Letters category: Letters

As we weather the current environment, we are reminded to focus on what’s important—our
health, our families, our community. At Hudock Capital, we continue to be grateful for the
opportunity to help our clients live the lives that they’ve imagined and have been deploying
dynamic strategies to navigate the present challenges and opportunities.

It is in the spirit of serving our mission that we were delighted to learn that Forbes just released
its 2020 Top Women Wealth Advisors and named our own Barbara Hudock as one of the top
ten Women Wealth Advisors in Pennsylvania! This follows additional recognitions announced
earlier this year by Forbes and Barron’s which place Barbara and our firm among the highest
ranked in the nation.

Of course, Hudock Capital cannot do what we do without our tremendous clients or our
amazing team of dedicated professionals. In that sense, Barbara shares her recognition with
each member of the Hudock Capital family, including you. Thank you for being a part of our
family!

As we celebrate our collective successes, we are reminded how fortunate we are, even in these
uncertain times. We are humbled by our clients’ trust and know that our faith in the future is
well placed. On behalf of each of us at Hudock Capital, we hope that you and your family
remain healthy and safe and thank you for your business and your friendship.

Sincerely yours,

Michael J. Hudock, Jr., CPM®
President and Founding Partner
Wealth Consultant

Coronavirus Market Recap

As you probably know, the markets have enjoyed a stellar April.  After hitting a low of 18,591 on March 23¹, the Dow has climbed over 25% since then.  (As of this writing, the Dow sits at 23,650.²) Technically, that means the brief-but-vicious bear market we endured in March is over.

So, does that mean the recent volatility is over, too?  To answer that, let’s recap what’s been happening in the markets over the last two months and what it all means for us.

February-March: How the coronavirus impacted the markets

Back in late January, when the world caught wind of an emerging outbreak in Wuhan, the immediate concern was how the virus would affect China’s economy.  The markets wobbled a bit during this time, but the hardest hits were still to come.

Within a few weeks, the markets realized that COVID-19 was no mere local epidemic.  This was not a repeat of SARS, but something far bigger.  As the virus spread across the world, concerns grew.  How would a global pandemic affect the global economy?  How would it crimp supply lines and consumer spending?  Would it cause a recession?

This was when the wild swings of early March started dominating the headlines.  But from an investor’s perspective, we still hadn’t hit rock bottom.  As the weeks passed, it became clear that we were experiencing something few had ever seen before.  The pandemic wasn’t just affecting people’s health, or the stock markets.  It was changing our daily lives.  As a result, concern grew again.  How long would this all last?  How many people would get sick?  How many would lose their jobs?

The Dow hit its all-time high on February 12 – the apex of the longest bull market in history.³  Within a month, it had fallen over 20%.³  It was one of the fastest slides in history, with several record-setting point drops.  There were more rough days ahead, but toward the end of March, the tide began to turn.

Late March-April: The markets rise

Between March 23 and April 14, the S&P 500 rose 27%.⁴  According to some analysts, it’s the biggest 15-day rally in 87 years. ⁴  The Dow rose even further — to the tune of 29%!⁴

But while the markets seem to be in recovery, the economy has only gotten worse.  Approximately 22 million people have filed for unemployment in recent weeks, and that number is all but certain to go up.⁵  Economies all over the world are facing their sharpest downturns since at least the Great Recession.  And while some countries seem to be “flattening the curve,” the number of worldwide cases continues to climb, including here in the United States.

So, that begs the question: If the economy is struggling, why have the markets been doing so well?  Why are stocks not continuing to suffer, too?

There are two main reasons.

The first reason centers around the government’s response.  On March 25, Congress passed the CARES Act, a massive, $2 trillion stimulus package.  Among other things, it provides funds for both the unemployed and for businesses to keep their staff on payroll.  The Federal Reserve, meanwhile, has lowered interest rates to near 0%.⁶  The Fed has also pledged to buy hundreds of billions in treasury securities and mortgage-backed debt over the coming months in order to stimulate the economy. ⁶  More relief is in the works, and it will certainly be needed.  But these are important first steps, and they have helped to buoy the markets.

The second reason has to do with how the markets often work.  You see, the economy and the markets are not the same thing.  They’re related, but different — and they don’t always move in concert with each other.  The economy moves based on activity, like production, consumption, and trade.  The markets, on the other hand, move largely on anticipation.  When investors expect something will happen, they make decisions based off that expectation.  So, when the markets plummeted in March, it was based on the expectation that unemployment would rise, consumer spending would fall, and the economy would contract.

All those things have happened.  So why haven’t the markets continued to slide?  Because those developments have already been “priced in.”  The massive swings we saw in March were based on what is happening right now.  By the same token, the stunning climb we’ve seen in recent weeks is based on what investors expect will happen in the future — that the provisions of the CARES Act will kick in, more government stimulus will arrive, and the pandemic will end.

So, does that mean volatility is over?  To put it simply: no, it doesn’t.

Late April-Future

Here’s why.  We mentioned a moment ago that the markets often move based off expectation.  But market volatility is driven by uncertainty.  When investors don’t know what to expect, they tend to get nervous — and the result is a topsy-turvy market.  Right now, there is still a lot of uncertainty.  We are dealing with a pandemic for which there is no playbook.  While we can make educated guesses, no one knows when this pandemic will end.  No one knows whether things will get worse before they get better.  To be frank, no one knows whether the government’s actions will be enough.  Should the headlines take a turn for the worse, we may well see the markets fall again.

Now, this doesn’t mean we are due for another round of wild swings like we saw in March.  Here’s what it does mean.  When the markets were in free-fall, we counseled you to avoid making any drastic decisions.  In fact, better to ignore what the markets were doing altogether then stress over what they were doing day-to-day!

