I hope you may benefit from this edition of Notes Along the Path.
I cannot remember a time when I've seen such a wide disparity between what is happening in the economy and what is happening in the stock market. As I explained last month, much of what is happening is the achievement (fault?) of the Federal Reserve and its Chairman Jerome Powell. His commitment to do whatever it takes to keep the economy afloat is unprecedented.
Let's take a moment to briefly outline the situation using hard data.
The unemployment rate soared to a post-depression high of 14.7% in April, while the survey of businesses by the US Bureau of Labor Statistics revealed a loss of 20.5 million jobs in April, the worst monthly reading since records began in 1939.
In a single month, nearly all of the jobs created after the financial crisis disappeared, at least temporarily.
April's 11.2% drop in industrial production, a metric the Federal Reserve has tracked since 1919 – is the largest monthly decline on record. Furthermore, in April, consumer spending fell 13.6%, the biggest drop ever recorded (US BEA, data back to 1959).
Record layoffs continue, with the number of first-time claims for unemployment insurance topping 40 million over the 10-weeks ending May 23 (Dept. of Labor/St. Louis Federal Reserve). Put another way, nearly one in four working Americans have experienced a job loss.
If there is any good news, the number of first-time filings has been declining, and the number of individuals who regularly file to receive jobless benefits is about half the number of first-time filings.
This would suggest that paycheck protection loans are kicking in, and re-openings are encouraging businesses to recall furloughed workers. Still, May's employment report will likely show another rise in the jobless rate.
|Dow Jones Industrial Average||4.3||-11.1|
|S&P 500 Index||4.5||-5.8|
|Russell 2000 Index||6.4||-16.4|
|MSCI World ex-USA*||4.0||-15.5|
|MSCI Emerging Markets*||0.6||-16.5|
|Bloomberg Barclays U.S.
Aggregate Bond TR
MTD: returns: Apr 30, 2020-May 29, 2020
YTD returns: Dec 31, 2019-May 29, 2020
*in US dollars
I understand the uncertainty facing all of us. We are grappling with an economic and a health care crisis, not to mention recent civil unrest. It’s a combination none of us have ever faced.
7 steps to successfully steer your finances in a COVID-19 world
Since the economic crisis began, I have shifted my focus towards financial planning pieces that incorporate the COVID-19 crisis and its impact on your finances.
I have highlighted the many scams that have sprung out of the pandemic. Be careful. New ones pop up all the time. I have written about new rules that make it easier to tap into your IRA if you’ve been affected by the coronavirus. I have also counseled on ways you might financially right yourself if you have been laid off and are nearing retirement.
This month, we want to look at various ways you might shore up your finances in today’s uncertain world.
If you are single, take control of your situation. If you are a couple, sit down with your partner and craft a plan. It’s essential that both of you are on the same page. These are guidelines, and we are here to assist if you have any questions.
1. Now is the time to build up an emergency reserve of at least three to six months. You don’t know what the future may bring, and savings will help you weather a job loss if it were to occur.
If you have been laid off, the federal government is providing an additional $600/week in unemployment benefits.
Some are earning more unemployed than when they were working! If you are in this situation, use the extra cash to build up your savings.
2. Start saving. If you met the income criteria, you received a stimulus check of up to $1,200 from the federal government ($2,400 if you are a couple). Now it’s time to eliminate unnecessary expenditures. Lockdowns have made the task easier. Yes, I understand that forced closures have had a devastating economic impact. However, outlays on gasoline, Uber, car repairs, entertainment, eating out, and much more have been curtailed. Build up your rainy day fund.
3. Do you have a mortgage? If so, record low rates could save you hundreds of dollars every month. Review the numbers and determine if refinancing makes sense.
4. Are you making monthly payments on federally backed student loans? Payments for student loans owned by the federal government are suspended through September 30, 2020, and the interest rate is zero.
No action is required by you. If someone contacts you and can stop payments, provided you pay a fee, hang up the phone or ignore the email. This is a scam.
Your deferred payments will allow you the opportunity to build up your savings. If your finances are stable, any monthly payments will go entirely towards the principal, enabling you to pay off your loans sooner than anticipated.
5. Consider college refunds and your 529 plan. With lockdowns, dorm closures, canceled meal plans, and online learning, you may be due a refund from your college. If you used 529 funds, your refund becomes a taxable distribution and will be tagged with a 10% penalty.
Usually, you have 60 days from the date of the refund to redeposit the funds and avoid the penalty. Today, the period has been extended.
If the 60-day period ends on or after April 1, 2020, and before July 15, 2020, the redeposit can be made any time before July 15, 2020, or 60 days after the refund date, whichever is longer.
6. Do you need financial assistance? Contrary to popular opinion, banks don’t want to get tough with borrowers. A bank’s business model is based on repayment of loans, not foreclosures. Many banks are willing to work with you in today’s environment, but you must reach out to them. The same holds for utilities and other monthly services.
7. Mortgage forbearance programs may be available for those who have lost jobs due to the pandemic. Be sure the terms being offered are reasonable. Again, reach out for assistance. Simply stopping payments will quickly get you into trouble.
Next stepsPlease recognize that you are not in this alone. We are here to assist you as you formulate a plan.
The steps above offer a broad overview. Taking action is critical. It’s half the battle. Be proactive, not reactive. You may find you are in a much better position than you realized, which will relieve an enormous amount of stress.
If you like it this newsletter I encourage you to pass it on to any contacts you have that might benefit.
I remain honered and humbled that my clients have allowed me to serve as their financial advisor. Thank you for your support.
All the Best!