Much has changed since we provided our last quarterly commentary in early January, as the economy’s brisk pace continued, and the stock market showed no real signs of letting up. Then came the coronavirus, and with its spread throughout the world have come tragic human loss and economic fallout. Our thoughts are with the families who are suffering, and our gratitude is with all those who are working tirelessly to support their loved ones, communities, and their fellow global citizens through countless personal and professional acts of courage.
Market and Economic Recap
From the top on February 19th, the stock market, as represented by the S&P 500 Index, plunged -34% in 23 days. Other market segments fared worse during this dramatic period of liquidation. At the recent low on March 23rd, the market appeared to be discounting a depression-like economic scenario. In a normal business cycle, it would take many months for investors to discern whether the economy was heading into a recession. This cycle, of course, is different from the past, as governments shut down economies to hopefully save lives. The evidence of the coming recession became almost immediately apparent and was rapidly priced into the stock and bond markets.
Markets seemed to stabilize as the calendar progressed from March to April and daily price volatility has come down a bit as well. Government interventions in the fixed income area have worked in opening up markets, reducing fears of further liquidation. Solvency concerns persist as investors are seeking information within a very uncertain economic backdrop. Business leaders are also operating under conditions of extreme uncertainty. Companies have been withdrawing guidance about their near-term earnings outlooks. Investors are attempting to weigh the short-term risks against the business values determined by the longer-term earnings power of these companies.
Business leaders and investors are attempting to better understand the potential depth and duration of the current economic downturn. We have advised our clients to think with a long-term lens and focus investment in high quality businesses: industry leaders with relatively stable revenues and strong balance sheets. Business models and managements will be severely tested in the coming months and new leaders may emerge. Careful research and analysis as well as a strict price discipline will limit the risk of permanent loss of capital. Opportunities for excess returns are developing now and the relation of investment risk to reward has already improved.
U.S. Government Legislation
On March 27th the U.S. government responded swiftly to the current crisis by enacting into law the Coronavirus Aid, Relief, and Economic Security Act. The CARES Act primarily provides stimulus to individuals, businesses, and hospitals to counter the economic suffering resulting from the coronavirus pandemic.
For individuals, the CARES Acts aims to keep people engaged in the economy. Americans who made $75,000 or less ($150,000 in the case of joint returns and $112,500 for head of household) based on their 2018 or 2019 income tax return (whichever is the latest return the IRS has on file) will receive a one-time payment of $1,200 and $500 for each child. Payments phase down above these limits up to incomes of $99,000 for individuals and $198,000 for couples. Of importance to many of our clients, the CARES Act temporarily waives the minimum distribution requirements for IRAs and 401(k)s for all required minimum distributions (RMDs) that otherwise would have been required in 2020. As a reminder, at the end of 2019 the law changed the age to begin RMDs from 70 ½ to 72. Also concerning retirement accounts, a “coronavirus-related distribution” from an eligible retirement plan will not be subject to the traditional 10% tax penalty imposed on early withdrawals of up to $100,000 of 2020 distributions. Income tax would still be due on the withdrawal, but could be spread evenly over three years. Alternatively, the funds could be repaid into the retirement account during those three years.
In addition to the CARES Act, in response to the declaration of a national emergency by the President, the IRS announced relief for taxpayers by automatically postponing the due date for federal income tax payments from April 15 to July 15, 2020.
Everyone at Clifford Swan remains healthy, and thanks to our clients' patience we are able to continue to do the work we love which is to serve them, even though we are not able to meet with them, or collaborate with each other, in person. Our operations and those of the vendors we rely upon to support us are functioning well. Thanks to technology, we are all in close communication with each other, and encourage our clients to continue to be in touch with us whenever they have a question or feel a conversation would be helpful. We want to do everything we can to be here for our clients during these challenging conditions. Above all, be careful and stay healthy.
The above information is for educational purposes and should not be considered a recommendation or investment advice. Investing in securities can result in loss of capital. Past performance is no guarantee of future performance.