A RETURN TO OUR OFFICE
On June 22nd our staff returned to our office in the Jonnet Building for the first time in three months. We began working remotely on March 17th as a result of the Governor’s stay-at-home orders to help combat the spread of COVID-19. Fortunately, we had the technology in place that allowed us to do so with relatively few hiccups. The quality of our phone communication may have been fuzzy at times, or we may have dropped your call on occasion. Since then, we have been working on ways to resolve those issues. Should circumstances require us to work remotely in the future, we are confident we will be able to do so even more effectively.
We are again having face-to-face meetings with clients in our office on an as-needed basis. Where possible, we continue to conduct meetings by phone or virtually. All in-office client meetings are scheduled by appointment only, and we are staggering visits to avoid having more than one client in the office at one time. Clients who visit are asked to wear a mask. Upon your arrival, you will come to our office suite then be directed across the hall to our conference room where the meeting will be held. This will minimize your exposure to us and vice-versa.
We would like to thank you, our valued clients, for your cooperation and continued patience during these challenging times. We are also very grateful to our staff for their efforts in keeping business operations flowing while working remotely in order to serve our clients’ needs.
MARKET OUTLOOK
We started the year with an economy that was still growing and stock markets reaching all-time highs. We had no warning of what was to come. By late February, we were facing a global pandemic as the spread of COVID-19 reached the U.S. Healthcare systems around the world became overloaded. Businesses began to shut down and furlough their workers. Millions of Americans found themselves unemployed and in line at food banks. Fears caused by the pandemic sent stock markets tumbling. From their highs in mid-February to their lows (thus far) on March 23rd, the S&P fell approximately 34% and the Dow fell approximately 37%. At that time, the hope was that the spread of the virus would soon be contained and that business shutdowns would be short-lived. But that was not the case, causing havoc on U.S. and global economies.
On March 27, 2020 President Trump signed the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, which was a $2 trillion U.S. economic stimulus package designed to provide payments to many Americans and to help businesses, local governments, and public health systems impacted by the effects of the pandemic. Investors reacted favorably to the stimulus package followed by news of a possible fast-track development of a vaccine to fight the pandemic. Hopes of a quick economic recovery caused investors to become overly optimistic and to begin buying stocks again, driving up stock markets to regain much of the losses incurred in March. Thus far, not all stocks have rebounded. A true dispersion of stock values continues among the different sectors and industries. Those that have rebounded include online retailers, healthcare providers, broadband, and home improvement companies. In fact, many of those in such sectors are now showing year-to-date gains. On the other hand, restaurants, energy, airlines, and other travel and leisure firms continue to suffer.
Though the stimulus package provided relief, it could not prevent the blow to our economy caused by the pandemic. GDP (gross domestic product) for the first quarter of 2020 fell by nearly 5%, one of the worst quarterly showings for GDP in history. Unfortunately, second quarter GDP is expected to be even worse than the first quarter and worse than what was experienced during the financial crisis of 2008-2010. GDP is the total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period. As a broad measure of overall domestic production, it functions as a comprehensive scorecard of a given country’s economic health. The grim economic results show that the U.S. had been thrust into a recession.
With a recession being felt all around the world, the IMF (International Monetary Fund) reports that $10.7 trillion in fiscal measures have been announced worldwide to fight the pandemic. With more stimulus expected, global public debt is expected to reach an all-time high. There are concerns that this stimulus will add to an already existing problem of rising Federal debt. Why is National debt a concern? As debt rises, it requires the government to pay more of its budget on interest expenses. This is turn makes less money available in the budget for areas that are important to economic growth. Additionally, Federal borrowing competes for funds in the capital markets, thereby raising interest rates and crowding out new investment in business equipment and structures. A growing debt also has a direct effect on the economic opportunities available to everyone. Rising interest rates resulting from increased Federal borrowing make it harder for families to buy homes, finance cars, and pay for college. However, the lack of a stimulus package would have been more detrimental in the long run and would have left the economy weaker for an extended period of time. The Center on Budget and Policy Priorities reminds us that the dollar amount of debt has little economic significance. Instead, it is the debt relative to the size of our economy or the debt-to-GDP ratio. So if measures are taken to fight the economic impact of the virus and speed recovery, it could lessen the rise of the debt ratio. Additionally, the pandemic-related budgetary costs are temporary and should not impact the long-term fiscal gap. Does the U.S. need more stimulus to help economic recovery and help pull us out of a recession? Congress will return from a recess in late July and will decide whether to vote on a second stimulus package.
As for the election, it was to be the biggest story of the year, which has proven not to be the case. During an election year, many investors try to anticipate what the outcome of the presidential race might mean for the economy and their investments. As a general rule of thumb, election years in particular have historically been good for stock market returns. But this year might prove to be different because of the pandemic. In the long run, investment results depend more on the strength of the U.S. economy than which candidate or party holds office. For example, the election of George W. Bush in 2000 coincided with one of the worst periods in American history, both geopolitically and economically. He arrived right after the dot.com stock market bubble had burst and shortly before 9/11. He also had to deal with a recession in his first year as President. So the stock market during his first term didn’t have a chance. Conversely, Barack Obama started his first term after the financial crisis of 2008. Shortly after his inauguration, the market found its bottom in March of 2009. Over the next eight months, the market went up dramatically to give him one of the biggest wins of any President. Regardless of who wins, they will be faced with the task of dealing with the pandemic, coordinating a possible vaccine, and getting the economy back on track.