Our advice remains the same.  Just as we stayed calm while the markets were falling, we’ll also stay calm while the markets rise.  Just as it wasn’t time to throw in the towel when things looked black, we’ll also avoid irrational exuberance just because the sun is coming out.  Our team relies on preparation, not predictions.  So, we must remain mentally prepared for more volatility in the weeks ahead.  If the markets recover entirely, and even climb to new heights?  Terrific!  We are well-positioned to take advantage of that.  If not, that’s okay too.  Remember, we are in this for the long term.

So, our advice is to focus on three things: Your family, your health, and your happiness.  Our team will continue to focus on the markets.  As always, we will let you know the minute we feel any changes are necessary.  But in the meantime, we will remain in “watchful waiting” mode.

Of course, if you have any questions or concerns, please feel free to reach out via phone or email.  We are always here to serve you in any way we can.

Stay healthy, stay safe, and have a great rest of the month!

Sincerely,

Barbara B. Hudock CIMA®, CPM®
Chief Executive Officer
Founding Partner

Michael J. Hudock, Jr., CPM®
President and Founding Partner
Wealth Consultant

Sources

¹ “Dow sheds another 3%,” CNBC, March 23, 2020.  https://www.cnbc.com/2020/03/22/stock-market-futures-open-to-close-news.html

² “Dow tumbles 600 points as oil’s May contract stages historic plunge,” MarketWatch, April 20, 2020.  https://www.marketwatch.com/story/dow-tumbles-600-points-as-oils-may-contract-stages-historic-plunge-and-wall-st-braces-for-worst-earnings-since-2008-2020-04-20

³ “Dow Highest Closing Records,” The Balance, March 20, 2020.  https://www.thebalance.com/dow-jones-closing-history-top-highs-and-lows-since-1929-3306174

⁴ “The stock market is acting like a rapid recovery is a slam dunk,” CNN Business, April 16, 2020.  https://www.cnn.com/2020/04/16/investing/stock-market-dow-jones-recession/index.html

⁵ “22 million Americans have filed for unemployment benefits,” CNN Business, April 16, 2020.  https://www.cnn.com/2020/04/16/economy/unemployment-benefits-coronavirus/index.html

⁶ “Fed Slashes Rates to Near-Zero and Unveils Sweeping Program to Aid Economy,” The New York Times, March 15, 2020.  https://www.nytimes.com/2020/03/15/business/economy/federal-reserve-coronavirus.html

Breaking down the CARES Act

As you know, the coronavirus pandemic has created both a health crisis and an economic crisis.  As of this writing, there are over 160,000 known cases.¹  By the time you read this, there will certainly be more – and that number does not reflect those who have been infected but not tested.  The economic cost, meanwhile, has resulted in millions of Americans losing their jobs.  Some economists at the Federal Reserve estimate the unemployment rate could rise as high as 32%!²

To help address both crises, Congress recently passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act.  It’s a massive, $2 trillion stimulus package designed to help everything from hospitals, to individuals, to businesses large and small.  Time will tell if it will be enough to blunt the impact of this pandemic, but the fact Congress was able to pass something so significant, so quickly, is a rare feat worth celebrating.

Charles Darwin once said, “It is the long history of humankind that those who learned to collaborate and improvise most effectively have prevailed.”  For many years now, that is not a quote you could usually apply to the United States Congress.  Political partisanship has meant that gridlock usually prevails over collaboration.  Thankfully, both sides of the aisle recently proved the institution still works when people put aside their differences and work together for the common good.

This is major legislation, with benefits for almost every American.  Some of the bill’s provisions are especially important for retirees.  So, to help you understand what the CARES Act does, and how it will impact you, we have prepared a special breakdown.  As we are sending this to all our clients, some information may apply to you, and some may not.  Please read it carefully, and then let us know if you have any questions.

As always, we hope you and your family are staying healthy and safe.  Please let us know if there is anything we can do for you!

Sincerely,

Barbara B. Hudock CIMA®, CPM®
Chief Executive Officer
Founding Partner

Michael J. Hudock, Jr., CPM®
President and Founding Partner
Wealth Consultant

Important Provisions of the CARES Act

The CARES Act is designed “to provide emergency assistance and health care response for individuals, families, and businesses affected by the 2020 coronavirus pandemic.”³  Think of it as a kind of massive care package.  Just as an actual care package is meant to get somebody through a tough time, that’s what the CARES Act is designed to do.  Because so many people have either lost their job, seen their hours cut back, or experienced drastic changes to their daily lives, many Americans must now contend with potential cashflow problems.  The CARES Act contains a number of provisions to help individuals and businesses handle those problems, at least for the short-term.

What follows is a brief overview of the provisions that could affect you and your finances.  Let’s start with:

Direct Payments⁴

What’s the quickest way to ensure people get the money they need?  Pay them directly.  Perhaps the most newsworthy aspect of this bill is that many taxpayers will receive a one-time direct payment to help them cover expenses.

Here’s a breakdown of how it will work.

Individuals who made up to $75,000 in 2019 will receive $1,200.

Heads of Household (single parents, for example) who made up to $112,500 in 2019 will receive $1,200.

Married couples filing a joint tax return who made up to $150,000 in 2019 will receive $2,400.

On top of this, each taxpayer will receive up to $500 for each child they have under the age of 17.  So, for example, a married couple with two children would receive $3,400.

Note that payments decrease for individuals and married couples with income above their respective thresholds.  Specifically, payments shrink by $5 for every $100 earned above the $75,000/$150,000 limits.  The payments disappear entirely for individuals who made $99,000 or more, and for married couples who made $198,000 or more.

So, when will this money actually arrive?  It’s unclear.  The IRS could start issuing payments sometime in April or May, but an official schedule has not been released.  (The CARES Act itself only mandates that payments be made “as rapidly as possible.”⁴)  It’s likely that those who filed their 2019 tax returns with direct-deposit information will receive payments first.

