First Quarter 2020 Review & Outlook

"We know from history, over time, our country perseveres and its markets rebound…Throughout this downturn, we are reminding our clients that panic is not an investment strategy and that trying to time the market is futile." - Charles Schwab CEO, Walt Bettinger

Review & Outlook

The Black Swan Theory, developed by Nassim Taleb, is described on Wikipedia as follows - "The black swan theory or theory of black swan events is a metaphor that describes an event that comes as a surprise, has a major effect, and is often inappropriately rationalized after the fact with the benefit of hindsight. The term is based on an ancient saying that presumed black swans did not exist - a saying that became reinterpreted to teach a different lesson after black swans were discovered in the wild." The health, societal, and economic impact of the Coronavirus certainly fits the definition of a Black Swan event.

The stock market, as measured by the S&P 500, posted a decline of 20% in the first quarter. This was the largest quarterly decline since the fourth quarter of 2008 during the financial crisis. No sector of the stock market was positive during the downturn. However, the technology, healthcare, and consumer staples sectors managed to limit the damage to down 11.9%, 12.7%, and 12.7%, respectively. At the other end of the spectrum was the energy sector, which was down 50.5% for the quarter. The energy sector has been the victim of the Saudi Arabia/Russia oil price war. The only silver lining is gas prices have dropped to under $2/gallon on average. Stress was not only seen in equity markets, but in the bond market as well. Corporations looking to issue debt during times like this suffer from a lack of buyers just like the stock market.

In response to the economic fallout, the Federal Reserve and Congress have taken unprecedented actions to support the economy. The Fed first cut interest rates by half a percent on March 3rd.Then on March 15th, the Fed announced a 1% cut to rates, reducing the fed funds rate to nearly zero.The Fed also stated it would purchase $500 billion in Treasury bonds and $200 billion in mortgage bonds to provide liquidity to the broad fixed income markets.Furthermore, the Fed has taken aggressive steps to support the commercial paper market and money market mutual funds.In addition to the Fed's actions, Congress passed the following three major pieces of legislation over a three-week span in March:

  • $8.3 billion emergency coronavirus response bill - provides funding for health agencies and testing along with small-business loan subsidies.
  • $100 billion coronavirus aid package - provides funding for tax credits for employers that offered paid sick leave, increased unemployment benefits, and food assistance.
  • $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act - provides emergency relief checks for certain individuals, economic assistance for airlines and other distressed industries such as hotels, and loans and grants for small businesses.

Now the discussion is on a potential $2 trillion infrastructure spending bill. This phase four stimulus bill could be voted on as early as April 20th. The above actions show that the government is doing all it can to bridge the economic gap until the coronavirus pandemic is under control.

One of the interesting things about investing in the stock market is how many people want to sell stocks when there is a sale going on instead of buying more shares of solid companies with bright prospects for the future. When you examine history, much of a new bull market's returns will occur in the very early stages of the recovery when investors are the most fearful. In referencing the eleven year bull market that just ended, the Wall Street Journal notes, "Putting $100,000 into an S&P 500 index fund on the day the bull began on March 9, 2009, and selling at last month's peak would have seen that turn into $630,000 including dividends. Waiting just three months to make sure it wasn't yet another head fake would have earned you only $450,000."

One of the encouraging developments recently has been the surge in corporate insider buying.As reported by the Wall Street Journal on March 26th, "More than 2,800 executives and directors have purchased nearly $1.19 billion in company stock since the beginning of March. That's the third-highest level on both an individual and dollar basis since 1988, according to the Washington Service, which provides data analytics about trading activity by insiders."

Another encouraging sign has been the stability shown by individual investors. According to an interview in Axios, Jeffrey Kleintop, chief global investment strategist at Charles Schwab, points out that passive index ETF's saw a net inflow of $20 billion in inflows through the first four weeks of March. Kleintop says, "Obviously, selling is big among traders, institutions, computer algorithms…but the one stabilizing factor in this market has been individual investors…That has never been true before, and it's a very unique aspect of this downturn."

We fully appreciate the magnitude of the crisis at hand, but we believe it is critical during difficult market environments to stay calm and stay the course. History tells us that this too shall pass. Attempting to time the market is futile and will likely lead to significant damage to potential long-term rates of return. We continue to look for value in stocks and will not hesitate to make portfolio changes we think will be beneficial over the long term.

We encourage you to be safe, patient, and enjoy the time at home with family. Reach out to friends and family on the phone to comfort them and take a break from the news cycle.Please feel free to reach out to us with any questions.We look forward to better days for all of us in the near future.

CARES Act Highlights

The main provision from the recently passed CARES Act that affects individuals is the elimination of required minimum distributions from retirement accounts for 2020. The suspension applies to inherited IRA accounts in addition to traditional IRAs and 401(k)'s. This suspension also applies to participants who turned age 70 ½ in 2019 and had deferred taking their 2019 distribution until April 1, 2020. Please discuss the provision with your tax preparer to see if any changes need to be made for your 2020 taxes, especially if you typically fulfill your tax obligation through withholding on your retirement account distributions. Under normal rules, if a retirement account distribution has been made, the individual has the option of depositing the funds back into the retirement account within a 60-day window to avoid reporting a taxable distribution. However, the IRS has issued guidance that allows anyone taking a retirement account distribution between February 1st, 2020 and May 15th, 2020 to put the funds back in the retirement account by July 15th, 2020 to qualify as a rollover. After July 15th the normal 60-day rollover window requirement will be in effect.

Sincerely,

Marietta Wealth Management, LLC