Home Guides & Resources chevron_right Weekly Update Reopening Old Wounds June 29, 2020 Table of Contents Is This a Tipping Point? How Would Investors Respond to New Shutdowns? New RMD Relief from the IRS Podcast: Don’t Fight the Fed! FPF: Freelancing Adviser Investments’ Market Takeaways Looking Ahead Please note: This update was prepared on Friday, June 26, 2020, before the market’s close. StockA financial instrument giving the holder a proportion of the ownership and earnings of a company. markets continue to yo-yo even as daily coronavirus infections rose in states that were among the earliest to reopen, sparking worries that a new round of social-distancing restrictions could hobble a budding economic recovery. Despite a volatile week, markets have recovered mightily from their late-March lows. Through Thursday, the Dow Jones Industrial Average and the broader S&P 500 index were down 8.7% and 3.6% 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 11.4%. As of Thursday, 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’s 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. stood at 1.30%, 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 5.9% for the year. Is This a Tipping Point? The past week had the feel of a potential watershed moment for the economy and the markets. Will growth and economic recovery continue, flail or fail? Will the market keep climbing on hopeful but opaque expectations or will a gloomier reality take hold? The pattern we’ve been noting for weeks continues; the economic data is bad, but in some cases getting slightly better. Take the Federal Reserve of New York’s weekly economic index (WEI), a composite of 10 daily and weekly data series covering consumer behavior, the job market and production. Yesterday’s WEI clocked in at -7.69, suggesting that over the next year the economy will contract by about 8%. Objectively, not good, but up from an estimated 11.5% contraction registered in late April. Yes, it’s bad, but getting better. Source: Adviser Investments, Federal Reserve Bank of New York. New applications for unemployment are also falling, albeit slowly, but remain extremely elevated—another 1.48 million people filed for first-time benefits last week. There’s no sugarcoating how bad that number is, but it’s also slightly better than it’s been, and the 19.5 million people claiming state unemployment for the week ending June 13 was a 767,000 drop from the week before, and down from almost 25 million at its peak. As a reference point, in February, there were two million unemployed people receiving those benefits. Two indicators of activity in the manufacturing and service sectors hit four-month highs in June, though that’s not as rosy as you might think; they are still indicating contraction rather than expansion. Again, those aren’t good reads, but they are indicative of a recovery trajectory. Not surprisingly, given various state-wide lockdowns, we’re starting to see signs of pent-up demand. Consumer spending rose a record 8.2% in May as salons and restaurants reopened, and low, low borrowing rates enticed some into making big-ticket purchases. Orders of durable goods—long-lasting, expensive items like appliances, computers, furniture and cars—leapt 15.8% last month, bouncing back from historic declines during March and April. With a lot of ground to make up, it’s too early to bank on one or two months of economic data foreshadowing a longer-term trend. But it may not be too soon to be a bit more hopeful. Unfortunately, the same can’t be said for the medical data surrounding the pandemic. How Would Investors Respond to New Shutdowns? Since early this year, we’ve added another data series to our normal economic potpourri of indicators: The spread of COVID-19 cases in the U.S. and globally. And, sadly, this one’s not getting better. The number of new cases and hospitalizations had fallen in many parts of the country that were hardest hit in the months after the novel coronavirus breached our shores. But now 29 states, notably in the South and Southwest, are facing a surge in cases. This isn’t just a function of more testing—the percentage of positive tests is rising, and, more worryingly, so are hospitalizations. Texas, for example, has hit pause on its phased reopening and announced—as we were writing this—that they are closing all bars immediately to combat the spread of COVID-19. While not a typical economic indicator, the medical data does have an impact on growth and on investors’ mindsets. The S&P 500 index fell 2.6% Wednesday as coronavirus cases (and concerns about them) rose. That suggests to us that the recent market gains are at riskThe probability that an investment will decline in value in the short term, along with the magnitude of that decline. Stocks are often considered riskier than bonds because they have a higher probability of losing money, and they tend to lose more than bonds when they do decline. if COVID-19’s spread continues and reopenings become reclosings. Whether investment markets react exactly the same as they did the first time remains to be seen. Source: Adviser Investments, S&P Dow Jones Indices. The pandemic caught Wall Street by surprise in March as volatilityA measure of how large the changes in an asset’s price are. The more volatile an asset, the more likely that its price will experience sharp rises and steep drops over time. The more volatile an asset is, the riskier it is to invest in. went off the scales. But even with so much remaining unknown about the virus, we’ve at least seen social-distancing shutdowns before. Markets tend to handle known risksThe probability that an investment will decline in value in the short term, along with the magnitude of that decline. Stocks are often considered riskier than bonds because they have a higher probability of losing money, and they tend to lose more than bonds when they do decline. better than unknown risks. And you’d have to be living way off the grid to not be aware of COVID-19’s risks—both to our health and the economy—this time around. New RMDA required minimum distribution is the amount of money that must be withdrawn each year from tax-deferred retirement accounts once the beneficiary reaches retirement age (72, according to IRS rules). Relief from the IRS There’s good news this week for retirees and heirs unable to take advantage of one of the Congressional coronavirus relief package’s major provisions: Now, everyone who took a required minimum distribution (RMD)A required minimum distribution is the amount of money that must be withdrawn each year from tax-deferred retirement accounts once the beneficiary reaches retirement age (72, according to IRS rules). in 2020 has more time to put those withdrawn assets back into a retirement account, even if you took the money out before the