Weekly Market Update 4/8/20
Transcript:
Maureen: Welcome, and thank you for joining HCM’s call with Doug Johnson and Mike Hengehold. Doug and Mike will discuss the economic developments from the last week, the market activity over the last week, and we'll address specific client questions that have come in. And with that, I will turn this over to Mike Hengehold and Doug Johnson.
Mike: Welcome everybody. This is another in our series of weekly calls to keep you up to date on what's happening in this whole sort of stimulus program world and what we're doing. From a planning perspective, regarding those changes and also how we're handling it with the portfolios.
The first thing I'd like to do is start with a positive focus, though. Even in the midst of all these scary times, there are still good things that are happening here at HCM. Believe it or not, we added a new team member this week. We added her virtually; Cassidy Harrison joined our operations group this past Monday.
Another positive, is that our politicians seem to be pulling together in the same direction to get Americans that are affected by all the Covid crisis to where they were before this whole mess started. And again, one of our regular shout-outs as we would like to recognize all those working hard to meet our healthcare needs and all of our basic stay at home needs so that, so that we can be successful with our quarantine efforts as we try and keep our social distance and the goal setting has is I'm in one of my regular practices for as long as I can remember. And one part of that process has always been to develop a specific actionable plan for the 90 days right in front of me.
Nothing groundbreaking there, that's just essentially a rolling quarterly game plan. But as a result of that, fortunately, HCM has had disaster plans in place, which allowed us to step into remote capabilities pretty much immediately before social distancing even became a thing. And as a result of that, we've been able to stay focused on our rolling 90 day game plan through all the recent turmoil.
Now a benefit of that is that this rolling planning allows us to quickly refocus our priorities as things change and with the care sack that was passed really just a week ago. We have a boatload of new priorities that we're focusing on. And what we're trying to do here is help our clients make the best use of all the various stimulus programs they're going to be made available.
There are a lot of planning opportunities here for people to take advantage of, and others simply need the help. And we want to make sure we're there to help people make the best decisions that we can. Jake and I were talking yesterday and he said, it seems like we are going into a perpetual mode of tax planning this year, and I think that's right. Most of the opportunities are going to come out of these stimulus programs are going to have a particular tax advantage or they're going to create tax opportunities. So everything here is tax related one way or another. Fortunately, we are pretty uniquely positioned to be able to help you make good tax decisions because we've got, of course, the CPA firm and all our advisors are pretty tech savvy in that regard.
The first thing that I want to touch on briefly, that we're dealing with all of our clients that have businesses of any sort. You have to do with these tax-free grants that are being made available through the forgivable loan program. And then as the payroll protection program, all of the banks are being overrun with requests for loans.
And basically these loans are going to allow people to get, a multiple, two and a half times their average payroll burden in order to help keep employees associated with the company. The politicians have decided, and the policy makers have decided that restarting the economy will be much, much easier if employees still have a relationship with their company rather than getting benefits.
To these people through the unemployment system, so they're really bending over backwards to keep that employer, employee relationship intact. We are reaching out to everybody that we can think of who we think might be eligible for these programs. So, if you haven't heard from us, you will.
However, if you have any questions whatsoever, please feel free to reach out to us. We can help you get the information together, get ready to make application to the bank for these programs. There's one other item I want to touch on, but I'll do that in a minute. Right now, Doug Johnson, HCM’s director of portfolio management is going to give us a bit of a summary of what's going on over the last week or so, and also what HCM is doing.
Doug: Yep. Thanks, Mike. So first thing, some, minor, portfolio talking points. Earlier this week, we made a position change, based on our outlook of pre-recessionary type growth going forward. We took a look at portfolio positions and looked at what we thought wouldn't perform well in that environment, and, and what we thought would. We have sold our equal weight S& P 500 index ETF, which is essentially a broad market index, and replaced it with the Spider Conservative Staples ETF. So the ETF consists of companies that we believe will still be able to drive demand for their products in both a recessionary environment and or a continued lockdown. You're probably familiar with a lot of these names - the P&G's of the world, the Costcos, the Walmarts, the Krogers, basically companies that make things that people still need. Throughout all of this staying at home, I've noticed personally that my spending has gone down in a lot of different places, but it certainly hasn't gone down in the areas of, of buying groceries in essential items.
