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Markers and the Metrics That Matter for the Balance of 2020

A client astutely asked what we saw as the “markers” going forward over the next few months. Ordinarily, we might point to traditional economic and financial data (i.e., earnings, GDP growth, interest rates, inflation, etc.). But now, as the US begins re-opening, the metrics that matter in the short-term are the Coronavirus dashboard numbers (new confirmed cases and # tested). Axios If these metrics are relatively positive, from state to state and from community to community, then we expect to see the US economy gradually recover. Long-term, the US only recovers fully when there is widespread effective Coronavirus testing, vaccination and treatment.

The US economy has severely contracted. We expect US economic data for the first, second and third quarter to be negative, perhaps shockingly so. Whether we will see more positive data for the fourth calendar quarter of 2020 will depend almost entirely on whether the re-opening is successful and does not trigger a meaningful Coronavirus resurgence. While everyone acknowledges the need to get back to work, consumers and workers are concerned about trying to move too fast. Washington Post Stock market investors, who tend to look forward, appear to be relatively positive, with the US recovering over half of its 2020 losses to date. Business owners and executives, fearful of damage already done and to come, are less sanguine. Axios

What are the long-term implications for this pandemic and the massive government response? What will change? Some good minds are thinking about these questions:

  • The End of Globalization? World trade benefits all and will continue, but the world economy is going to look different. Countries will increasingly think more about protection in the broader sense. Do you want a high percentage of your pharmaceuticals coming from a global competitor? How dependent do you want the key supply chains of your leading companies to be on other economies, friendly or otherwise? New York Times Axios

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The Price of Oil Goes Negative

On Monday, the price of oil dropped to -$38 per barrel.  Yes, negative thirty-eight.  With the economy drastically slowing, oil reserves are building up and storage facilities are running out of room. Even though producers have cut production, it is not enough to offset the drastic drop in demand. So, this week when the current monthly oil contracts were expiring, the owners of the contracts were paying over $30 per barrel for someone to take possession of the oil and store it.  As of midweek, the oil markets had recovered to positive territory in the low teens.  The next monthly oil contract is set to expire on May 18th and the price may go negative again.  Unfortunately, for those still driving, filling up your tank may be a little cheaper, but those negative prices will not be showing up at your local gas station any time soon.  CNN  WSJ

Stocks had been rallying the past couple of weeks, but the oil price shock on Monday set them back.  Stocks stabilized by midweek though there are concerns about the economic fallout in regions with large energy sectors and the government may step in to help.  WSJ  CNBC  Over the coming weeks, markets will be attuned to how states will reopen their economies and those announcements are expected soon.

This month marks the second anniversary of the RSWA weekly newsletters Coffee Notes and The Friday Buzz.  We have had great feedback on the newsletters and appreciate any comments or suggestions for improvement.  And if you have not shared it yet, now is the perfect time to do so!  Thank you again for reading!

  • Another Stimulus Bill Close to Done:  Congress is close to completing another stimulus package, this one for almost $500B. It is expected to pass and will include additional funding for small business loans, hospitals, and coronavirus testing.  This would be the fourth stimulus bill to pass Congress in response to the virus and together they total $3T.  Reuters

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6 Ways We Make Working Remotely Easy for Our Financial Advisor Clients

The coronavirus hit hard and fast.  Everyone is adapting to the new reality of social distancing, staying at home and sheltering in place.  Millions are learning how to work remotely and use technology to socialize.  And as we adapt and get used to remote tools that connect us to the world, many have discovered a new way to work with a Financial Advisor.  When face to face meetings may have been preferred before, many now choose to work with advisors through technology.  For those who don't want to fight traffic or are struggling to find time in their calendars, remotely working with an advisor may prove to be a more efficient and enjoyable experience than in-person meetings.

We have successfully worked with clients located across the U.S. for many years.  From our experience, there are several things we have found that make it easier for clients to work with us remotely.

1. Client Portals 

Being able to view accounts and exchange paperwork is essential when working with clients.  Providing a client portal is a big help when paperwork has to be shared or a signature is needed.  A portal is a secure website that a client can access by establishing a password.  It allows clients to view account positions and pass documents back and forth to their advisor securely.  Many times, this is even more efficient and easier than mailing documents.  One thing to note is that the client will need access to a printer and scanner to first print, sign and then upload the signed document to the portal.   Other important information can be posted through the portal as well, such as quarterly reports.  Having a client portal is one of the best tools when working together remotely.

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How and When to Re-Open the US Economy?

How and when to re-open the US economy is the question, with some pushing for a re-opening to begin as soon as May 1st. The widely respected Murray Model (COVID-19 Projections) does suggest that the US may have passed the peak of anticipated deaths per day but that isn’t to say that the pandemic is winding down. And note that the model assumes that social distancing will remain in place until the end of May. Given that a premature re-opening could trigger a virus resurgence, we trust that the state and local officials making these calls err on the side of caution and start with very low risk workers. Washington Post

The US stock market continues its wild ride. The bear market bottomed at a 34% loss from its high but had recovered 20% of that loss as of early this week. Our view is that stock investors have likely written off what will surely be dismal 2020 GDP and earnings numbers and are already focused on attempting to project where the US will be in 2021 and even 2022. Moreover, they are counting on massive monetary and fiscal stimulus. New York Times Has a stock market “bottom” been made? We don’t know but infer from the rapid bounce back that few investors have given up on stocks.