legislation passed. Congress had included a 2020 RMD waiver in the CARES Act in late March, enabling some retirement account holders to avoid taking RMDs. Rather than take money out this year, you could leave the money in the account and let it grow. And if you’d already withdrawn the funds, you could choose to pay the sum back. But there was a catch—under existing IRS rules, you had only 60 days from the date of withdrawal to return the funds, meaning those who’d taken RMDs in January were out of luck. The IRS announced this week that those restrictions have been relaxed, and anybody who took an RMD earlier this year now has until August 31 to put the money back into the account and reduce their tax burden. Moreover, the new IRS rules also allow beneficiaries of an inherited IRAA type of account in which funds can be saved and invested without being subject to tax until the account holder reaches retirement age. to take advantage of this relief. Podcast: Don’t Fight the Fed! (Especially in a Pandemic) You’ve probably heard the old investment maxim: “Don’t fight the Fed.” But what exactly does that mean, and how does it apply to the challenges of today’s markets? In this episode of The Adviser You Can Talk To Podcast, Chief Investment Officer Jim Lowell and Vice President Liz Kesselman talk about the role of the Federal Reserve and how it has used its monetary policymaking powers both historically and in fighting the economic difficulties wrought by the COVID-19 outbreak. In this enlightening conversation, Jim and Liz discuss: What is the Fed’s function, and how does it impact the lives of our clients? How did the central bank respond during the Great Depression? Have policymakers run out of options to combat the current recession? …and much more! For this informed perspective on the Fed and how its policies influence our investment portfolios, click here to listen now! ***** Financial Planning Friday: Freelancing In 2019, 57 million Americans worked a full- or part-time freelance job, a number that was trending upward even before the millions of layoffs caused by measures to curb the pandemic’s spread. So how do you start working for yourself in a way that sets you up for success? If you’re considering freelancing—consulting, doing taxes seasonally, tutoring or starting a small business or private practice—or have already hung up your own shingle, here are four things to keep in mind: A Rock-Solid Budget. Whether you’re freelancing part-time or it’s your main employment, establish a solid budget in the context of your overall financial plan. Your budget will help you grow your business without losing sight of your other goals, like building a cash reserve for emergencies, accumulating more wealth, saving for education costs or retiring earlier. Supercharge Your Savings. Speaking of retirement, among the biggest benefits of freelancing are the myriad ways that you can supercharge your retirement savings. Earning additional income through freelancing on the side might allow you to max out your retirement contributions at your day job. Or you can open a retirement account on your own, such as a solo 401(k) or a SEP-IRA. Both options allow you to save up to $57,000 in 2020, and an additional $6,500 if you’re 50 or older. As a bonus, with a solo 401(k), you can choose to defer taxes or pay taxes now via Roth contributions. Don’t Forget Uncle Sam. All that extra income does come with a price in the form of additional taxes, especially if you’re freelancing as your primary source of income. Your employer withholds taxes from your paycheck to help you minimize payments when you file your return. Since you’re employing yourself, you’ll need to hold back your income at your marginal rate. You’ll also want to start making quarterly tax payments to avoid penalties and unnecessary shocks to your cash flow. On the plus side, freelancing opens the door to a variety of deductions, such as home office, technology and travel expenses that you can use to reduce your tax bill. Shields Up. If you go your own way, it’s key to ensure that you’re properly protected. We often recommend a personal umbrella insurance policy as a hedge when we discuss financial plans with our clients, but working on your own can present new challenges and potential risks that require specialized insurance. This might mean malpractice insurance and errors & omissions insurance for your private practice. Or it could be as simple as an adequate business liabilityLiabilities are calculated by adding up your existing debts (mortgage, car loans, student loans, credit cards, etc.). policy, if you need broader protection. Adequate insurance protection includes medical, life and disability if your freelancing work is your main job—as with withholding taxes, we often rely on our employers for administration and offsetting costs of these key safety nets. Before you take the leap, it’s worth talking with an experienced professional to help you navigate the details, protect against the unexpected and find satisfaction in your new gig. ***** Adviser Investments’ Market Takeaways Calm and clarity have been sorely lacking when it comes to market news recently—that’s why we’ve begun providing Today’s Market Takeaways, short videos in which a member of our investment team analyzes what the market’s telling us. This week, 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 takes a look at why companies are raising so much cash, while Vice President Steve Johnson commented on the Fed’s requirement that large-cap banks suspend their buybacks and limit dividendsA cash payment to investors who own stock in the company. through the third-quarter. Looking Ahead Next week’s trade-shortened week presents some key reports: Reads on the labor market (including June’s unemployment rate) could be market movers. We’ll also get the minutes from the Federal Reserve’s meeting two weeks ago and June data on consumer confidence, car sales and manufacturing. 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. About Adviser Investments Adviser Investments is a full-service wealth management firm, offering investment management, financial and tax planning, managed individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trustsA legal document that functions as an instruction manual to how you want your money managed and spent in your later years as well as how your assets should be distributed after your death. Assets placed in a trust are generally safe from creditors and can be sold by the trustee in short order, avoiding the lengthy and costly probate process., institutions and foundations since 1994. Adviser Investments and its subsidiaries have over 5,000 clients across the country and over $8 billion in assets under management. 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