What Should You Do About The Coronavirus And Stock Market Volatility?

I recently discussed what I think were the reasons for the current market decline, largely based on fears around the spreading coronavirus.  Investors are understandably nervous about their money and their health. But during stock market volatility, it’s important to keep a level head to avoid financial mistakes.  Here are some things that all investors must consider in times of market uncertainty. 

Stay Calm

At times like these, it’s important to put current conditions into perspective. This is not the first time the market has taken a tumble and it won’t be the last. Declines in the Dow Jones Industrial Average are actually fairly regular events. In fact, drops of 10% or more happen about once a year on average.

Keep An Eye On The Situation

We simply do not have enough information yet to know how the coronavirus will impact the economy in the short and long term. It’s possible that the virus will soon be well-contained and the markets will recover. But it is also possible that the virus will spread and impact global markets, which would lead to a full correction or even a longer-term recession. 

It’s important to remember that markets dislike uncertainty. With so much uncertainty over how fast the virus could spread and the potential impacts, volatility right now is extreme. As we get more information, it is likely that day-to-day market fluctuations will decrease. 

Play Dead

There’s an old saying that the best thing to do when you meet a bear market is the same as if you were to meet a bear in the woods: play dead. While easier said than done, successful long-term investors know that it’s important to stay calm during a market correction. We don’t know yet whether the coronavirus fears will translate into an official correction, but the risk always exists.

Market volatility has increased in recent years and the media can often make it seem like each episode is worse than the one before. In reality, volatility does not hurt investors, but selling when the market is down will lock in losses.

Remember That Your Portfolio is Diversified

We understand that volatility and market declines are stressful. However, we encourage you to keep in mind that while the stock market may be down significantly, your portfolio is made up of both stocks, bonds, and other assets that are designed to work together to decrease overall losses. It’s important to consider your specific portfolio, investment horizon, and circumstances when reflecting on economic events. If you have questions about your portfolio, get in touch with our office.

Review Your Other Investment Accounts

Now is a good time to take a look at all of your investment accounts, including your 401(k) to make sure it is well-diversified. If you have not reviewed the investment accounts that we do not manage, get in touch with our office and we’ll take a look and offer recommendations to minimize potential losses.

Speak With Your Advisor

Whether you’re new to investing or an experienced investor, it’s helpful to consult with an objective third party. Human nature causes us all to act out of emotion when our accounts go down. As an independent firm, we put your best interests first. We seek to serve as a support system for our clients, helping them make informed financial decisions that aren’t driven solely by emotion. 

We’re Here for Your Friends and Family

If you have friends or family who need help with their investments, we are happy to offer a complimentary portfolio review and recommendations. We can discuss what is appropriate for their immediate needs and long-term objectives. Sometimes, simply speaking with a financial advisor may help investors feel more confident and less concerned with the day-to-day market activity.

Thoughts On The Coronavirus, Bernie Sanders & The Current Market Decline

I wanted to take some time to discuss with you the current market turmoil.  I may have some thoughts on what I think this could mean longer-term in a later posting.  Also I will push out to a later date my next article  on the fiscal issues in Illinois given the current state of things 

First let's look at the damage to the markets.  Currently major indices have lost about 10% from their highs set, believe it or not, about a week ago.  The Old Wall Street saying that "markets take the escalator up and the elevator straight down" is currently being demonstrated.   Given that most of these major indices are market cap weighted, many sectors and individual stocks have performed worse.  Still, a bit of context is in order.    The magnitude of the decline, while dramatic in how quickly it has occurred, is not that out of the ordinary for a market correction.   Also stocks are now trading about the same levels we saw just a few months ago.  The S&P 500* is still up around 30% without dividends since Christmas of 2018.  That's worth noting and worth remembering as we go through this market decline.

