Insights & Advice

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Take CARES of yourself

Dalton — The 880-page CARES (Coronavius Aid, Relief, and Economic Security) Act was passed recently. If you don’t know why or that’s important to you, it’s not for a lack of understanding or interest on your part. It’s because there’s been almost too much information thrown at you in a sea of other information. Please allow me to skip fancy language and multisyllabic words that make me seem smart and just give you the bullet points you might have missed. It’s not meant to be a full list, and it’s not meant to be a set of instructions (or advice). My intent isn’t to leave out important information, but rather to draw your attention to aspects of the CARES Act that weren’t sexy enough to make it to the news headlines but may still be relevant to you.

Instead of writing massive passages, I’ll provide you enough information to possibly pique your interest. If you’re a true do-it-yourselfer, just Google “CARES Act full text,” or just the part that is interesting to you, and you’ll find some helpful reading. Otherwise, take these bullet points to your financial advisor and discuss them. The CARES Act provides: 

  • Up to a $10,000 grant for business owners, sole proprietorships, and independent contractors just for applying to the Economic Injury Disaster Loan.
  • Businesses can go through the Small Business Administration to get a loan through the Payment Protection Program equal to 2.5 times their monthly payroll. The loan can be forgiven if you retain employees. Oh, and whatever is forgiven is not taxable.
  • Distributions of up to $100,000 from IRAs and employer-sponsored retirement plans can be taken, without being subject to the 10 percent penalty. The plan can be repaid over three years, or you can spread the taxes over three years (although you might want to pay all the taxes this year, if you think your income is going to be lower than the next two years).
  • Required minimum distributions are waived in 2020. If you’ve already taken an RMD this year, you can return it.
  • If you have an inherited IRA, the five-year rule is ignored this year.
  • Some employer-sponsored plans, like 401(k)s and 403(b)s, offer participants the option to take loans on a portion of their account. The maximum loan amount has been increased to $100,000, and payments may be be delayed for up to one year.
  • You can suspend payments on federal student loans through Wednesday, Sept. 30, 2020. If your payments are automatically made, you need to contact your loan provider to stop payments.
  • Self-employed individuals are generally not eligible to receive unemployment benefits, but under the CARES Act, they can get up to 39 weeks of benefits.

I left out a lot — a real lot. I strongly encourage you to contact your financial advisor and have them update your financial plan and determine which benefits you should take advantage of. If you don’t have a financial advisor, ask your accountant.

Bear-market rally, or something more? Probably a bear-market rally.

Last week, I wrote: “If I was a gambling man (and I am), I’d say that the stock market was low enough to call it a bottom at 2,200 points on the S&P 500, but as massively bad economic news rolls out in the weeks to come, the stock prices will retest those lows and probably challenge the 2,000 level in late April or early May. I’m thinking Buy-in-May-and-Make-Hay. But, since I only gamble with my life and not my money, I’ll continue to observe and react.” I have never, ever had such a moving target when it comes to trying to determine what is going to happen with the economy and thus the stock market. I admitted that last week when I wrote that “the virus will dictate the timeline,” and nobody is comfortable predicting the path of COVID-19.

However, I can’t just shrug my shoulders and think about it another day. It’s my job to figure out where the stock market will go. And right now, my job sucks. Given what I witnessed over the last week, I’ll extend my expectation that the stock market low made Monday, March 23, will be revisited, and possibly broken. There is a completely arbitrary 25 percent chance that the market has a bit of an L-shaped recovery and meanders sideways for a quarter or two until we get through this recession. There is 74 percent chance of a retest, and only about a 1 percent chance of V-shaped recovery. For now, my investment decisions are going to mostly center around that slim possibility of a V-shaped recovery. While there is a chance that the stock market will rocket higher from here, I’m willing to risk losing out by remaining conservative.