So, we feel like that small position change should benefit us, based on our outlook, going forward. And then we've also used this recent rally as an opportunity to rebalance some of our tactical portfolios back to model weights. So, you know, using this equity strength as a way to sell off some of those gains, and and move them back over to the fixed income side of the portfolio.
So if anybody has any further questions about those trades, please reach out to your advisor and we can get those answered. so now onto a market and an economic updates. So it's been kind of another crazy week in the market. There seems to be this kind of cognitive dissonance going on, right now.
And really that, that term is, it's a, it's a psychology term, but it's often used in behavioral finance to describe this, this, I guess, conflict between two scenarios that are, seem to be at odds with each other. and, and what you're seeing right now is economic numbers that are truly, unprecedented, almost, you know, depression, every level numbers versus a market that seems to, you know, for lack of a better term, not care at all.
We had a, a good rally to start the week, on the back of, you know, what was term is optimism surrounding, . Case, loads, deaths, new cases, et cetera. I read an interesting study on some of this data that was suggesting that there's actually some seasonality in the reporting. Now, all that means is that on different days of the week you can get a drop and, or rise in cases from the week before.
So, Sunday and Monday, ironically, has been found to always have the most optimistic data. The conclusion was simply that there's not a lot of tests going on Saturdays and Sundays. So, when we come into Monday, it seems like the last three Mondays we've gotten really optimistic news about the case numbers.
And that's caused some rallies in the market. So we had a strong rally on Monday, followed yesterday with another one that sold off at the end of the day. But it seemed like most of that was made back today. So this, this isn't necessarily surprising market action. I mean, we've been talking for the past two weeks about how bear markets normally operate, how there's normally a reflexive rally after this big steep drop. And we're seeing that right now. it's probably been a little quicker and steeper than most were expected. But I don't think that there's anything right now that would lead us to believe that the all-clear flag has been waived because on the other side of this, where you see the economic data, so there'll be another initial claims number tomorrow morning, but the last two have been 3.3 million, and then the one last week was 6.8. So you've had 10 million initial unemployment claims over the past two weeks.
To give you some perspective, the highest number that we've had in history before this, I believe it was in the, the early eighties, and was right around 695,000. We're almost at a factor 10 times higher than that. In addition, you've got a nonfarm payroll. Last week they came out, in a good economy, those will run anywhere from a hundred to 200,000 jobs added. This one had 700,000 jobs lost. So you, you're starting to see the economic impact of essentially shutting the economy down, for the foreseeable future, and it starting to flow through.
The other thought I've been having over the, over the past few days is we've gotten a little bit more optimistic about the fact that we've reached a peak in cases, so to speak. It seems that if we've been doing something, (quarantining essentially), for four weeks now and we're just starting to see the effects of that, it wouldn't make a whole lot of sense from my perspective for us to then go and say, all right, well, we can stop doing this now, When it's taken so long just to be effective in the first place. So I think there's a lot of optimism surrounding what the other side of this is going to look like, and I feel like there's been a lot of focus recently on just the medical information and we've kind of pushed the economic data to the side a little bit. And it feels like once that peak passes and the, the medical data kind of takes a back seat a little bit, then we're going to have to stare the economic data right in the face. And we've had approximately, 13 recessions, since the great depression and all of them have existed outside of the constructs of the virus shutting down the economy.
I think a lot of people are looking at the facts and saying, well, once the virus is done, we'll just go back to business as usual. If it was that easy to just restart an economy, then we would essentially never have a recession because we could just do that all the time. It's more akin to, to driving an aircraft carrier when you can't just turn on a dime. It takes time to navigate through these things. Our concern remains that the economic impact of this is still not fully understood, quite frankly, and we simply don't know, what the depth or duration, I think it's fair to say the recession that were either and are going to be in is, is going to last and until we can put some, some certainty around that.
Now, we don't see a whole lot of reasons to move off of the defensive position that we've established. And for the timing, we will continue to use any kind of market strength in order to rebalance portfolios and make sure that we're as close to our targets as we can be.