Ok so why such a huge decline and why now?  First and foremost a correction at some point this year was not unexpected by me.  This is what I said a few weeks back in my winter letter to clients:

"Markets haven’t seen a substantive down week now since Labor Day. As wonderful as this is, logic dictates that it won’t go on forever. It’s hard to judge if we pulled some of this year’s advance into the last three weeks of 2019. It is entirely possible that markets may post returns that are normal by historical standards but seem subpar when viewed through the lens of the last decade. There is a higher probability that we could see most of our gains in the first six months of the year as election uncertainty enters the picture next fall..."

Markets took off back in October and went nearly straight up without any major pullback until mid-February.  That kind of move begs for profit taking at some point.  Whether it was the coronavirus  or something else, stocks were vulnerable at some point to a correction.  The prime motivator for this sell-off has been the economic impact of the coronavirus on the world economy.  The secondary impact I believe is the unexpected surge of support in the Democratic primaries for Bernie Sanders.  I have been amazed that it took this long for investors to worry more about the coronavirus.  It has been ravaging China and parts of Orient now for the better part of three month, yet markets ignored these implications until it became obvious that the virus was not going to be contained to Asia.

 I have been and still remain skeptical on whether the world should become as alarmed about the longer-term medical implications of the disease based on what we currently know.  After all, we are in prime flu season right now in the northern hemisphere.  Millions will get the flu this winter here in the US and on average tragically over 60,000 die here from its complications, yet life goes on and very few of us limit our winter activities because of the flue virus.  However, the economic impact  as millions stay home across Asia and work has ground to a halt is impossible to now ignore. Companies in the US are now pulling their forward guidance as conditions on the ground remain so uncertain.    Economic growth both here and abroad will likely now be lower than previous estimates as a result of this stoppage.  Right now it is impossible to estimate how much the economy will recover from this once things get back to normal, hence some of the uncertainty in the markets.

Also I think some of this sell-off has to be attributed to how well Bernie Sanders has done so far in the Democratic primaries.  We don't do politics on this blog and when we discuss the subject at all it is in context of how it bleeds over into the economic realm.  From that standpoint I can say with a lot of confidence that markets won't take well to a Sander's presidency and he will be like a lead weight around stocks the better he potentially does in the coming months. 

An overbought market, coronavirus and Bernie Sanders are what I think are hurting stocks right now.  So what are my thoughts going forward?  First, I believe there is a high probability that prices remain vulnerable through the rest of this week.  The last sentence is a guess based on past probabilities and could obviously be wrong.  However, it would strike me reasonable that investors might at least want to see the results from the South Carolina primaries this weekend.  That could make stocks vulnerable today and tomorrow. Now I obviously don't know what will happen, but I want you to be aware of the potential for a few more bad days right now should they occur.

While economic conditions in the US will likely slow this year because of the virus, the underlying fundamentals here at home are still strong based on what we know today.  At some point that will put a floor under stock prices and some sort of bottom will be put in.  Whether that is today or a few days from now is unknown but there will be a point where equities are oversold enough and have created potential value that buyers will step in, if only for a trade.  It is possible we are closer to that point even now.  As such I am more inclined to start looking for value down here then trying to sell at these price levels based on my analysis of things.  Value is now being created but you may have to be patient before you see it pan out and the probability of more volatility is now higher than it was a few months ago.

From a money flow perspective we are now very oversold and we are closer to a major band of price support so that may help as well.  While I think it is possible we are nearing price levels where value can be found in the markets, I do think there is a much higher probability that stock prices have seen their highs for the year until sometime after the elections or at least until the point where markets sniff out who they think will win.  New highs in prices could be pushed out now into 2021 depending on the damage to the economy.  A period of  price consolidation after such a large move would be very much in keeping for how this bull market has behaved since 2009 and would likely set the stage for the next market advance.  I'll try to flesh out what this possible trading range might look like in a future post.

