70½ when you make the contribution. If using QCDs to offset income is part of your tax strategy and you are also considering skipping your RMD this year, you may want to speak to a CPA or tax specialist about how it impacts your plans (see the next point as well). 
  5. Tax Planning: Since you don’t need to take your RMD in 2020, it’s possible that you are going to have significantly less taxable income this year than you did last. If that’s the case, you may want to consider a Roth conversion. The amount you convert from a traditional IRA will be taxed as ordinary income, but if you find yourself in a lower tax bracket this year, you’ll have more room to work with.

In addition to all the nuances we’ve mentioned above, if you, your loved ones or your business have been directly impacted by the coronavirus, some exceptions to the above rules may apply. We recommend you talk to your wealth management team here or another tax professional if that’s your situation. There is a lot to absorb from the recent CARES Act, and we’ll continue to provide details on how the changes may affect you in the weeks to come. But if you have any questions regarding how the new RMD rules apply to you specifically, please get in touch with us. We are happy to assist.

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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.

Looking Ahead

Finally, as we head into the long weekend, Passover and Easter recall the trials and tribulations we have faced in the past, and our ability to overcome them. This time will be no different. We hope you and your loved ones are safe and healthy.  The investment markets will be closed this Friday as we head into Easter weekend, and at Adviser Investments, we will also be taking a brief respite. We’ll be back at the ready on Monday. 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.


Please note: This update was prepared on Thursday, April 9, 2020, before the market’s close.

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