The Historical Ride of the Market
We have survived the first quarter. This is indeed one for the record books (both on the up and downside). From the market peak on February 20th, to the recent trough on March 23rd, the U.S. market plummeted roughly 37%. We have not seen such declines since the Great Financial Crisis in 2008. Last time, it took about 11 months for the market to drop the same 37%. This time, it happened in a month. By the end of March, the DOW & S&P 500 posted the worst month since October 2008 down 13.7% and 12.5%, respectively. For the quarter, the DOW and S&P 500 ended down 23.2% and 20.0%, respectively. Specific sectors like energy and financials fared significantly worse: -51% and -32%, respectively.
Recent economic data suggests that we are now in a recession. The projected GDP for Q2 is -30% (annualized), and the unemployment rate is 15 to 20%. All of us want to be back to our pre-COVID-19 lives, but absent a vaccine, it’s hard to see how we can go back. In reality, things are different going forward, just like in 2009, after the Great Financial Crisis. There was no going back to 2007. At this point, any hope for a “V” shaped recovery is diminishing as the jobless claims data deepens, some major retailers now closed are weighing bankruptcy, and the virus is still peaking.
With all the negative news and continued slowdown, it’s essential to acknowledge the long-term objectives of your financial goals and the allocations in your portfolios. We aim to maintain a properly diversified portfolio and refrain from the notion of trying to time the markets. For example, if we look at the S&P 500 data going back to January of 2000 until December of 2019, the annualized return during the 20-year period was roughly 6.1%. If you had missed the 10 best days during the 20-year period, the annualized return is greatly diminished to 2.4%. In fact, 6 of the 10 best days during the 20-year period occurred within two weeks of the 10 worst days. Over the long-run, trying to time the markets is arguably a fool’s game. Don’t do it.
Families First Corovavirus Response Act
The Families First Coronavirus Response Act (FFCRA) was passed just before the CARES Act back on March 18th. This Act provides tax credits for small businesses with under 500 employees to help maintain employees on the payroll.
Under the FFCRA, employers must provide up to 80 hours of paid sick leave to employees who need to take leave from work for specific reasons related to COVID-19. Specifically, if an employee:
- Is subject to a Federal, State, or local quarantine or isolation order related to COVID-19;
- Has been advised by a health care provider to self-quarantine related to COVID-19;
- Is experiencing COVID-19 symptoms and is seeking a medical diagnosis;
- Is caring for an individual subject to an order described in (#1) or self-quarantine as described in (#2);
- Is caring for his or her child whose school or place of care is closed (or child care provider is unavailable) due to COVID-19 related reasons; or
- Is experiencing any other substantially-similar condition specified by the U.S. Department of Health and Human Services.
Additionally, an employee could get up to 12 weeks of paid sick leave and expanded family, and medical leave paid at 2/3 pay for qualifying reason #5 for up to $200 daily and $12,000 total. Of course, these rules are complicated, but we are happy to assist as needed to discuss and get you in touch with the appropriate counsel. For businesses that qualify, we would encourage you to explore FFCRA with your payroll provider and tax professional. As you may have heard, your options surrounding the Payroll Protection Program (PPP) is minimal, thus making the FFCRA an attractive option for those eligible employers.
Coronavirus Aid, Relief, and Economic Security Act
As mentioned in our latest Market Update email, there are a few components in the Coronavirus Aid, Relief, and Economic Security Act (CARES) that may affect you. We have highlighted a few provisions that could help provide relief or might be worth considering depending on your circumstances:
- If your income has decreased, you may qualify for relief as a Coronavirus Related (CVR) Eligible Participant.
- Under this provision, you can distribute up to $100,000 from your retirement plan, including your IRA account, without the 10% early withdrawal penalty. This provision does not apply to pension plans. For company retirement plans, your plan provider or your employer will need to amend the plan documents to allow this. If you have questions, please feel free to give us a call and talk with your employer’s human resources department.
- If you take the distribution, you can spread the tax liability over the next 3 tax years, and you may also repay this distribution over 3 years as well to avoid taxes.
- The Required Minimum Distributions for 2020 have been waived. There are additional rules to follow if you have already taken your distribution and would like to return it back to your account. The 60-day rule still applies, but the IRS will be giving further guidance on this in the coming months.
- If you are taking the standard deduction in your taxes, the Act allows for up to $300/ individual ($600 per couple) as an above the line deduction. For example, if you make a donation to a qualified charity, you’ll get a dollar-for-dollar reduction in your adjusted gross income.
- The Act allows borrowers to request for forbearance up to 180 days on debts. At the end of that 180 day period, they can then request to extend this period for an extra 180 days — adding up to 12 months maximum. Forbearance doesn’t mean you don’t have to repay the postponed payments or that your debt is forgiven. It means your mortgage payments are deferred or delayed until the end of the agreed-upon forbearance period. As such, when the forbearance ends the lender might do the following:
- It can be a lump-sum payment due of all deferred amounts; or
- You can request an extension added to the end of the loan term equal to the number of months that payments have been deferred. For example, if no payments were made for six months, an extra six months are added to the end of your loan; or
- You can ask your servicer to amortize the amount due over the remaining life of the loan.
The initial funds set aside for the PPP has run out. Congress set aside $359 billion in the CARES Act to help small businesses. The entire loan process was a fiasco; many have applied, and few have been approved. The funds ran out in fourteen days. Looking at the statistics, the funds likely ran out on day one of the application process. All financial institutions were overwhelmed by the volume of applications. Congress on April 21st approved an additional $310 billion in funding for PPP. However, given the number of applications in queue already, we do not expect this second round to be much different. If your loan has been approved but not funded due to the depletion of funds, you may get funding with this new round of cash. However, if your loan is still to be processed, the odds are not in your favor. If you are eligible, the FFCRA is a better bet.
From the Tax Desk
As we have mentioned, the federal and California tax deadline has been pushed back to July 15th. This deadline is applicable to filing, paying your tax liabilities (including Q2 2020 estimated tax payments), as well as 2019 IRA contributions. If you file an extension, the deadline remains October 15th. We are happy to review your return when it is available and are here to answer any questions you may have.
As always, we appreciate the confidence you have placed in us to work alongside you regarding your planning needs. Be sure to follow us on Facebook, LinkedIn and Twitter as well as our RSS feed to stay up to date on what we’re reading and thinking.
The Archvest Team
Archvest Wealth Advisors