Obviously we're in a period of extreme uncertainty and in times like these some investors and many traders indiscriminately sell.  Like "Mad Money's" and CNBC's Jim Cramer, I subscribe to the believe that panic is not a strategy.  The time for indiscriminate selling was probably a few weeks ago.  Investors that want to realign their asset allocations will likely be better served to review their portfolios after the market's rally, which it some point they inevitably will do.  Again I will refer you to something I said in my last investment letter:

"Over the long-run stocks have produced above average returns for many decades but the ticket you punch when you buy into the markets is volatility.  On average stocks have a volatility reading of about 14%.  That means at least once a year stocks will likely decline on average 5-20%.  That’s something to think about after such a huge advance last year.  If you have a million-dollar portfolio and it’s all in equities or their related instruments then you should prepare for potentially anywhere from a $50,000 to a $200,000 decline in your investments at some time during the next downdraft.  If that gives you a pause at this point then we need to talk.  Just know when we’re down that 5-20% all of the investment media will tell you the world’s going to end from an investment perspective.  We came close to that in 2008 and it’s possible that one day in the future the investment world will end.  But it only gets to do that once and there’s still a higher probability that the next correction we see will be more of the same and likely a better period to buy equities."

I'll have some further long term thoughts on this hopefully next week.

*Long ETF’s related to the S&P 500 in both client and personal accounts.

What You Need To Know About The SECURE Act

By Christopher R. English, President of Lumen Capital Management, LLC

I have been asked by more than a few people to give a brief summary on the SECURE Act, the new retirement laws enacted by Congress at the end of last year.   The passage of the Act was meant to address the grim reality that on the whole, Americans are woefully unprepared for retirement. (1) With wages not increasing as quickly as the cost of living, many savers are unable to put away as much as they’d like and potentially face a lower standard of living in retirement. Policy-makers and employers have recognized this savings gap and have now taken the first step to help retirees manage their money as well as allow for pre-retirees to plan ahead.

Back in May 2019, the House of Representatives passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act. This was passed with bipartisan support by a count of 417-3. On December 20, 2019, President Trump signed the bill into law, making it easier for retirees to have a reliable stream of income that lasts through retirement—exciting news for the many Americans who are concerned about stretching their retirement dollars.   While the SECURE Act bill proposes over 20 changes, here are 6 major changes that could potentially impact you if you have an IRA or 401(k).  

1. No More Contribution Age Caps On IRAs

Under the current law, a plan participant can’t contribute to an IRA account past the age of 70½ (a major deterrent for those who are still working later in life). (2) Under the SECURE Act, this age cap would be removed.  

2. Required Minimum Distribution (RMD) Age Raised To 72

Currently, people who have money in 401(k)s or other tax-deferred plans must start making required minimum distributions (RMDs) at age 70½, even if they’re still in the workforce. (3)

Under the SECURE Act bill, the new mandatory withdrawal age would be 72. This is helpful for those who are still working or are trying to stretch their savings out for a longer retirement. 

3. Additional Exception To The IRA 10% Penalty Added

The new law would require employers to list a participant’s projected monthly retirement income on their 401(k) statements. This projected monthly income would be based on their current account balance and would give plan participants time to adjust their savings rate and better prepare for retirement.  

The bill would also allow new parents to make a penalty-free withdrawal of up to $5,000 from their retirement account within the first year of their child’s birth or adoption. This money could then be used to cover child-related expenses.

Under the SECURE Act, long-term, part-time workers would be able to finally take part in 401(k) plans. This is great news for women who disproportionately take on part-time work to care for children and aging parents.  

4. Changes To Inherited Retirement Accounts

Under the current law, inherited retirement account distributions can be spread out over the recipient’s lifetime. Under the SECURE Act, a beneficiary would be required to withdraw the money—and pay taxes on it—within a 10-year period. 

This doesn’t affect those who inherit smaller accounts. But for those who inherit larger accounts, taxes will have to be paid over a shorter amount of time, which means a higher tax bill. And, for those who inherit an account in their prime-earning years, their tax burden will increase even more, decreasing the value of the account. Surviving spouses and minor children are exempt from this rule.

5. More Annuity Options

Annuities are a type of insurance that guarantees a monthly income in retirement. They’re usually part of pension plans. Annuities aren’t popular 401(k) options because the employer can be sued if the insurance company goes out of business or fails to pay a claim. 

