July 8, 2020

The first half of 2020 has been exceptionally difficult, affecting each of us in one or many ways. Since our last quarterly commentary, the coronavirus pandemic has continued to take its tragic toll on human life, with over 130,000 deaths in the United States and over half a million worldwide. Measures implemented to combat the pandemic resulted in a sudden and deep recession. Even with the economy partially reopened, more people are unemployed than at any time since the Great Depression. While significant monetary and fiscal stimulus have softened the effects of the recession, these interventions have raised worries about long-term financial stability and fears of inflation. Adding to current health and economic challenges, social and political tensions are heightened from recent events and an upcoming election.

Despite all this, the stock market experienced a dramatic rebound in the second quarter. After reaching a low point on March 23, the market (S&P 500 Index) recovered sharply, with gains of 39% through the end of June. The path has been very volatile; smoothing out wide price swings, the index is down 8% from its peak in February through the end of the second quarter (and down 4% from the beginning of the year). We expect volatility to continue and create opportunities to buy quality companies with strong fundamentals at good prices.

Why has the stock market bounced back given the continued challenges to the economy? There are a few possible explanations. First, we can’t discount the buoying effect of fiscal and monetary interventions. Investors have faith in the Federal Reserve and Congress to do whatever it takes to get us through this. Fed Chairman Jerome Powell’s statement in early June that the central bank is “not even thinking about thinking about raising rates” is a clear commitment to support the economy (and markets). Policy makers don’t anticipate an interest rate increase until 2022, and even then, most expect rates to remain at low levels. Second, the market is already pricing in expectations for the economy’s recovery. However, we note that the low interest rates put in place to support the economy are a counterargument to this investor optimism. If the market has been too optimistic and the economy recovers more slowly, we will see a correction. Finally, the acronym TINA (there is no alternative) provides another potential explanation for why the markets are decoupled from the economy. With record-low interest rates, investors seeking yield have few places to turn other than the stock market.

In the face of such uncertainty, we believe now is an opportune time to focus on what can be controlled: your investment plan. We encourage you to take stock and consider how the last six months may have impacted you. Has your household income or expense situation changed? Is your ability to stomach market swings different from what you thought prior to COVID? For our institutional clients, have your fundraising opportunities changed? Our work rolls back to our clients. Rather than predict short-term market movements, we believe that developing an investment strategy should start with your needs and priorities. The number one factor in risk management is your individual circumstance, so please let us know how your situation might have changed.

On a practical note, the Internal Revenue Service has provided updated guidance pertaining to the CARES Act required minimum distribution (RMD) waiver for 2020. As a reminder, one provision of the CARES Act was to temporarily waive the distribution requirements for IRAs and 401(k)s for all RMDs that otherwise would have been required in 2020. Under the new guidance, anyone who already took an RMD in 2020 can now roll those funds back into a retirement account. To give taxpayers time to take advantage of this opportunity, the 60-day rollover period for any RMDs already taken this year has been extended to August 31, 2020. If you already took a distribution for 2020 and wish to discuss reversing it, please contact us.

Our thoughts are with our clients during these trying times. Please take care 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.

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