If you haven’t filed your tax return for 2019 yet, please let us know.  We would be happy to work with your tax preparer to expedite the process.

Speaking of tax filing…

New Tax Deadlines⁵

This isn’t technically part of the CARES Act, but we’re going to cover it anyway because it’s important.  Due to the pandemic, IRS has extended this year’s tax-filing and payment deadlines.  Now, taxpayers have until July 15 – up from the standard April 15 – to file their 2019 tax returns.  The deadline to make IRA and Roth IRA contributions is now July 15 as well.

Note that this new deadline applies to everyone, not just those who are sick, under quarantine, or materially affected by the coronavirus in some way.  And if you’ve already filed your return, you should still receive your refund around the same time you would during a typical tax season.

Unemployment⁴

Let’s get back to the CARES Act.

We said a moment ago that direct payments were the most newsworthy aspect of the bill.  But for the overall economy, the bill’s unemployment provisions are probably the most important.  Unemployment claims rose by 3.28 million between March 15-21.  That’s the highest weekly surge in history.  The previous record?  695,000.⁶

To help combat this, the CARES Act provides approximately $260 billion in unemployment assistance for those who lose their jobs.  This includes freelancers, independent contractors, and other self-employed workers.  That’s a major change, because under normal circumstances, they can’t apply for unemployment benefits.

Generally, workers who lose their jobs will receive $600 per week for four months, in addition to what their state unemployment program pays.  The CARES Act also adds an additional thirteen months of federal unemployment insurance on top of a person’s state benefits.

If any family members lose their job, please let us know.  We would be happy to answer their questions or provide any assistance we can.

Business Support⁴

Even those who don’t lose their jobs will still want to keep a close eye on our nation’s unemployment rate.  More people out of work means less people spending money on the economy – which can have a profound influence on the markets.  That’s why one of the most critical things the government can do right now is help businesses avoid laying people off. 

Roughly $350 billion of the legislation’s price tag is geared towards just that.  Companies with up to 500 employees can receive loans of up to $10 million.  Any portion of the loan used to maintain payroll or retain workers – at least through the end of June – will be forgiven.  In addition, businesses can apply for grants of up to $10,000 to cover their operating costs.

For larger businesses, the CARES Act sets aside around $500 billion in loans and grants, especially for hard-hit industries like airlines.  And for companies that are forced to close or furlough workers, the legislation “covers to 50% of payroll on the first $10,000 of compensation, including health benefits, for each employee.”⁷

These are all necessary steps to keep our economy going.  Will they be enough?  That’s an open question.  The answer largely depends on how long the pandemic lasts – and how well Americans commit to social distancing to stop the virus’ spread.  Watch this space.

Retirement Funds⁴

We said at the beginning of this message that some of the CARES Act’s provisions are especially important for retirees.  Let’s cover those now.

First up, Required Minimum Distributions, or RMDs.  In a normal year, anyone 72 years or older would need to withdraw a minimum amount from their IRA or 401(k).  Not this year.  Under the CARES Act, all RMDs are suspended in 2020.  That means you can leave that money in your retirement account for the year if you don’t need it now.  Note that this applies both to retirement account owners and beneficiaries.

People who have already taken their distribution for 2020 can potentially return the money to their account if they want.  This could be a slightly complicated process, so we won’t cover it here.  However, if you want further information about it, let us know.

The CARES Act also waives the 10% early withdrawal penalty for retirement accounts.  Withdrawals will still be taxed, but spread over a three-year period.  Under most circumstances, our advice is to leave your retirement savings where they are, but it’s nice to know that early withdrawals are an option if you need them.

Finally, the CARES Act increases the 401(k) loan-limit from $50,000 to $100,000.

If you have questions about any of these provisions, or how they apply to you, let’s chat!

Combatting the Coronavirus⁴

Finally, it should come as a great comfort to know that the brave doctors, nurses, and scientists on the front lines are getting assistance, too.  Specifically, the CARES Act provides $100 billion for hospitals, $1.32 billion for community health centers, $11 billion for coronavirus treatments and vaccines, $16 billion for additional medical supplies, like ventilators and masks, and $20 billion for veterans’ health care.  You should know, too, that the Act includes a telehealth program so that if you can’t leave home, you can still have a virtual appointment with your doctor.

Our hearts go out to all those giving their time, talents – and sometimes, lives – to keep the rest of us safe.  They are true heroes, and we are so grateful for them.  Let’s all do our part to make their jobs just a little easier by maintaining our distance, keeping clean, and staying home as much as possible.

Conclusion

As you can see, the CARES Act is a loaded piece of legislation.  Time will tell whether more measures are needed, but this is definitely a good start.

Of course, our team will continue poring over these changes.  If there is anything else we feel you need to know, we’ll reach out to you.  In the meantime, if you have any questions about:

• Getting a direct payment
• Filing your taxes
• Protecting your paycheck and/or income
• Your retirement accounts

Please don’t hesitate to let us know.  Whether we’re in the office or working from our own homes, our team is always here for you.

Stay healthy, and stay safe!