Under the SECURE Act bill, the liability would be removed from the employer. This means more employers could offer annuities to their employees without having to worry about being held liable for unpaid claims. The benefit to you is that you get more options to diversify your retirement income through different types of investments. 

6. Lifetime-Income Provision

There’s plenty of advice on how to accumulate wealth using your 401(k), but no one really talks about how to manage your wealth once you retire. The new lifetime-income provision, coupled with annuities, would ensure retirees don’t outlive their money. 

If your employer doesn’t offer annuities, the bill would allow you to roll your accounts over to an IRA so you could continue contributing to your retirement.   

How Should You Respond To These Changes?

There is more to the Act than what we’ve described above.  This article is meant to be a summary of some of the main points now impacting retirement and retirement planning.  If you’re concerned about how the SECURE Act will affect your path to retirement and your investment strategy, now is a good time to meet with a financial professional to review your plan and check to see if any updates should be made in light of these legislative changes. If you’d like to learn more about how Lumen Capital Management can help meet your investment and retirement planning needs, reach out to my office at 312.953.8825 or lumencapital@hotmail.com.

About Chris

Christopher R. English is the President and founder of Lumen Capital Management, LLC-a Registered Investment Advisor regulated by the State of Illinois. A copy of our ADV Part II is available upon request. We manage portfolios for investors, developing customized portfolios that reflect a client’s unique risk/reward parameters. We also manage a private partnership currently closed to outside investors. Mr. English has over three decades of experience working with individuals, families, businesses, and foundations. Based in the greater Chicago area, he serves clients throughout Illinois, as well as Florida, Massachusetts, California, Indiana, and other states. To schedule a complimentary portfolio review, contact Chris today by calling 312.953.8825 or emailing him at lumencapital@hotmail.com.

___________

(1)  https://thehill.com/policy/finance/457447-report-americans-unprepared-for-retirement

(2)  https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits

(3)  https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions

The Silent Epidemic {Part I The Weight Of Water}

"In the struggle between the stone and water in the end the water wins."

 Japanese proverb.

Water in small quantities weighs very little.  A drop of the stuff is barely noticeable.  Almost any human beyond a toddler has little trouble lifting a glass of H2O.  However, get much beyond a pint of liquid and one begins to notice its weight.  A quart is noticeably heavier although still requiring little effort to lift.  A gallon of fresh water weighs 8.34 pounds.  One cubic foot of water contains about 8 gallons.  Water gets heavier and denser the more of it there is, just notice some time the pressure on your ears when you dive much below six feet.  Water is a life giving element as well as one of the most destructive forces on this planet.  It weaves it's way through everything on earth.  In mighty oceans it dictates much of what transpires on earth, yet a single drop is almost not worth noticing.  

Taxes perform much of the same function in civic life as water.  They pay for collective services that the public wants or needs or are mandated by governmental authorities.  In a democracy, we deem that collectively paying for things such as schools, security and fire protection a good thing.  Combined, it costs us all much less to have a fire department then if say we still had a system where neighborhoods banded together to pay for fire protection.  It is not necessarily any individual tax that is the burden it is the cumulative weight of these that over time can sap the vitality out of a community.  When one looks at the cumulative effects of all the additional taxes that have been added onto people's bills in the past few years then like the weight of vast amounts of water it is easier to see how the citizens of Illinois are being crushed.

In this post we will look at a very broad overview of the financial problems facing the state.  It is possible that the numbers I'm showing you below will have changed since I last found these statistics and I'm sure there are other sources that might say I am understating or overstating the situation.  Assume these numbers are close to what is actually out there.  These are not meant to be a primer on all of the tax issues facing Illinois, her cities and counties.  I am trying to highlight the problem facing us and do so in nothing more than a quick reference manner.  For my analysis it won't matter if my numbers are off by a few billion dollars in either direction.  They will still point out the issues we face at both the governmental and individual levels.  Both governments and individuals have to pay their bills.  Governments operate under the principle that they can always tax citizens and business.  Businesses may be able to charge more over time to offset the encroachment on taxes but it is not clear that all individuals can do so.