Moving forward, the strength of the economy and moving out of a recession will greatly depend on further spread of the virus and development of a vaccine. Historically, recessions have tended to be short in duration, and the expansions to follow have been powerful. Over the past 70 years, recessions have averaged 11 months in length while expansions have averaged 69 months, as measured by GDP growth. GDP will backslide for the second quarter then likely bottom. It is possible we could see an economic recovery begin as early as later this year. Though this recession is expected to be worse than the one experienced during the “Great Recession of 2008”, the recovery this time could be faster. Following the “Great Recession of 2008” came the longest lasting bull market in history. As Capital Group vice chairman and portfolio manager Rob Lovelace has noted in recent investor calls, there is a unique aspect of this downturn in that it was self-imposed. He states, “this is different than the 2008 financial crisis – we can see the other side of the valley”.
As history has shown, strong businesses have a way of surviving and even thriving during difficult times. Challenging times also foster opportunities for innovation. Many successful companies have been born during tough economic periods, such as McDonalds, Walmart, Starbucks, Microsoft, Facebook, Tesla, Uber and now Zoom. Innovations in healthcare have already begun, which could change the world. Trends are being created as a result of the stay-at-home mandates that are benefiting e-commerce and food delivery companies to name a few. The pandemic has shed light on deficiencies and shortages and will likely cause many companies to revisit their use of “just in time” inventory. This could cause demand to grow for supplies. It has also accelerated the focus of companies to revisit their supply chains, which could result in more manufacturing returning to the U.S. and moving away from China. In the end, this could create new jobs and an opportunity to replace those lost during the pandemic.
In the meantime, expect a bumpy ride for our economy and the stock market as we work our way through this crisis. For now, it is too early to determine what the long-term impact of the pandemic might be, as the virus continues to spread throughout the U.S. The advice for investors is to stay fully invested, resisting the urge to time the market, and to hold a properly diversified portfolio in line with their goals and risk tolerance. Lastly, remember that the stock market and the economy are not the same. The market tends to be a reflection of the economy. It looks forward while the economy looks back. That is why the market is considered a “forward-looking mechanism”; it factors in today what is expected in the future. During challenging times, the market bottom usually occurs BEFORE economic data improves. So the stock market could begin its recovery before the economy does.
INFORMATION YOU RECEIVED FROM TRUSTMONT GROUP
For those clients who hold investment accounts that we service which are market-related or for whom we provide advice, you recently received information from Trustmont Group. Trustmont Financial/Trustmont Advisory is the broker-dealer/investment advisory firm with whom we are registered. They supervise us as your registered representative/investment advisor. As a result of recent regulation by the Securities & Exchange Commission, Trustmont was required to provide you disclosures on our behalf about the services we provide and how we are paid. The new regulation DOES NOT CHANGE the existing services or fees. It merely disclosures information to clarify those services and fees. If you have any questions on the disclosures, please feel free to call our office.
ADDITIONAL INFORMATION ON THE “CARES” ACT
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed by Congress and signed into law by the President. This economic relief package was intended to help Americans from the economic impacts of COVID-19. It provided stimulus payments to many Americans, assistance for small businesses, and the expansion and enhancement of unemployment benefits for those furloughed or laid off as a result of the pandemic. Since the Act was passed, we have learned two additional pieces of information.
First, stimulus payments were automatically sent to taxpayers who qualified based on income eligibility, which was less than $75,000 for single filers and less than $150,000 for married filers. (Reduced checks were issued for single taxpayers with income between $75,000 and $99,000 and for married filers with income between $150,000 and $190,000.) In an effort to get checks out to Americans as quickly as possible, the IRS used 2019 income tax returns, or the 2018 return if 2019 had not yet been filed, to determine a taxpayer’s eligibility. The stimulus payments were not to be considered as taxable income but as advanced tax credits for 2020. As a result, you will reconcile the stimulus payment when you file your 2020 return. Therefore, if you did not receive a payment and your 2020 income would have made you eligible to receive it, you may receive the credit when you file your 2020 return. If your 2020 income would have disqualified you and you already received a payment, you will not have to pay it back.
Second, the CARES Act also enabled any taxpayer who was subject to RMDs (required minimum distributions) from a retirement account to skip a distribution for 2020. It also allowed those who already took their distribution before the law was passed the ability to do a rollover (and put it back without taxation) within 60 days of the distribution. However, on June 23, 2020, the IRS announced that the 60-day rollover period for any RMDs taken this year has been extended to August 31, 2020 to give taxpayers time to take advantage of this opportunity. Be aware only ONE rollover per year is permitted. Therefore, this may or may not be a beneficial strategy for you.
Sources for All Articles: Internal Revenue Service; National Association of Tax Professionals; American Funds/Capital Group; MarketWatch; and Center on Budget and Policy Priorities.
Disclaimer: The opinions expressed herein do not necessarily reflect those of Trustmont Financial Group/Trustmont Advisory Group. Additionally, the information contained herein has been obtained from sources believed to be reliable but the accuracy of the information cannot be guaranteed. Lastly, reference to any product, service or concept in no way implies that it is suitable for everyone. There may also be risks and costs associated with any product, service or concept mentioned herein. Where applicable, a prospectus should be read for complete details. The material presented here is neither an offer to sell nor a solicitation of an offer to buy any securities.