Sources

¹ “Cases in U.S.”, Centers for Disease Control and Prevention, March 31, 2020.  https://www.cdc.gov/coronavirus/2019-ncov/cases-updates/cases-in-us.html

² “Coronavirus job losses could total 47 million, unemployment rate may hit 32%, Fed estimates,” CNBC, March 30, 2020.  https://www.cnbc.com/2020/03/30/coronavirus-job-losses-could-total-47-million-unemployment-rate-of-32percent-fed-says.html

³ “Text of S. 3548,” United States Senate, https://www.congress.gov/bill/116th-congress/senate-bill/3548/text

⁴ “Text of the Coronavirus Aid, Relief, and Economic Security Act,” United States Congress.  https://www.congress.gov/116/bills/hr748/BILLS-116hr748enr.pdf

⁵ “New Details From the IRS on July 15 Tax Deadline, Audit Relief,” The Wall Street Journal, March 30, 2020.  https://www.wsj.com/articles/new-details-from-the-irs-on-july-15-tax-deadline-11585087948

⁶ “Unemployment claims soared to 3.3 million last week, most in history,” CNN Business, March 26, 2020.  https://www.cnn.com/2020/03/26/economy/unemployment-benefits-coronavirus/index.html

⁷ “What’s Inside the Senate’s $2 Trillion Coronavirus Aid Package,” NPR, March 26, 2020.  https://www.npr.org/2020/03/26/821457551/whats-inside-the-senate-s-2-trillion-coronavirus-aid-package

What to do while social distancing?  Experiment with new recipes!  We’ve compiled some of the Hudock Capital team’s favorite recipes in a special cookbook for our clients and friends. Enjoy and bon appetit!

On Thursday, March 5, 2020, the Dow fell 969 points – just the latest in a week of wild swings.¹  While monitoring the situation, a headline caught our eye:

“Dow tumbles nearly 1,000 points again, because stocks can’t figure out coronavirus.”² 

To us, this headline illustrates what the media often gets wrong about investing.  But before we dive into that, let’s review how the coronavirus (COVID-19) is impacting the markets.

A wild week

In terms of pure numbers, the first week of March has been one of the wildest in recent memory.  In fact, the Dow had two of its best days ever on March 2^nd and 4^th…but two of its worst days ever on March 3^rd and 5^th. ²  Writers have been comparing the stock market to a roller coaster for decades, but this takes the analogy to a whole new level.

It’s not hard to understand why.  The coronavirus outbreak – which as of this writing has spread to over 100,000 people, with over 3,400 fatalities – is putting a major crimp on business activities around the world.³  Global supply chains, which are the networks between a company and its suppliers, have been dramatically affected.  As a result, some of the world’s largest corporations have warned shareholders that they may not be able to reach their quarterly profit estimates as a result.  Industries like travel and transportation, which depend on the movement of people and goods, have seen business plummet.  This in turn has impacted the energy industry, as less travel and transportation mean less demand for oil.

So.  Coronavirus is definitely taking a toll on global markets.  The question economists are struggling to answer is, “How will coronavirus affect the global economy?” 

Here in the United States, consumer spending is one of the main drivers of our economy.  There have been over two-hundred confirmed cases of COVID-19 thus far. That’s a small number in the grand scheme of things.  Economists’ concern, though, is that the virus may spread, causing people to stay home and consumer spending to slow dramatically.  Nations with far more cases, like China, South Korea, and Italy, are already seeing slowdowns.  The worst-case scenario, according to some analysts, is that economic growth for 2020 could be cut in half if the virus continues to spread.⁴  Should that happen, some nations may well experience a recession.

The Federal Reserve responds

For weeks, analysts expected the Federal Reserve would act at some point.  That’s exactly what they did on Tuesday, March 3^rd, when the Fed announced they would cut interest rates by 0.5%.⁵  The Fed figured lower interest rates would  prompt more spending and lending.  Think of it as giving the economy a dose of Vitamin C.

But the markets fell anyway.

There are a few reasons for this.  While a rate cut was expected, the Fed acted much sooner than many anticipated.  So, rather than prompt enthusiasm, it instead prompted concern.  “If the Fed feels like they have to cut rates to keep the economy going,” the thinking goes, “what does that say about the economy?”

Then, too, there’s only so much that lower interest rates can actually do.  To be frank, the Fed had already spent most of its ammunition on this front.  Interest rates have been low for years and have only gotten lower lately.  Furthermore, interest rates can’t fix global supply chains, or replace lost business.  They won’t fill seats on airlines or keep the machinery running in hard-hit factories.  Nor can they stop coronavirus from spreading.

Viruses are no respecter of borders or laws; they’re certainly no respecter of lower interest rates.

Headline-driven investing

Just typing those words makes us shudder!  Headlines are one of the last things that should drive investing, but that’s where we are right now.  The proof is in what happened on Wednesday, March 4^th.

The night before was Super Tuesday – when fourteen states held presidential primaries.  Joe Biden won most of these states, which buoyed investors, as Biden is seen as more centrist than his main opponent, Bernie Sanders.

What connection does Joe Biden winning have on stocks?  None right now.  It doesn’t change anything about coronavirus.  It won’t magically increase economic activity.  The election itself isn’t for another eight months!  And yet, the markets rose over 1,000 points on the back of that headline…before giving most of it back the very next day when the headlines changed.⁶

Which leads us back to the headline we showed you at the beginning of this letter.

“Dow tumbles nearly 1,000 points again, because stocks can’t figure out coronavirus.” 

Look at those words again: Stocks can’t figure out coronavirus.  Stocks don’t have minds of their own, of course, so our guess is the headline really meant investors can’t figure out coronavirus.

But here’s the thing.  For long-term investors, there’s not much to figure out.

Economists, analysts, and pundits try to divine how today’s news will affect tomorrow.  They create projections to help banks, businesses, and politicians make decisions.  It’s a hard job, there’s no denying.

But no investor can accurately predict how bad the virus will or won’t be.  We’ve seen some commentators make claims about vaccines, or how warm weather will stop the virus in its tracks, or any of a dozen other things.  It’s all speculation.  The fact is, no one knows how long this epidemic will last, or how far it will spread.  No one knows who will win the election in November.  No one knows the future!  We can make educated guesses, but we can’t know with any certainty.  So of course investors can’t “figure out” coronavirus.