Mike: Alright. What I would add, just on top of what Doug is saying, I don't want anybody to misinterpret, we go to great lengths to make sure everybody understands, we don't really predict the market. However, we go to great, great lengths to manage the risk in our portfolios.
Maybe the line, the difference between those two things may be a little blurred. But, when you look at the consequences of an economy that nobody can predict, but we just know it's going to be bad, the only question is how bad, that's being met with the sort of the other force, which is the central banks around the world saying they're going to print as much money as they need, in order to solve the problem.
We have lots of models for these things in the past, different levels of, of a stimulus. but often times, and in fact, most times, we see what Doug was alluding to before with the reflexive rally in the middle of the bear, even when the stimulus is known. there's oftentimes pretty difficult markets that follow went when the economic news starts to become a reality, that's a risk that we feel we need to protect against. So that's sort of what's behind this defensive posturing. There is one other planning item that I wanted to touch on today. We mentioned it briefly last week when we were going through more details of the cares act that had just been released.
But this is something that's going to affect, probably every HCM client, either directly or indirectly, and it has to do with the waiver of their required minimum distributions for this year. So, if you are subject to required minimum distribution, so you know the term RMD very well, and you've been living with it, you know what that is.
But if you, pardon me, if you have parents, if you're not, either 70 and a half or 72, because those rules change this year, but if you're not in an RMD mode, but if you have parents who are, then there's a good chance this is a decision/opportunity that you're going to have to deal with and you may wind up helping them and doing that.
So what I want to do is just lay out, what this change is and where the opportunities lie. So the RMD is the required distribution. A required minimum distribution is what RMD stands for. And essentially what this is is the government has allowed people to accumulate money tax free in their retirement plans for all of their working lives.
And when you get to the magical age, used to be 70 and a half, now at 72, they want their money. And the way they get their money is to force a gradual liquidation, to force Required distributions from that retirement account. You don't have to spend the money, but you do need to take it out of the plan and that triggers a taxable event.
And retirees face this, and these RMDs happen every year of their life. Because these are taxable distributions, they can force people into higher tax brackets. They can force people to pay higher Medicare taxes and other things that are related to tax rates or levels of adjusted gross income and so forth.
So it's very much a tax planning opportunity. This year the RMDs are waived. And so that means that those payments no longer have to be taken. That means now from a tax planning perspective, there's a big hole in your tax return that's going to mean either lower taxable income or the opportunity to fill up those tax brackets in a meaningful way with other things that can provide a benefit. The number one favorite here are Roth IRA conversions. So that's one planning opportunity. Something to be aware of is that many people use their IRA distributions at the end of the year in order to pay their federal income tax through withholding.
These people may need to make estimated tax payments beginning as early as June 15th if they're not going to be taking RMD. So that's another tax consideration. But the big thing again, we're looking for are the Roth conversions. Another issue that's come up already as some people take their IRA distributions very early in the year just to get them out of the way. Well, right now, if you've taken that distribution within the last 60 days, you can go ahead and simply put it back. There are rollover provisions which would allow you to basically squash that taxable income.
There are some technical requirements if you want to do that. Talk to us or talk to your CPA to make sure you meet them. But it's a pretty straightforward process as long as you haven't done it within the last year since we're more than 60 days into the tax year. Though, if somebody did this right away early in the year, then, then putting that money back right now is prohibited by statute. We expect the Service to put a broad waiver in, but to this point, that has not happened. So that's something you'd want to pay close attention to if you've already taken that money. If you take your IRA distributions every month, then we might want to talk about stopping that and sourcing money from other places.
Of course, you're still allowed to take your IRA distribution. Some people, that's all they have is their IRA. All their money is wound up there, and that's where they get their spending money from, so that's certainly permissible. There are other opportunities that may come up that we'll talk about more in future weeks that give you the ability to manipulate your IRA through loans and so forth.
That may help with that, but I don't want to get too far into the weeds on that today. Basically, it is to be aware of these RMD rules that they've been waived. It creates a great opportunity either for you or I'm sure somebody you know, and it would be a terrible thing to just let that go by without using some of these planning opportunities.
