Please note: This update was prepared on Friday, May 8, 2020, before the market’s close.
Investors seem to have concluded that today’s devastating economic news portends better times ahead—and they may be right. It’s hard to imagine that unemployment, for instance, could worsen from the 14.7% rate reported this morning by the Bureau of Labor Statistics. However, it’s still rather stunning to see stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company. rising this early in a recession even as we are being bombarded with data showing the impact the coronavirus pandemic is having on the U.S. economy.
Through Thursday, the Dow Jones Industrial Average and the broader S&P 500 index were down 15.7% and 10.2% for the year, respectively. The MSCI EAFE index, a measure of developed international stockA financial instrument giving the holder a proportion of the ownership and earnings of a company. markets, is down 19.7%. 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 1.33%, down from 2.31% at year end. 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 4.8% for the year.
Unemployment Hits Historic Highs
To say that we are living in unprecedented times would be a vast understatement.
The 14.7% unemployment rate is more than triple last month’s 4.4%; it’s also the highest rate since the Great Depression (based on economists’ estimates) and the single biggest monthly jump since records began in 1948.
It’s rather stunning to see stocks rising this early in a recession even as we are being bombarded with data showing the impact the coronavirus pandemic is having on the U.S. economy.
The jobs numbers, however dire, were still a bit better than consensus expectations. Economists surveyed by The Wall Street Journal had predicted an unemployment rate of 16.1% and 22 million job losses. Traders seemed to take the news with a could-have-been-worse shrug, continuing the optimism-powered rally that has sent stock prices higher on the assumption that the worst is behind us and we’ve “flattened the curve.”
We continue to wait for more definite medical data before we’re ready to declare a recovery is in sight. We won’t be letting our guards down, but we will gladly take the stock market’s gains while they’re being handed out.
We also think it’s important to note that while the economy has rapidly shifted from expansion to contraction, there are companies benefitting from pandemic-induced changes in spending patterns. Consumers are spending on home upgrades, benefiting home-goods sellers like Wayfair. Online gaming demand is soaring, boosting companies like Zynga. And with many more people working from home, Microsoft had a particularly strong first quarter—subscriptions and usage improved substantially for its Office 365 and Teams apps, while revenue jumped 27% for its cloud-based services division.
Home isn’t just where the heart and hearth are; it’s where consumer dollars are flowing.
Special Podcast: Earnings Overview—How Are Companies Adapting to the Pandemic?
Earnings and interest rates drive stock prices over time. Given the pandemic and stay-at-home advisories, first-quarter earnings season has held extra importance for investors wanting to know how companies fared as the economy ground to a halt and how they’re planning to battle back in the months and quarters ahead.
In this episode of The Adviser You Can Talk To Podcast, Vice President and Portfolio Manager 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. Research Analyst Kate Austin, who run our DividendA cash payment to investors who own stock in the company. Income Strategy, discuss with Director of Research Jeff DeMaso how they take in what they’re hearing from individual companies for a clearer sense of the overall economy and where we’re headed.
- Which industries are being hit especially hard?
- How do you predict future earnings with this landscape?
- Where we see opportunities for long-term investors
- Companies innovating to succeed now and when recovery gets underway
Amid the challenges, we’re seeing silver linings. For our informative insights on how companies are adapting to the pandemic, please click here to listen now.
As events continue to unfold, we’ll be updating our podcast and blog page regularly to keep you informed on the latest developments and our response.
Financial Planning Focus:
Tapping Into Retirement Accounts During the Pandemic
We’ve written a lot about the CARES Act in recent weeks; the $2-trillion Congressional relief act is packed with provisions that impact savers. Today, we want to touch on an aspect of the law that may be helpful for those whose jobs or businesses have been hurt by the virus—the ability to take early distributions from retirement accounts before reaching age 59½.
Generally, early withdrawals from a retirement account come with a hefty tax bill. In addition to being taxed as part of your income for the year, withdrawals prior to age 59½ are subject to a 10% federal income tax penalty. But the CARES Act has made a few changes to these rules to allow those who’ve been hard-hit by the virus to access their savings.
Eligibility requirements are fairly broad. If you, your spouse or a dependent have been diagnosed with COVID-19, or if you’ve lost work, been unable to work because of a lack of childcare, or experienced other adverse financial consequences due to COVID-19, you may be eligible to take a coronavirus-related distribution.
Note that we typically recommend investors seek other options before making an early withdrawal from a retirement savings account. While the CARES Act has made it a little less painful for people who need to do it, we’d suggest consulting with your adviser before taking advantage of this provision.
That said, here’s what you need to know if you’re considering this type of withdrawal:
- The 10% early-withdrawal penalty on distributions from retirement accounts has been eliminated for coronavirus-related distributions
- You can withdraw up to $100,000 from your IRAA type of account in which funds can be saved and invested without being subject to tax until the account holder reaches retirement age. for coronavirus-related reasons. You may be allowed to take it from your employer’s qualified retirement plan, such as a 401(k) or profit-sharing plan, if the plan allows it
- You can take distributions from several accounts as long as you do not take out more than $100,000 in total
- You will have the option to pay income tax on the distribution(s) for tax-year 2020 or spread the liabilityLiabilities are calculated by adding up your existing debts (mortgage, car loans, student loans, credit cards, etc.). out evenly over three years
- If you choose to recontribute some or all of the amount withdrawn within three years (either as a lump sum or over time), you can claim refunds for taxes paid on the amount you reinvest
- In addition, you can recontribute to one or several IRAs; they don’t have to be the same accounts you took the distributions from originally
- There are no limitations on what you can use the funds for during the three-year period
- Note that this kind of distribution is different than a 401(k) loan—the rules for repaying those loans have not changed, though the CARES Act gives the option of delaying any payments due in 2020 by a year. Otherwise, all of the existing loan conditions (penalties on not repaying, tax treatment and deadlines) still apply
In essence, a coronavirus-related withdrawal could end up working like a tax-free rolloverThe process of transferring funds from one retirement account to another, typically without incurring a tax., albeit one with a number of hoops to jump through. While you have to pay taxes on the withdrawal, you can get them refunded by making an equal-value reinvestment over three years.
Taking early withdrawals from your retirement accounts gives you another option during these uncertain times, but it could come at the cost of missing out on some tax-deferred or tax-free growth. We recommend carefully considering the tradeoffs and your other options before taking this kind of withdrawal.
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 also posted two new Market Takeaways videos this week, featuring Equity Research Analyst Kate Austin on the virus’ impact on dividends and Vice President Steve Johnson with some sound Mother’s Day-themed advice for investors.
Next week, we can expect more April data, including small business confidence, inflation gauges, retail sales and the Empire State Manufacturing Survey—a monthly New York State manufacturing gauge. We’ll also get an early look at consumer sentiment in May.
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 Friday, May 8, 2020, before the market’s close.
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