Even if we could, the situation would likely change the next day!

To us, the problem with the headline above is that it implies investors should be trying to “figure it out.”  But if we could, there would never be any uncertainty.  Investing would become as predictable as grocery shopping.  But investing doesn’t work like that.  That’s why we don’t make investment decisions based on predictions.  It’s why, during times of market volatility, we don’t chase our own tail, trying to time the markets or make risky bets based on what we guess might happen.

In other words, we don’t need to “figure out” coronavirus.  Let’s leave that to the scientists.  Instead, all we need to do is largely what we’ve already done!  And that is:

1. Determine what kind of investment return you need to reach your goals.
2. Next, since all investing involves some risk, we determine the right level of risk for you.
3. Create a well-diversified portfolio, rebalance regularly, consider and make tactical adjustments as appropriate.

 Remember that times like these can often provide us with some unique opportunities.

In the short term, coronavirus will probably continue to impact the markets.  The global economy will continue having symptoms.  But on its own, coronavirus doesn’t make a good investment bad.  On its own, it doesn’t change what kind of long-term return you need, or how much risk you can afford.  Only when those facts change does our strategy change.  To us, it’s comforting to know that we don’t need a crystal ball to be successful long-term investors.  We don’t need to be virus experts.  All we need to be is disciplined, informed, and prudent.

In the meantime, we expect volatility will continue.  By the time you read these words, the headlines will have changed again.  That means the markets will have probably swung again.  That’s okay.  Because while volatility is never fun, we don’t need to “figure it out.”

We’ve already done that.

One more thing, «Salutation».  While we’re encouraging you to not stress over daily headlines or market swings, we understand that’s sometimes easier said than done.  After all, it’s your money!  So, if you have any questions or concerns about your portfolio, please let us know. We will always be here for you.

Have a great week!

Sincerely,

Barbara B. Hudock CIMA®, CPM®
Chief Executive Officer
Founding Partner

Michael J. Hudock, Jr., CPM®
President and Founding Partner
Wealth Consultant

¹ “Stocks Close Sharply Lower as Anxiety About Virus Returns,” The Wall Street Journal, March 5, 2020.  https://www.wsj.com/articles/global-markets-follow-u-s-stocks-higher-11583376176

² “Dow tumbles nearly 1,000 points again, because stocks can’t figure out coronavirus,” CNN Business, March 5, 2020.  https://www.cnn.com/2020/03/05/investing/dow-stock-market-today/index.html

³ “Tracking coronavirus,” BNO News, Last updated March 6, 2020.  https://bnonews.com/index.php/2020/02/the-latest-coronavirus-cases/

⁴ “Coronavirus is plunging the global economy into its worst crisis since 2009,” CNN Business, March 2, 2020.  https://www.cnn.com/2020/03/02/business/oecd-global-economy/index.html

⁵ “Federal Reserve Cuts Rates by Half Percentage Point to Combat Virus Fear,” The Wall Street Journal, March 3, 2020.  https://www.wsj.com/articles/federal-reserve-cuts-interest-rates-by-half-percentage-point-11583247606

⁶ “Dow soars more than 1,100 points as market rallies off Biden win,” CNBC, March 3, 2020.  https://www.cnbc.com/2020/03/03/dow-futures-show-300-point-pop-as-early-super-tuesday-results-favor.html

It started in China, then spread to South Korea and Japan.  Cruise ships have carried it; tourists have transported it.  Now it’s in Italy and Iran, Thailand and Taiwan, and more countries besides.  It has infected almost 80,000 people and been fatal to over 2,600.¹

We’re referring, of course, to the coronavirus.

COVID-19, as scientists call it, is a new strain of respiratory virus that can cause severe pneumonia and even death.  What started as a local outbreak in the Chinese city of Wuhan has rapidly become much more, and the markets are beginning to take it seriously.  On February 24, the Dow dropped over 1,000 points, and the S&P 500 over 100, after news broke that cases have surged in Italy and South Korea.²

Obviously, the human cost of an epidemic is more important than anything else.  But in addition to being a health crisis, COVID-19 also has the potential to create an economic crisis.  Viruses are small but insidious, and they can infect more than just people.

They can also infect supply chains.

This fact is what has investors – and even some of the world’s most powerful corporations – spooked.  As your financial advisors, we believe that it’s our job to explain why that is, as well as what we should do about it.

The Global Economy

There’s nothing like a virus to remind us that we are all connected.

To show what we mean, look at your phone for a moment.  In a sense, you’re holding a miniature version of the world.  The screen you’re looking at probably came from Japan.  Your phone’s accelerometer likely came from Germany; the gyroscope, from Belgium.  The wi-fi chip may have come from Mexico, or perhaps Brazil; the audio chip, from the United States.

And your phone’s battery?  That probably came from China.³

For a company like Apple to sell you an iPhone, they rely on the work of millions of people based in dozens of countries.  That is a supply chain, one of thousands of arteries that keep the world’s economy beating.

A chain is only as strong as its weakest link, though.  Imagine an epidemic breaks out near one link – a factory that produces widgets, for example.  Suddenly, people can’t go to work.  Manufacturing stops.  Fewer widgets are produced.

Somewhere down the chain, another factory makes gizmos – but they need widgets to do it.  What happens when there aren’t enough widgets?  Soon, there won’t be enough gizmos, either.

And at the end of the chain, the company that turns the widget-powered gizmos into gadgets has fewer of those to sell.  Which means they can’t reach their quarterly estimates, which means their stock price falls.  As do the stock prices of the widget and gizmo manufacturers.

The result is a black day for the markets.  Like the one we had on February 24.