This is surely going to be a long economic recovery, stretching into 2021 and perhaps 2022 or beyond. COVID-19 disappears as a serious national health risk only when we have all three of the following in place: effective testing; a vaccine and a successful treatment protocol. The need for social distancing will abate in time, but we wonder if our lives may change in that respect at least for the foreseeable future. CNBC

Please read on for more of the following: Black Swans; Maine Medical Joins Remdesivir Trials; Chairman Powell Gets High Marks; A Zoom Tutorial; Courage During Difficult Times; and A Quote to Contemplate.

  • Black Swans: The coronavirus is understood in the investment world as a “black swan”. Black swans were so rare in nature as to become a metaphor for an unusual and unpredictable event. By its nature a black swan cannot be anticipated but should we be planning for more frequent “black swans”? Have globalization and technology increased the odds of them occurring? Plan for black swans to occur frequently and we may live narrow, fear driven lives. But perhaps we need to tilt more in our planning at all levels for the possibility of an acceleration in the frequency of “black swans”? Wall Street Journal

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Stocks Continue Advancing But it is Prudent to Remain Cautious

This week the stock markets continued to rally based on the belief new virus cases were peaking and there is potentially more government stimulus on the way.  Reuters  Evidence is starting to mount that there is a decrease in new hospitalizations and admittances to ICU for some of the earliest and hardest-hit places in the U.S.  Axios  Also, many are viewing Italy as a precursor to the U.S. and virus deaths in Italy are now at a 25-day low.  Reuters

There is still plenty of bad news including rising U.S. death rates, skyrocketing unemployment claims, and the British Prime Minister requiring hospitalization from the virus.  BBC  Despite that bad news, the markets were starting to look past the virus and toward the recovery.  But we would caution that many bear markets have strong stock rallies within them, only to give up the gains shortly thereafter.  Bloomberg  The good news is welcomed, but we still have a long way to go before there is an all-clear signal that we are firmly back on the road to recovery and investors should remain braced for continued market volatility.

  • Can the U.S. Afford the $2T Stimulus?  Many investors are asking how the U.S. will pay for the huge stimulus package.  But interest rates are low on debt issued by the U.S. Treasury with strong demand from investors and quantitative easing.  There is a good chance the annual costs on interest for borrowing for the trillion-dollar bill could be $30B or less.  A paltry sum for a $20T economy and equivalent to about 2-3 days of normal annual federal spending.  NYT

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Making Sense of Surreal Times

The substantial stock market rally during the last week helped, but we are still coming off the worst quarter for the Dow ever. The global Covid-19 pandemic continues, and the US is now at the epicenter. Stock market investors, especially large institutional investors, are forward looking. Many may already be discounting 2020 earnings and economic growth as negative and trying to assess the outlook for 2021.

We counsel patience. Axios There must be a credible consensus on a rough timeline for Covid-19 to abate in the US and permit our economic (and social) lives to recover some sense of normalcy. CNN Then and only then might we see a sustained stock market rebound. Buoyed by the massive monetary and fiscal stimulus, some investors may jump in a little earlier in an effort to capture low prices, but we predict continued heavy volatility until there is light at the end of the pandemic tunnel. MarketWatch

One RSWA focus has and will be discerning the implications of the so-called CARES Act for our clients. An immediate question will be cash distributions to some individuals. Here is one summary. CNN The Treasury Department has already reversed itself on one decision, as social security recipients who do not file tax returns will be able to get their checks by direct deposit. Washington Post Here is another resource for the legislation’s impact on retirees. MarketWatch Much more to come on this topic.

One last thought. We have been impressed by the high quality of questions posed by several clients. Many recognize that this “black swan” event is a game-changer and are already asking what opportunities will lie ahead and where they will be. Others, while acknowledging the critical nature of short term massive fiscal and monetary support, are concerned about the implications for the dollar and our national debt. New York Times

Please read on for more of the following: Kindness-Also Contagious; The Science Behind Coffee; Babylon Berlin; Groundhog Day; A Quote I Like.

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The U.S. Government Steps in to Support the Markets and the Economy

In the current environment, it is difficult to give a short summary of events from the last couple of days, let alone a whole week.  My apologies in advance for the lack of brevity.    

The situation for the last couple of weeks has been grim.  In the U.S. and other developed countries, new COVID-19 cases are rising exponentially.  Governments are reeling and trying to get a handle on things.  Businesses are closing down or scrambling with contingency plans for customers, clients, employees, and offices.  The markets are in upheaval with volatility levels not seen in decades.  The stock, bond, and money markets showed signs of stress.  And traditional safe-havens gold and U.S. Treasury bonds were volatile as well.   

If the capital markets quit functioning properly it creates additional risks.  And major industries such as airlines, hotels, and restaurants, will need assistance to get through this.  If the markets are left to get worse or businesses left with no support, the danger is that the current event-driven bear market could turn into a much worse structural bear market.  These are challenges that only governments can step in and solve.