Again, In this series I am making no judgments on why we pay taxes or on whom the burden should fall.  You will have to make your own decision on that.  I am simply discussing the consequences of that burden and what is not debatable are the consequences of those taxes to individual's bank accounts.  In Illinois the biggest burden to the tax structure is the stress being caused by pension liabilities at nearly every level of government.  By one measure the total combined pension debt in Illinois is $203 billion.   According to one study, Chicagoans are on the hook for nearly $150 billion in overlapping retirement debt and another study shows Chicago has the worst pension crisis of any major city studied.  Below the same study linked above shows the pension retirement debt burden per Chicago household. 

Chicago enacted a series of tax hikes in recent years and still saw some its pension liabilities rise from $23 billion dollars to $30 billion.  Most important, nearly all of those tax hikes went to try and shore up the city's pensions.  Very little of that money went for things like extra police, infrastructure like new roads or money to aid the poorest communities in the city.  

Of note this analysis also does not include all other debt obligations the city has compiled nor does it include the debt or pension obligations of Cook County or the state of Illinois.  Nor are we looking at downstate cities such as East St. Louis or Peoria which have funding issues of their own.  There is no time and not enough space to detail how we've all come to this point.  Nor are we going to review the machinations of politics at all levels that have tried and failed to come to grips with the crisis.  Just know that the main way most governmental units have chosen to deal with this has been to raise taxes and take on more debt.  The end result is so much debt that it is crushing almost every governmental unit just as sure as a bursting damn and the ensuing weight of water crushes everything in it's path.  

Now that we've defined the problem we'll start next week discussing how this burden affects the pocketbooks of citizens.  What first started as a trickle has turned into a torrent that threatens to wash many things away.

Coming next time:  Rendering Unto Caesar.

The Silent Epidemic {Reprint Of The Introduction}

I originally wanted to run this series back in the fall of last year but events prohibited me from pulling it together in the comprehensive manner I'd intended.  Instead we're going to run this serially over the next few weeks.  We're going to start off this week with a reprint of the introduction originally posted back in November.   Expect to see these articles run at least once a week until we're finished.  I hope you find it interesting and informative about the tax crisis facing all of us in Illinois.

Today begins a series of posts on the tax and budgetary problems that plaque Illinois.  I'm calling this series "The Silent Epidemic" because Illinois problems seem to me to mimic the issues of high blood pressure and heart disease.  The tax and budgetary issues facing those of us in this state are currently  strangling the people of Chicago, Cook County and Illinois. High blood pressure has been called the silent killer as it sneaks up unknowingly on people and the first sign many have of it is a cardiac event.  Like cardiac issues the problems faced by people in the above named places has been sneaking up on all of us for years.  We are at the stage in my opinion where the cumulative effect of all these budgetary issues cannot be ignored by individuals living in these parts and whatever cure comes from trying to make whole those with the disease will likely be painful and lead to life changing events.

Before I go any further with this introduction and with this series I want to make one thing clear.  I will not be writing a political column.  I write about money.  Pure and simple.   People can debate all they want on the issues of taxes, pensions and equity.  I'm not entering into that arena.  I am not interested going into the history of how we got to where we are or in picking sides in the debate on who's to blame.  My guess if I had one is that there's plenty of blame to go around on both the living and some of the dead.  Instead I intend to be like a doctor and weigh in on the symptoms of the problem, not want to dwell on how my patient came to this event.  If I'm the doctor in the case of using a cardiac event as the reason my patient is in for a visit  I'm going to tell the causes for your chest pain but not weigh in on lifestyle choices that perhaps got you to where you are today.  Rather I'm going to delve into the financial consequences as it effects people that get a paycheck and pay taxes.