This is exactly what’s happening right now.  With one of the world’s largest economies, China is at the center of many, many supply chains.  From electronics to blue jeans, the world relies on China for its resources and manpower.  But China is also at the center of the current outbreak, with over 77,000 confirmed cases and 2,500 deaths.¹  This is why even companies like Apple and Adidas have recently admitted that COVID-19 will probably affect their bottom line.^4&5

But the story doesn’t end there.

From Asia to Europe

The markets have long known about how the coronavirus could hamper global supply chains.  But as long as the virus seemed limited to China, investors largely shrugged it off.  That all started to change last week.

Take South Korea – small in terms of size, but a giant in terms of industry.  On February 17, South Korea had 30 confirmed cases.⁶  Just one week later, there were over 800.¹

Even more unnerving, to some analysists, is what’s going on in Northern Italy.  Last week, there were only a few reported cases.  As of this writing, there are over 200, mainly centered in Lombardy, where some of the world’s most important carmakers are located.¹  Officials have closed schools and put multiple towns on lockdown to keep the virus from spreading, but the fact that COVID-19 is now established on an entirely different continent is what’s causing fear.

Another cause of fear is that it’s not just supply chains and manufacturing being affected.  Tourism, airlines, energy –many industries have seen a drop in business due to the coronavirus.  And of course, the sheer fact that people have died is enough to make anyone wonder, “Should I be afraid, too?”

Let’s answer that right now.

Fear and financial decisions

Fear is at the heart of every market drop.  Usually, it’s fear of the unknown.  In this case, there are several unknowns for investors to contend with.  Why exactly is this virus spreading so fast?  How far will it spread?  How long will it last?  These are questions that no financial advisor can answer.

But fear, as we know, is a bad reason to make decisions.  Fear of missing out, for example, often makes us behave too rashly.  On the other side of the coin, fear of not getting out leads us to toss away opportunities or abandon the progress we’ve made to our goals.

Fortunately, whenever we feel fear, there are two tools that we can use to steady ourselves.

The first tool is history.  Past performance, as you’ve no doubt heard many times, is no guarantee of future results.  But past is also prologue, which means history can give us a good idea of what to expect in the future.  For example, here is how the S&P 500 performed over a 6-month period after other recent epidemics.⁷

Now, these are all imperfect comparisons, as they dealt with different viruses, at different times, in different regions, in different contexts.  The point is that the markets, while occasionally impacted in the short term by epidemics, are rarely impacted over the long-term.  And as we are investing to help you achieve your long-term goals, it’s the long-term that we care about.

The second tool, of course, is our own plan.  You’ve probably heard us say this before, but we invest expecting volatility to happen.  As your financial advisors, we can’t predict exactly when it will occur, nor always what will cause it.  But we know that it will, so we are prepared for it.  This particular bout of volatility is coming after months of astonishing growth, and a correction has always been bound to happen at some point.  If it’s not coronavirus, it could be the trade war, or the U.S. presidential elections, or any of a dozen other things.

Over the coming weeks, we’ll probably see more scary-sounding headlines.  It’s possible that COVID-19 could spread, and further disrupt the world economy.  It’s possible that should these things happen, the markets will drop – and then climb again when more positive headlines emerge the next day.  Coronavirus is unquestionably a serious issue of global importance, but it’s not worth panicking over.  So, our advice is to not overreact to these day-to-day or even week-to-week swings.  To do that would be like playing whack-a-mole with your investments. Our team certainly won’t do that!

What we will do is continue to keep a very close eye on how the coronavirus is spreading, as well as how the world is handling it.  If we ever feel that the long-term situation has changed, we may then make changes, too.  But in the meantime, let’s continue to be cautious, but never fearful, investors.

As always, please let us know if you have any questions or concerns.  We are always happy to help with both.  Have a great week!

Sincerely,

Barbara B. Hudock CIMA®, CPM®
Chief Executive Officer
Founding Partner

Michael J. Hudock, Jr., CPM®
President and Founding Partner
Wealth Consultant

SOURCES:

¹ “Tracking coronavirus,” BNO News, last updated February 24, 2020.  https://bnonews.com/index.php/2020/02/the-latest-coronavirus-cases/

² “Dow Industrials Close 1,000 Points Lower as Coronavirus Cases Mount,” The Wall Street Journal, February 24, 2020.  https://www.wsj.com/articles/stocks-fall-as-coronavirus-spread-accelerates-outside-china-11582533308?mod=hp_lead_pos1

³ “Where is the iPhone Made?” Lifewire, November 9, 2019.  https://www.lifewire.com/where-is-the-iphone-made-1999503

⁴ “Apple Signals Coronavirus’s Threat to Global Business,” The New York Times, February 17, 2020.  https://www.nytimes.com/2020/02/17/technology/apple-coronavirus-economy.html

⁵ “Adidas, Puma Warn of Coronavirus Blow,” The Wall Street Journal, February 19, 2020.  https://www.wsj.com/articles/puma-tops-hopes-but-warns-of-coronavirus-hit-11582106613

⁶ “S. Korea reports 1 more case of novel coronavirus, total now at 30,” Yonhaps News Agency, February 17, 2020.  https://en.yna.co.kr/view/AEN20200217002900320

⁷ “How the stock market has performed during past viral outbreaks,” MarketWatch, February 24, 2020.  https://www.marketwatch.com/story/heres-how-the-stock-market-has-performed-during-past-viral-outbreaks-as-chinas-coronavirus-spreads-2020-01-22

Breaking down the SECURE Act

In December, Congress passed a new bill called the Setting Every Community Up for Retirement Enhancement Act, aka the SECURE Act.  Besides proving that Congress can make an acronym out of almost anything, the bill – which goes into effect on January 1, 2020¹ – makes some important changes to various rules on saving for retirement.  Many of these changes are positive, in the sense that they should make it easier for people to save more for longer.  However, the SECURE Act also eliminates a popular estate planning tactic that many Americans have used to help their family after they pass away.