V-shaped recoveries are rare — 1966, 1978 and 1998 stand out. Sure, there was one in December 2018, so maybe it seems like it’s a bigger possibility than it is, but based on my drawing of a line on some graphs and deciding what to call a V-shaped recovery (scientific, I know), there haven’t been many over the years. More important than the number of occurrences, when they do occur, is symmetry. The selling that goes into a capitulation low is heavy and broad-based. The same should occur on the other side of the V, with lots of volume and breadth. And while there were four Upside Days that met that criterion, the demand — the buying — historically needed to continue in order to experience the V-shaped recovery (Monday, April 6, was one of those major Upside Days, followed by a huge opening for the market on Tuesday, which could change things, but it’s too early to tell). That doesn’t mean that stock prices need to just keep going up — they also need to stop being sold. Buying is happening in this rally but selling hasn’t yet dried up. Listen, I know that isn’t the best reason to expect the stock market to go anywhere from sideways to down, but in the absence of knowing the fundamentals, I resort to the technicals. At least if I’m wrong, and I am too conservative as the stock market goes up, I don’t lose anything.

On the subject of V-shaped recoveries, I’m not convinced that the U.S. economy is going to snap back immediately either. Currently virtually everyone is expecting a V-shaped recovery for the economy. I am wildly in the minority to think otherwise, so I’m admittedly questioning my own calculus on this matter. Oh, it will come roaring back once the economy gains some traction and begins to build some momentum. There is a massive amount of stimulus in the economy, and I wouldn’t rule out 2021 being one of the biggest years on record for the stock market because of that. However, arriving at that relative paradise may require a circuitous path. The economy will get back to where it was in January 2020, but it won’t be without sacrifice and it won’t come without some sort of change that will slow the handoff from contraction to growth. There is going to be great dislocation as we struggle to navigate when to get back to social gathering and rehiring workers. Additionally, the economy will need to digest bankruptcies and foreclosures, while at the same time attempting to strengthen what will almost surely be weakened banks and state balance sheets.

Not to mention it looks as if this recession is going to be a doozy! Predictions are all over the place. It’s not entirely improbable that U.S. gross domestic product will decline by 2 percent in 2020, the second largest calendar-year decline since 1948, trailing only the 2.5 percent drop in 2009. Looking at it from another angle, the average peak-to-trough decline in U.S. GDP during recessions is 1.8 percent. The largest decline was 4 percent during the Great Recession, and the smallest was 0.1 percent. From the fourth quarter 2019 to the second quarter of 2020, the peak-to-trough decline could reasonably be expected to exceed the 4 percent decline of the 2008-09 Great Recession. And while the third, or maybe the fourth quarter, of 2020 could see an annualized growth rate of 10 percent for GDP, I expect it to level off from there as it takes businesses time to get back online. It could be years before the U.S. gets back to something close to full employment.

At the heart of this, it’s a medical issue, not an economic issue. The virus will determine the pace and the path of economic recovery. When it comes to getting reinvested back into the stock market, each investor must decide what mistake is the best mistake to make: the mistake of being too early, or the mistake of being too late. I’d venture that for most investors, the mistake they can’t afford is to be wiped out. Last week I gave two options. One was a nonsophisticated but tried-and-true method, specifically, “Don’t try to pick the exact bottom; reinvest back into the equity portion of your investment portfolio, the portfolio that reflects your personal financial plan, every month for the next three to nine months depending on your risk NEED (as opposed to your risk ‘tolerance’).” The second was to use buffer funds to protect you from some of the downside while allowing you to capture some of the upside. I just don’t see the reason to be anything other than conservative in your investment portfolio right now.

Stay safe and stay healthy, my friends.

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Allen Harris, the author of ‘Build It, Sell It, Profit: Taking Care of Business Today to Get Top Dollar When You Retire,’ is a Certified Value Growth Advisor and Certified Exit Planning Advisor for business owners. He is the owner of Berkshire Money Management in Dalton, managing investments of more than $400 million. His forecasts and opinions are purely his own. None of the information presented here should be construed as individualized investment advice, an endorsement of Berkshire Money Management or a solicitation to become a client of Berkshire Money Management. Direct inquiries to email hidden; JavaScript is required.

This article originally appeared in The Berkshire Edge on April 8, 2020.