That's the last thing I wanted to touch on, on planning. We do have some questions that came in again this week. So, we want to address those as well. To the extent we have time, which I think we will. So the first one, I'll take, it's an easy one. I like the easy ones. The question is: I haven't heard any of the news reports about the $1,200 stimulus payments, which should be arriving soon specifically as to whether or not these are going to be taxable income in 2020. Any idea of whether or not it's taxable or tax free?
The $1,200 payments that are coming in are going to be tax free. We went into a little more detail last week, on how they're delivered and so forth and how you qualify. There is some planning here.
If you are going to be outside of the qualification zone, you may be able to do some planning, especially with these RMDs being waived that would allow you to capture these stimulus payments when you file your tax return later next year. So if you think you're going to be out of the zone, but would like to look at planning options to capture them, give us a call.
Next question. Doug, I'll let you have this one. How fast will the economy recover when the quarantine is over and we're back to normal?
Doug: Well, I think that on a best case scenario and the one that everyone is hoping for, you will get what is called a V shaped recovery. The name honestly implies the letter, because of the shape and that it produces, which is essentially a sharp contraction in growth in the first half of this year, followed by kind of explosion of growth in the second half of the year.
I don't know how realistic that really is, considering all the things that we talked about, considering the amount of jobs that have been lost and considering the fact that the whole construct of what's going on here and the demand destruction, it's going to take some time to get that started.
Simply because absent a vaccine or a cure, there's certainly going to be behavioral modifications for that. Would you want to sit on a crowded airplane? Would you want to go to a crowded restaurant? Would you want to go to a sporting event and sit next to somebody? If you are concerned or if you were an at risk individual and you were possibly going to contract the virus. So I think outside of that, the V-shape is a little bit less likely. I think what we will probably see, is something more, and I'm going to steal this letter from. From a Lizanne Saunders, who's, who's a market strategist to Charles Schwab, she can refer to it as a Y. You get a, a steep contraction, you get an initial pop up, then you get a flattening out to where things just kind of taper off a little bit. And if you remember back to 2008, coming out of the great financial crisis, we had a very strong market response and initially we had a pretty strong economic response.
But then it also leveled off. You've had what was the longest expansion in history or over 10 years. But it was also one of the weakest in terms of growth percentage. So I think we're probably more in line with that than the V. I think everybody's optimistic and hopeful that we get the V and if we do, that'll, that'll certainly be a best case scenario.
Mike: Okay. I think we have time maybe for one more. I've heard this, this one is a popular question that hit a lot of people ask me. How will our country get out of this? A country can't give away this much money and not have a problem for generations to come. If they just start printing money, won't inflation take over like it did in Germany in the 20s after World War I?
Doug: Wow. This is, this is a lot to unpack in two minutes. So, I'll, I'll do my best here. I think, yes, there is a significant concern that at some point all of this stimulus, the deficits will eventually lead to some kind of inflationary pressures. I think the issue right now is there still a lot of leverage in the system, and a lot of it is probably unproductive leverage. So that is, certainly a deflationary force that's fighting against any inflationary forces that we would get. I think until that leverage clears out of the system and the stimulus is maintained, that inflationary pressure is probably down the road a little bit of ways, but it certainly should be a concern.
Though, in times like this, when we feel like we need these emergency measures just to essentially prevent the market from falling apart, we're willing to look past that, possibly to our detriment. I think it will start to be a bigger concern as we move forward in this.
The German situation I think is a little bit unique in the sense that they had very specific problems. Mainly, that they had a massive amount of debt that they needed to repay from, war reparations, and it was owed in a currency that was not theirs. So they couldn't simply just print more money to pay this back.
The more money they printed to buy the currencies caused their currencies to hyperinflate. And, there is actually a really, really good book called the Lords of Finance, that goes into great detail about that whole situation. And I know since everybody's at home doing nothing, they could certainly pick up a copy and read it if you're so interested.
Mike: Okay, well, that does it for our 30 minutes. I hope everybody enjoyed it. I want to say thank you to everybody for participating. Again, Doug and I are thrilled. We're getting over a hundred people calling in pretty much every week. And so we'll keep doing that as long as there's something newsworthy, to cover.
So thanks everybody. We'll look forward to talking to you again soon. Bye. Bye.