To help you understand the SECURE Act and how it may affect your finances, we’ve written this special letter.  There’s a lot to unpack here, so please take a few minutes to read about these changes.  Most are fairly simple, actually, but if you have any questions or concerns, please let us know.  Even though you are not a client of ours, remember that we are always available to help provide financial clarity.  In our opinion, that’s one of the most important things any person can have.

In the meantime, we wish you and yours a Happy New Year! We hope the year 2020 is a great one!

Sincerely,

Barbara B. Hudock CIMA®, CPM®
Chief Executive Officer
Founding Partner

Michael J. Hudock, Jr., CPM®
President and Founding Partner
Wealth Consultant

Important Provisions of the SECURE Act

Before we dive in, understand, that the SECURE Act is over 20,000 words long.  (And in fact, the Senate had to tuck it away in a much, much larger appropriations bill to pass it.)  That means there isn’t room to cover every provision of the new law, and many won’t apply to you anyway.  So, what follows is a brief overview of the major changes that could affect your finances.

Are you ready?  Then take a deep breath as we go over…

Changes to the IRA “stretch” provisions²

For years, one of the most popular estate planning strategies was the use of Stretch IRAs.  When a parent or grandparent dies, they can leave their IRA to their children, grandchildren, or other heirs.  Under the old rules, these beneficiaries could take distributions from their inherited IRA based on their official life expectancy.  This allowed them to “stretch out” the value of the IRA – and the tax advantages that come with it – for a longer period.  For example, if a 50-year old with a life expectancy of 85 inherited her mother’s IRA, she could stretch out her distributions over the next 35 years.

Now, non-spousal beneficiaries who inherit an IRA in 2020 or beyond can no longer do this.  Instead, inherited IRAs fall under the new “10-Year Rule”.  This means that all the money in the IRA must be withdrawn by the end of the 10^th year following the year of inheritance.  At that point, the beneficiary must pay taxes on that money.

Note that the rule does not require the beneficiary to take withdrawals during the 10-year period if he or she doesn’t want to.  That’s important!  Deciding when to take withdrawals should be based on several factors, including the beneficiary’s current financial situation, how close they are to retirement, and when they plan on taking Social Security benefits.

Something else to note: The new 10-Year Rule does not apply to spouses, disabled and chronically ill beneficiaries, and minors.  For the last group, the exception lasts until the child reaches the “age of majority”, which is 18 to 21 depending on the state.  Once they reach that age, the 10-Year Rule kicks in.

Make no mistake: This new rule will have a profound impact on beneficiaries, especially those who are younger and could otherwise have waited decades before making withdrawals (and paying taxes on those withdrawals).  For this reason, if you are either planning to bequeath an IRA to your beneficiaries, or are expecting to inherit one yourself, consider scheduling a consultation with us about your options.  We want to do everything we can to help you and your heirs maximize your retirement savings while minimizing your tax burden.

Changes to Required Minimum Distributions for IRAs²

Speaking of maximizing your retirement savings…

Another change the bill makes is to lengthen the time people can contribute to their IRAs. Currently, retirees can only contribute to an IRA up to age 70½.  Once they hit this milestone, they are required to begin making withdrawals. (These are called required minimum distributions, or RMDs.) Under the SECURE Act, that age would increase to 72. That means retirees have an additional 18 months to benefit from the tax advantages that come with IRAs.

Note: This change only applies to those who turn 70½ in 2020 or later.  Even people who turned 70½ in December of 2019 would still have to take an RMD for 2020.

That’s it for this provision.  See?  We told you some of the changes were simple.

Other IRA Changes²

Here’s another simple change.  Under the old rules, contributions to a traditional IRA were prohibited once a person reached the year they turned 70½.  No longer.  Now, anyone, even those older than 70½, can keep contributing to their IRA so long as they continue to work.

Here’s an example.  Jane turns 70½ in 2020 but decides she wants to continue working.  So rather than withdraw money from her IRA, she decides to make a tax-deductible contribution to it instead.  While Jane must still take RMDs once she turns 72, she decides to keep making contributions every year until she actually retires, as the math still works in her favor.

Obviously, this change only benefits those who continue working into their seventies.  And even then, it may not always make sense to keep contributing to your IRA.  But it’s always nice to have options!

Another change is for new parents.  Under current law, a person must be 59½ years old to make withdrawals from a traditional IRA. If they withdraw money earlier than that, they must pay a penalty of 10% on the amount you took out. There are a few exceptions, such as if they need the money to pay large medical bills, buy a home, or manage a disability. But, generally speaking, the government wants the money inside a retirement account to be saved for retirement.

Under the SECURE Act, new parents can now withdraw funds penalty-free to help cover birth and adoption expenses.  This is especially helpful for younger parents who have high deductible insurance plans. There is a $5,000 cap on withdrawals, though, and they need to be made within one year of the birth or adoption.

Changes to 401(k)s²

The SECURE Act brings many changes to 401(k)s, but most are for businesses to worry about.  There is one change you should know about, though, and it involves annuities.

A type of insurance product, many annuities offer a monthly stream of income, sometimes for life.  This can make them attractive for retirees.  Historically, few 401(k)s contained annuities.  The SECURE Act makes it easier for employers to offer this as an option.

The reason we mention this is because you should get a second opinion before putting your money in an annuity.  Choosing the right annuity can be difficult, as there are many types and features, and some annuities come with high costs.  So, while an annuity may be right for some people, that doesn’t necessarily mean it’s right for you.

If you have questions about this, let’s chat!  We’d be happy to provide you with a second opinion.

Changes 529 Plans²

For many Americans, paying off student loans is a difficult financial burden.

