With 90% of the country now in lockdown to slow the spread of COVID-19, large swaths of the economy and small businesses are in dire need of assistance for survival. To provide this support, a slew of policies are being implemented by the government, including the CARES Act that was signed into law on Friday, March 27. We have some practical recommendations we want to share with you, but first we’re going to provide our perspective on the markets and the economy at this moment in time. Here’s a short video that summarizes it:
The Goals of Government Intervention Neither this legislation nor actions by the Fed can prevent the economy from falling into a recession in the second quarter. Nor can they prevent the unemployment rate from soaring in the weeks and months ahead. However, they should be able to sustain the economy as it goes into "hibernation" for some time. Hibernation is a lethargic state in nature when animals or plants are in a deep sleep for a period of time but then wake up without suffering any harm. It has never been a term used to describe a global economy but we think it’s applicable. The intended effect of the government’s actions is that when the pandemic is over, the economy will spring back into action, like a bear awakening from its slumber. In other words, the objective of the legislation is sustenance rather than stimulus. At a time of immense uncertainty, a hope of returning to normal is vital. We all need to know that once the pandemic has moved on, there will be jobs and commerce. In this transitional economy, workers should be able to pay their bills and feed their families, despite being unemployed. Many businesses, both large and small, should be able to avoid bankruptcy, despite having little or no income. Assessing the Time Frame Timelines and expectations are really critical. Animals do not hibernate indefinitely; it lasts for a specific period of time (3 months for bears) and then normal life resumes. The current fiscal relief is seemingly based on a three-month time frame. The one-time stimulus checks and temporarily enhanced unemployment benefits appear to be based on the idea that the need for social distancing will fade substantially by the summer. This time frame may be overly optimistic, since any success that we have today in slowing the spread of the virus may simply delay the peak in terms of cases and mortality. If this turns out to be the case, we expect that Washington will follow up this bill with a further fiscal package to maintain workers and businesses in place until medical science can produce and distribute effective treatments and a vaccine. Instinctively, bears know what they need to do after their hibernation. How the U.S. economy comes out of its enforced sleep is more questionable. What Now? What is not uncertain are three things we recommend you do right now: 1) Minimize income taxes by actively trading taxable accounts to harvest losses. Tax loss harvesting is the silver lining in a market downturn like we’re seeing. You do it by selling investments that have incurred losses and, at the same time, buy very similar investments so that you remain invested but are able to realize losses that can be carried forward to offset future capital gains. 2) Look for opportunities to buy solid companies at a good value. One of the things that happens in quick downturns like we have been experiencing is indiscriminate selling. On days were the market sells off, even the stocks of high-quality companies tend trade lower. We have already begun to buy and will continue to look for opportunities to buy large, high quality companies at a discount. 3) Have a personal financial plan that gives context about how the drop of investment values is affecting your ability to meet your financial goals. We've developed tools like our Retirement Shock Absorber™ and the Withdrawal Stress Test™ for exactly the types of adverse conditions we are now experiencing. If you’d like a second opinion on your situation, we’d be happy to provide a complementary review of your portfolio. Just let us know. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.