Uncategorized – Page 3 – Bloom Financial, LLC

Covid-19 Economic Update April 29

With talk of the virus permeating everything in our lives, I have some great news just in case you are still hiding in the depths of your basement, taking inventory of your toilet paper, and food supplies, or watching a video tutorial on how to sew your own face-mask on YouTube even though you don’t sew. If so (no pun intended), you’re probably like some of us who could use psychological help navigating the fog of uncertainty that, so far, has left us with far more questions than answers. The financial side of the virus is so important, I would like to try and help offer a steady grip on where we stand regarding financial markets and the economy.

This is great news with the first quarter of our new decade year 2020 arrived with a global pandemic and the most abrupt market decline in history. In just 23 days we saw a market drop of 34%, which is far worse than we have ever seen in history. Now the S&P 500 is only 16% down from the record high and up 29% from the low a month ago while the unemployment rate has passed 26 million lost jobs which is the most we’ve seen since the Great Depression.

While we are in a pandemic and we are not sure how long it is going to last, we are dealing with an oil price collapse where earnings could be deflationary, and an already fragile economy that was indicated by an inverted yield curve months ago. We can easily expect a rough going in the economy before it starts to improve. For better or for worse … all we can say today with certainty is that we have all be touched by the health or economic impact of Covid–19. I realize it’s hard to see any light at the end of the tunnel but on a good note, we have reason to be optimistic about the future.

In a recent interview, Stanford Graduate School professor and former White House economic adviser Edward Lazear referred to the current economic decline as a “supply-based contraction.” In basic terms, the global economy is experiencing a contraction because businesses have either had to dramatically alter or otherwise cease daily operations to crush the spread of COVID-19. Economists believe that the CARES Act and additional stimulus packages from the Federal Reserve will provide the much-needed financial support to small businesses and employees who would otherwise be working.

Because we are not spending money on events, eating out, traveling, shopping, and new washers and dryers, the demand side of our economy has ceased. Since we are not spending as much now, the businesses that benefit from our spending which is the supply side is temporarily shut off in the short term. However, economists also believe this is creating pent-up consumer demand that will soak up new supply as the economy resumes somewhat normal operation. If we use history as our guide, World War II serves as a comparable example of a supply-based blow to the economy that was then followed by successive years of strong economic growth.

This leads me to the reason for optimism regarding your portfolio. The extended relative under-performance of the small and value premiums (with premiums normally being a better return on a risk-adjusted basis) might have caused anxiety and frustration the last few years and, but our research shows that they could be poised for superior performance during the coming market recovery. The small-value premium underperformed by an average of 3.6% during some of the worst market draw-downs in history—6.1% after excluding fallout from the bursting tech bubble in 2002. However, the small-value premium went on to outperform the market during the subsequent recoveries by an average of 20.5%! Again, as you may have heard me reference in the past, I have no ability to foresee the future by reading the large crystal ball that sits on my desk but as we look back to history as our reference, it is not unreasonable to expect a similar outcome in the future.

Obviously, the path forward to recovery remains uncertain, and future levels of market volatility will always be unknown. But our scientific perspective on the future leaves a lot of room for optimism and positivism.

As I mentioned at the beginning of this brief, this is a very unsettling time. Let me rephrase, for some, this is clearly the most concerning moment in history on a global scale since World War II. I completely get it if you are concerned so if you have any questions about your investments, need to inform us of family or work-related changes, or want to discuss your financial planning needs, don’t hesitate to get professional help. Amy and I are not only here to help you reach your financial goals, but we want to make sure that we can help you get through this.

CARES Act for Small Business

The expansive coronavirus-related stimulus package signed into law last week – the CARES Act – has in it several relief measures for small business owners, ranging from various loan programs to tax credits and deadline extensions.

Our broader advanced planning team has compiled a one-page overview of CARES Act programs and benefits so that you can easily review and compare them against each other for planning purposes. Designed with a high-level approach in mind, this visual resource can help you walk through strategic decisions, understand the options available, and determine where to take more specific next steps.

If you are not a business owner, we would encourage you to share this with those you know that may benefit from this very important information.

Get the CARES Act for Small Business Chart

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 I have prepared a special breakdown.

Get the Download Here

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 me know. I 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 I’m 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.

I 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 of your family members lose their job, please let me know. I would be happy to answer their questions or provide any assistance I 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

I 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 is based on timing and could be a slightly complicated process, so I won’t cover it here. However, if you want further information about it, let me 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, my 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.

My heart goes out to all those giving their time, talents – and sometimes, lives – to keep the rest of us safe. They are true heroes, and I am 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, my team and I 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 me know. Amy and I are so thankful our “shut-down” did not occur 10 years ago because current technology has made our jobs a seamless operation. Our back office is fully functional, and my team and I are 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

you,

Important Tax Update, Covid-19

The IRS recently released answers to some commonly asked questions about the tax relief provisions designed to help taxpayers and investors dealing with economic fallout from the COVID-19 pandemic.

Specifically, the IRS moved its deadline to file 2019 federal income tax returns, pay any outstanding balance, and fund an IRA from April 15, 2020, to July 15, 2020. This extension comes as part of relief measures designed to help taxpayers dealing with economic fallout from the COVID-19 pandemic.