To help pay for their loved ones’ higher education, some parents and grandparents use 529 plans.  Any funds invested in a 529 plan can be used to help pay for college expenses, like room and board or tuition.  The best part is that the funds are exempt from federal taxes, and often state taxes, too, so long as they’re used solely for education expenses.

Under the SECURE Act, parents with 529 plans can make a tax-free withdrawal of up to $10,000 to help pay off their child’s student loans.  This $10,000 limit is per person, not per plan, which means another $10,000 can be withdrawn to help pay the student debt for each of a 529 plan beneficiary’s siblings.

If you have invested in a 529 plan for a child or grandchild with lots of student debt to pay off, let’s talk to see if it makes sense to take advantage of this.

Conclusion

As you can see, the SECURE Act is loaded with changes and provisions for those saving for retirement.  So, again, if you have any questions or concerns, please don’t hesitate to contact us for a free consultation!

In the meantime, remember that we’re here to help you work toward your financial goals.  Please let us know if there’s ever anything we can do – in 2020 and beyond.

Happy New Year!

Sources

¹ Anne Tergesen, “Congress Passes Sweeping Overhaul of Retirement System,” The Wall Street Journal, December 19, 2019.  https://www.wsj.com/articles/senate-spending-bill-includes-significant-changes-to-u-s-retirement-system-11576780736

² Text of “SETTING EVERY COMMUNITY UP FOR RETIREMENT ENHANCEMENT” (page 1532), Senate Appropriations Committee, December 16, 2019.  https://www.appropriations.senate.gov/imo/media/doc/H1865PLT_44.PDF

https://www.mdlinx.com/internal-medicine/article/4288

https://comphealth.com/resources/physician-views-on-retirement-survey-report/

Almost two-and-a-half centuries ago, fifty-six great Americans signed the Declaration of Independence.  It was a document that would change the world, but after the Revolutionary War ended, it languished in relative obscurity for many years.  In fact, to many, the Declaration was merely a simple letter that had served its purpose.  A historical artifact and nothing more.

It wasn’t until Abraham Lincoln that the Declaration took its place as the cornerstone of American ideals.  As a young prairie lawyer, Lincoln saw it as more than just a simple announcement of separation.  To him, it was a statement of human rights.  It was the foundation upon which the United States was built.  Lincoln made it the core of his political vision, referencing it often in speeches and letters, most notably in the Gettysburg Address.

But it was five years earlier that Lincoln spoke some of the most powerful words ever uttered about our nation’s founding document.

In the summer of 1858, Lincoln gave a speech in Lewiston, Illinois.  Concerned that people had forgotten what the Declaration said, he decided to remind them.  Not many Americans know about this speech today.  We had never heard of it until someone shared it with us.  But after reading it, and thinking about it, we’re convinced there’s no better message we can share this Independence Day.

Here is an excerpt¹ of what Lincoln said:

Lincoln on the Declaration of Independence

“My countrymen, if you have been taught doctrines [that] conflict with the great landmarks of the Declaration of Independence; if you have listened to suggestions which would take away from its grandeur and mutilate the fair symmetry of its proportions; if you have been inclined to believe that all men are not created equal in those inalienable rights enumerated in our charter of liberty, let me entreat you to come back.  Return to the fountain whose waters spring close by the blood of the revolution.  Think nothing of me – take no thought for the political fate of any man whomsoever – but come back to the truths that are in the Declaration of Independence.  You may do anything with me you choose, if you will but heed these sacred principles.

The Declaration…was formed by the representatives of American liberty from thirteen States.  These communities, by their representatives in old Independence Hall, said to the whole world of men:

We hold these truths to be self-evident: that all men are created equal; that they are endowed by their Creator with certain unalienable rights; that among these are life, liberty, and the pursuit of happiness.

This was their majestic interpretation of the economy of the Universe. This was their lofty, wise, and noble understanding of the justice of the Creator to His creatures.  Yes, gentlemen, to all His creatures, to the whole great family of man. In their enlightened belief, nothing stamped with the Divine image and likeness was sent into the world to be trodden on, and degraded, and imbruted by its fellows. They grasped not only the whole race of man then living, but they reached forward and seized upon the farthest posterity. They erected a beacon to guide their children, and their children’s children, and the countless myriads who should inhabit the earth in other ages.

Wise statesmen as they were, they knew the tendency of prosperity to breed tyrants, and so they established these great self-evident truths, that when in the distant future some man, some faction, some interest, should set up the doctrine that none but rich men, or none but white men, were entitled to life, liberty, and pursuit of happiness, their posterity might look up again to the Declaration of Independence and take courage to renew the battle which their fathers began – so that truth, justice, mercy, and all the humane and Christian virtues might not be extinguished from the land; so that no man would hereafter dare to limit and circumscribe the great principles on which the temple of liberty was being built.”

Lincoln, who was running for the Senate at the time, finished by saying that it didn’t matter which politician people voted for, or which party they belonged to.  What mattered was upholding the ideals of the Declaration of Independence.  “I charge you to drop every paltry and insignificant thought for any man’s success,” he said.  “It is nothing.  I am nothing.  Judge Douglas [Lincoln’s rival] is nothing.  But do not destroy that immortal emblem of Humanity – the Declaration of Independence.”

This July 4, we hope we all can take a moment to reflect on the meaning of the Declaration of Independence. It goes beyond politics and partisanship.  It’s more than a historical artifact.  It’s the foundation upon which our nation rests.

A nation we’re so grateful to call home.

From everyone here at Hudock Capital Group, LLC, we wish you a safe and happy Independence Day!

Sincerely,

¹ “Speech at Lewiston,” Collected Works of Abraham Lincoln, Volume 2.

https://quod.lib.umich.edu/l/lincoln/lincoln2/1:567?rgn=div1;view=fulltext