COVID – One Year Later

One year ago, the World Health Organization had recently declared that the spread of Covid-19 constituted a worldwide pandemic. Stringent measures in the U.S. were being taken to slow the spread of Covid and “flatten the curve.” Lockdowns and shelter-in-place orders dealt a tremendous blow to U.S. economic activity. Investors, with no prior experience to handicap a shutdown and eventual reopening of the economy, were driving through a dark and foggy night with no headlights to guide their path.

Yet, their reaction was swift and the first bear market since 2009 descended upon investors. Volatility was intense. In just one day, the Dow Jones Industrial Average lost nearly 3,000 points, or 12.9%. That day accounted for over 25% of the Dow’s nearly 11,000 point peak-to-trough loss.

The major market indexes bottomed on March 23. If we use the broader-based S&P 500 Index as our yardstick, then the bear market lasted barely over a month. It was a swift decline, but it was the shortest bear market we’ve ever experienced. The ensuing rally has been nearly unprecedented. Since bottoming, the S&P 500 Index advanced an astounding 77.6% through March 31. Its 3,972.89 close at the end of the first quarter put it within 1.65 points of the prior March 26 closing high. And that is on top of a series of new highs since the beginning of the year. Since the end of the quarter, the S&P 500 has gone on to the top 4,000.

Let’s back up and take a broader view. If we review the six longest bull markets since WWII, the S&P 500’s advance over the first year tops all other prior bull markets. In second place at 72.4% is the bull market that began in March 2009. That run lasted into February 2020.

But I want to caution you that past performance doesn’t guarantee future results.

If we gauge the first year of the 1990s bull market, the S&P 500 had advanced 32.8% during the same period. It’s an excellent performance for a period that runs about one year, but it would place the start of the long-running 90’s bull market in last place among the six longest periods since WWII.

Where are we headed from here? No one can accurately and consistently predict what may happen to stocks. Nevertheless, let’s look at what’s happened in the second year of bull markets that were born out of bear markets that saw the S&P 500 Index fall at least 30%. Since World War II, there have been six other bear-market selloffs of at least 30%. In each case, the market posted strong returns in the first year, with an average gain of 40.6%. Gains ran into year two, with an average increase of 16.9%; however, the average pullback during those six periods: 10.2%.

So, let’s not discount the possibility of a bumpy ride this year. Treasury bond yields have jumped as the government has embarked on an expensive $1.9 trillion stimulus package and talk of new spending from Washington is gaining momentum. Further, bullish enthusiasm can sometimes spark unwanted speculation. Might the economy overheat and spark an unwanted rise in inflation? Might rising bond yields temper investor sentiment? Up until now, investors have focused on the rollout of the vaccines, reopening of the economy and the benefits these are providing.

Today, momentum favors bullish investors, but valuations seem stretched, at least over the shorter term. When markets are surging, there is a temptation to load up on risk. Yet, we’d counsel against getting too aggressive because of a fear of missing out.

Just as a sound investment plan takes the emotional component out of the investing decision when stocks are falling, it also erects a barrier against the impulse to load up on riskier investments when shares are quickly rising. That is why we emphasize making adjustments to an investment plan that reflect the magnitude of changes in life or lifestyle. Ups and downs in stocks are rarely a reason to make emotion-based decisions in our portfolios.

Avoiding 7 Retirement Traps

You have saved and invested for decades and are now gearing up for retirement, or maybe you have already left your job. While the idea of leaving your career behind may be appealing, it is a monumental change that can also be unsettling for some folks. You will be sailing in a new direction, and you will take on new challenges. Your daily routine will dramatically change, and you’ll begin to rely on a lifetime of savings. What should you do?

1. A more conservative investment posture may be in order. There was little reason for concern when you were 30-years old and volatility struck. In fact, the idea of dollar-cost averaging and buying shares at a lower price may have been appealing. Besides, the market has a long-term upward bias, and it would be decades before you would tap into your 401k or IRA.
   