Also I'm not going to weigh in on what ought to be done going forward, although at the end I'll tell you what I think is going to happen. Instead I want to look from the ground up view of how these issues are taking a toll on citizens of these various entity's pocketbooks, their savings and ultimately on their decisions on where to live.  To do so I will draw on my over 25 years of experience of living in the twin suburbs of River Forest and Oak Park.  I intend to use real life illustrations of my communities and other people and places to try and paint a picture of how all these financials issues impact folks pocketbooks.

Besides the issues of pensions the city of Chicago has to deal with the issues of poverty race and crime.  Of course other metropolitan areas have to grapple with the same issues and this series is not intended to cover these topics except how the pension crises trickle down onto our most neediest communities.  Most tourists coming to Chicago only see the well traveled spots in the city's core and if that's all you've ever known of our area then you'd be surprised by what many other parts of the city look like.  Chicago is a city of neighborhoods and not a few of these are very poor, blighted and controlled by gangs.  The latest data that I could find indicated that nearly 20% of Chicago's population lived below the poverty level.  Cook County includes Chicago but many other communities as well.  Some of these are very impoverished.  Poverty levels for Cook County {which would include Chicago} is estimated at nearly 16% of the population.  High levels of poverty require high levels of social services which means higher levels of taxes.  The FBI estimates there are over 115,000 gang members in Chicago, not including juveniles or members living in the suburbs.  Chicago year after year is found to be one of the most racially segregated cities in the country.  Many {but not all} of the issues in the northern part of the state are defined by race, but poverty and it's impact on communities is probably as big a root cause.

Having given you this introduction  we need to do an overview of the biggest issue from a fiscal standpoint confronting all levels of government in the state which is the mounting pension burdens assaulting community finances both near and far, state and local.    It is to define these burdens that we'll turn in the  2nd part of this series, "The Weight of Water", which will be posted in a few days.

Coronavirus

The market sold off Friday.  The excuse is the coronavirus impacting China.  My guess is the we'd have seen a sell-off at some point anyway given how much markets have advanced since Labor Day.  Friday's loses were headline grabbing in terms of points but it's worth noting that it was only a bit over a 1% decline in most indices.  

Probability suggests we might see more volatility in the days ahead.  Probability also suggests markets may now be in a bit of a reset mode.  We might have to churn around now for some time.  If I had to guess, and it is only a guess, the higher probability event in terms of the equity markets is that we will see the highs for a very good portion of the year between now and sometime in May.  We may in fact have seen the highs already.  Markets are going to have to deal not only with the coronavirus but will start to focus on the election as we get closer to the fall.  I think it's possible we could see markets move to new highs after the election, but those are in November.  November is a long way off right now.

My thoughts above are based on nothing more than 30+ years of observations and have a very high probability of being wrong so I wouldn't suggest you plan your investments around what I've written above.  Also for those of you that think I'm being negative I'd note that the entire history of this bull markets has been a series of moves higher followed by a period of consolidation.  It will only be par for the course of this bull if we now back and fill for some time given how far we've moved higher since December, 2018.

As for the coronavirus I think we need to see the longer term facts before we get overly concerned.  Obviously nobody should ignore something that is killing people like this and it is of course tragic.  However, as of this writing there are 12,000 known infections worldwide and 250 known deaths.  For comparison the CDC calculates that something like 8% of the US population will contract the flu in any given year.  That translates to over 26 million people in the US alone that will come down with the flu in 2020.  Flu killed over 60,000 people in the US  last year.  There is a lot of fear talk rumbling around regarding this virus right now.  I think we need to step back and wait for the facts before we assume the worst.  I know the market has already cut and run but that's what markets usually do during uncertain times.  My guess is we'll have a better read on this in the coming weeks and can then judge how big of an impact it's going to be on the global economy.

I've alluded to certain events in my life right now that have kept me away from this blog a bit more than I would like.  Right now I'm committing to one post a week.  I'll try to do more but it will depend on the time.  At a minimum look for something here next Monday or Tuesday.

Thanks.