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Six Good Things Investors Can Do When Stock Markets Are Bad

It is always an unsettling time for investors when the markets have a big drop.  Many want to do something or really, anything, just because it feels better to be acting as opposed to doing nothing.  Unfortunately, many times the emotionally fueled actions are counterproductive.  So, if you want to do "something," look at the following actions that may actually do some good in the long run.

1. Use Tax-Loss Harvesting

If some of your stocks or investments in taxable accounts are trading below where you bought them you can sell them and realize losses.  These losses can be applied to offset any realized gains.  If you have more losses than gains in any given tax year, you can use up to $3,000 of those losses to offset your ordinary income. Any additional losses can be carried forward to use in future years.  This is called making lemonade out of lemons…

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Searching for Perspective in Turbulent Times

Finding perspective amid a public health crisis and a sudden bear market isn’t easy. As simplistic as it does sound, I find it helpful to remind myself frequently that both will pass in time. And my personal view is that we will be stronger and more resilient as a country for what we have been through. The question is how best to protect ourselves and live our lives in the meantime.

Bear Market Perspective

Investment perspective may be easier to come by than insight into pandemics. Goldman Sachs has excellent historical data on bear markets. They fall into 3 categories: Cyclical (caused by rising interest rates, an impending recession and falling profits); Structural (caused by financial bubbles or structural economic or financial problems); and Event-driven (caused by a one-time external shock). What we are experiencing now is an Event-driven bear market triggered by COVID-19. The good news? Event-driven bear markets are on average much shorter and with lower market drops than the Cyclical or Structural bear markets. Event-driven bear markets fall on an average by -26% and recover in 7 months on average. Compare this to a Cyclical bear market with average length of 26 months and an average drop of -30% and to a Structural bear market with an average length of 42 months and average loss of -57%. If the past is a reasonable guide to the present, this bear market may be nasty but with a relatively quick recovery. Many economists, but not all, share this view and expect an economic recovery as soon as the third quarter. My view is that we need to be prepared for a wide range of outcomes because the pandemic is such an unknown.

COVID-19 Information Sources

Almost overnight, we are all inundated with opinions, explanations and suggestions about COVID-19. People mean well, but it can be overwhelming. My suggestion is to find some sources on COVID-19 that you trust and screen out most everything else (or risk going nuts-your choice!). I want sources that are as “spin-free” as possible, so I subscribed to a Johns Hopkins COVID-19 daily newsletter. Search for Johns Hopkins COVID-19 Daily Situation Reports to find and subscribe. I also set up a Google News topic search for Dr. Anthony Fauci, a widely respected and frequently quoted infectious disease expert. Lastly, the New York Times has lowered its paywall for its comprehensive webpage on COVID-19. (New York Times)

Please read on for more of the following: Medicare Covers COVID-19 Testing; Amazon Prioritizing Delivery of Household Staples; When Isaac Newton Worked from Home; Biden’s Rapid Recovery; The Butterfield Diet; and A Quote I Like.

  • Medicare Covers COVID-19 Testing: For those eligible for Medicare, this is welcome news although getting tested may be difficult for a while. As we know, a major COVID-19 issue is that our healthcare system is overwhelmed. One client pointed out that one positive in all this is that we get to learn on COVID-19, which is truly dangerous, but may help us to prepare for even more virulent infectious diseases that may come later. (Medicare.gov)

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Demand and Supply Shocks Hit the Markets and Governments Respond to the Coronavirus

It felt inevitable, but the Coronavirus was officially declared a pandemic this week by the World Health Organization.  WSJ  To say the global stock markets have been a roller coaster is an understatement.  Markets are moving forcefully as investors and markets try to digest, analyze and interpret the short and long-term effects of major news coming out every day.  The world is coming to grips dealing with both supply and demand shocks at the same time.  The supply of materials and products have been disrupted by the fracturing of global supply chains and the curtailing of normal activities is creating much less demand for many products and services. 

Up until a few days ago, most economists were not calling for a recession in the U.S.  OECD  Swiss Re  But the situation remains fluid, and the markets are already pricing one in at this time.  Axios  Travel has been curtailed at businesses, major public events are being canceled, and workers and students are starting to work remotely.  Economic growth is slowing but by how much?  It's tough to gauge.  And will the eventual recovery be V-shaped or a long slow grind?  The volatility of the markets is going to remain until virus cases stabilize and new cases start to recede.

Is it all doom and gloom?  No.  New virus cases are subsiding and people are starting back to work in Hubei province, the epicenter of the China outbreak. Reuters  Governments across the globe are moving quickly to initiate large monetary and fiscal responses to support economic activity.  Yields have come down precipitously which will lower borrowing costs for homeowners, businesses, and consumers.  The price of oil is down almost 50% in the last two months acting like a tax cut at the gas pump and for heating homes.  And going into this, consumers had jobs, savings, and low debt payments relative to income.  Gauging consumer spending and if it drastically slows down will be the focus going forward.

Thank you for reading The Friday Buzz.  Stay safe out there.  

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