   But today, market volatility can be much more disruptive. A big decline in stocks at the onset of retirement could create significant problems down the road. We’ll handle these conversations at your leisure, but a shift towards assets that are not as volatile may be more suitable. It’s not that we want to completely avoid equities. Some may be tempted to exit stocks. That might not be the right choice either. Instead, we want to take on the right level of risk. In most cases, some exposure to stocks is the best path. But the growth-oriented strategies of your youth that helped build your nest egg should probably be tempered in retirement.
2. Be careful taking Social Security too early. There are some reasons to opt for Social Security when it becomes available at 62. For many, however, that will reduce their lifetime earnings from Social Security.   Today, the full retirement age runs between 66 and 67 years old, depending on the year you were born. Individuals who collect Social Security beginning at age 62 receive 25% less in monthly benefits than if they had waited until full retirement age. This assumes a full retirement age based on a date of birth between 1943 and 1954.
   
   Delaying Social Security until 70 allows you to receive the maximum benefit that’s available. It will provide you with an additional 32% over what you’d pocket at full retirement age, assuming full retirement age based on a birthdate between 1943 and 1954 (both examples are for illustrative purposes only). Rules governing Social Security are complex, and the information we’ve provided is simply a general overview. Much will go into your decision to begin collecting your monthly benefit. It goes without saying that we are happy to lay out various strategies so that we can best position you when the time comes.
3. Implementing the correct distribution strategy. If all your retirement assets are in a Roth IRA, taxes are much less of an issue when you withdraw for living expenses. However, many of us have our savings in a traditional IRA or 401k. Distributions are taxed at your marginal tax rate. You may also be liable for penalties if you withdraw before the age of 59½.
   
   Watch out for the required minimum distribution, or RMD, for your IRA, which now begins at 72 (70½ if you turned 70½ prior to Jan 2020). You may decide to leave your IRA alone until RMDs are required. Some may choose to take withdrawals prior to 72 as a way to reduce future RMDs and the potential tax implications of large withdrawals when they become mandatory. Let me add that these ideas are general in nature. It’s a complex topic that could be explored in depth. My goal is to make you aware of the idea. There are ways to maximize your benefits and minimize costs. We will tailor our recommended strategies to your specific needs.
4. Spending too much or spending too little. When you retire, your lifestyle will change. You’ll have the opportunity to enjoy new experiences and enjoy them on your terms. But let me gently caution you not to overspend in the early years of retirement. Recognize that you’ll be living on a fixed income, and you have a finite ability to earn extra cash. This is especially true as you get older.
   
   At the same time, some retirees can be too cautious about spending. They have ample reserves but sometimes guard them too closely. We applaud those who want to leave a financial legacy to their children, but balance that desire and have some fun in retirement.
5. Be aware of scams. I won’t spend much time on this as I’ve written about fraud in the past and will gladly provide you with more information if you would like. But be very leery of individuals and companies that prey on the elderly and their desire to grow their savings. We are always happy to provide you with an objective review of any investments you are presented. Remember, if it looks too good to be true, it usually is.
   
   Also, bear in mind that there are certain security habits that should follow you into retirement, such as getting an annual credit report and maintaining the security of your various banking and/or shopping accounts. This past year, many people who have been retired for decades found themselves the victims of unemployment insurance fraud, where scammers collect unemployment benefits by filing fraudulent claims using somebody else’s identity.
6. Watch out for medical expenses. You have Medicare and you probably have a supplemental policy. But deductibles and health expenses that are not covered by insurance are always a challenge.   It’s important to budget for insurance and medical expenses that will likely occur as you get older.
7. You may live longer than you expect. Don’t let the success of your retirement plan be predicated upon saying goodbye to your loved ones shortly after leaving the workforce. Life expectancy and longevity can only be estimated.   Some folks will live well into their 80s and 90s. Continue to plan as if you’ll be tapping your savings long after you have retired.

Lastly, stay active and volunteer. It will help keep you physically fit and mentally sharp. Just as we have a plan for your finances, it’s critical to have a plan that keeps you active and helps you enjoy retirement.

I trust you’ve found this review to be educational and informative. Let me once again emphasize that it is my job to assist you. If you have any questions or would like to discuss any matters, please feel free to give me or any of my team members a call. As always, I’m honored and humbled that you have given me the opportunity to serve as your financial advisor.

Table 1: Key Index Returns

Source: MSCI.com, Bloomberg, MarketWatch
MTD: returns: Feb 26, 2021—Mar 31, 2021
YTD returns: Dec 31, 2020—Mar 31, 2021
*in US dollars