Of course, when it comes to taxes, the rules tend to get complicated quickly. So, we distilled all the changes introduced over the past few weeks into a brief easy to understand Q&A, now updated to reflect how the latest information and guidance from the IRS will affect your tax plans.

Click the button below to see the details of the extension and as always, if you have any questions or concerns, please do not hesitate to reach out to us.

Click Here Now

How do you spell tax relief?

On March 18, 2020, the IRS released Notice 2020-17, which provides substantial tax relief designed to help taxpayers and investors dealing with economic fallout from the COVID-19 pandemic. The primary benefit of this relief is an extension of time to pay your taxes. Specifically, with certain conditions, individuals (and trusts) may defer income tax payments that otherwise would have been due on April 15, 2020, until as late as July 15, 2020.

Simply put, the relief works like this:

You still must file either your 2019 income tax return or an extension by April 15, 2020. However, you can delay paying up to $1 million of your outstanding 2019 federal tax liability and your first quarter 2020 estimated tax payment, combined, until as late as July 15, 2020, without incurring any penalties and/or interest.

Of course, when it comes to taxes, nothing is ever really that simple, so here are answers to a few common questions we’ve already been receiving:

Question: Do I qualify for this relief?

Answer: Do you owe the IRS a payment for 2019 income taxes? Do you have to pay a first quarter 2020 estimated tax payment? If the answer to one or both of these questions is “yes,” then you are eligible to receive relief!

Question: Is the $1 million maximum the same for everyone?

Answer: The $1 million maximum applies to all taxpayers (except corporations), including trusts, regardless of filing status.

Question: Is there a special form that must be filed, or other action necessary to be eligible for this relief?

Answer: No. The relief is automatic.

Question: Does this mean that I can wait until July 15, 2020, to make my 2019 traditional IRA, Roth IRA and/or HSA contribution?

Answer: No. The deadline for making these contributions is the filing deadline, not the payment deadline. Because this relief only delays the payment deadline, contributions to the accounts mentioned above must continue to be postmarked by no later than April 15, 2020.

Question: What if I owe more than $1 million between my outstanding 2019 tax liability and my first quarter 2020 estimated tax payments?

Answer: To avoid accruing penalties and/or interest, you must pay any amount you owe in excess of the $1 million maximum amount eligible for relief by April 15, 2020. The balance of your payment can then be made by July 15, 2020.

For example, suppose that you owe a balance of $900,000 to cover your 2019 tax liability, and you have a first quarter 2020 estimated tax payment of $250,000. That means you have $1,150,000 of total payments that would normally be due on April 15, 2020.

To avoid any penalties or interest, you would need to make a payment of at least $150,000 by April 15, 2020. The remainder, $1 million, could be paid as late as July 15, 2020.

Question: If I’m not mistaken, my second quarter 2020 estimated tax payment is due on June 15, 2020. Are you saying that, if I take advantage of this relief, I’m going to have to pay my second quarter 2020 estimated tax payment before I pay my first quarter 2020 estimated tax payment?

Answer: Yep! This is going to be a very weird year for many of us in many ways.

Question: I plan to file my tax return by the April 15, 2020, deadline and would rather just pay my tax liability now so that I don’t have to worry about it. Is that OK?

Answer: Yes. Uncle Sam is always happy to take your tax payments early.

Question: What if I’ve already filed my taxes, and have a payment scheduled to automatically be deducted from my account on or before April 15, 2020?

Answer: You may call IRS e-file Payment Services 24/7 at 1-888-353-4537 to inquire about or cancel your payment. We would suggest, however, that you wait at least seven to 10 days after your return was accepted by the IRS before calling. So, if you filed within the last week, you may have to wait a few more days before calling to stop your payment.

Question: I’m expecting a refund. Is there any reason for me to wait to file my tax return?

Answer: If you expect a refund, it is generally better to file your tax return as soon as possible. Nothing associated with this relief changes that equation.

Summary of Deadlines

April 15, 2020: File your 2019 income tax return or an extension. If your outstanding 2019 tax liability and first quarter 2020 estimated tax payment exceed $1 million when combined, pay the amount in excess of $1 million.

June 15, 2020: Pay your second quarter 2020 estimated tax payment.

July 15, 2020: Pay your outstanding 2019 tax liability and your outstanding first quarter 2020 estimated tax payment.

It’s important to note that this relief only applies to 2019 federal income tax liabilities. If you owe state taxes as well, be sure to check with your tax preparer to see if any additional relief is available at the state level.

This information could change quickly and without much or any notice as additional guidance becomes available, so we will continue to keep you informed.

The Retirement Gamble

Watch The Retirement Gamble

A class action lawsuit has recently been filed against Vail Resorts over the 401(k) retirement plan, for failing to monitor the investments. The suit alleges that the Vail Resorts 401(k) plan has high administrative fees, and poor net performance, which may have put Vail in a breach of fiduciary duties.

Bloom Financial and Mitchell Bloom, Financial Advisor, serves as a fiduciary in the investment advisor role, so we watched The Retirement Gamble with tremendous interest. This film covers exactly what is wrong in the retirement plan industry as noted in the lawsuit against Vail Resorts.

The Retirement Gamble is a must-watch PBS FRONTLINE documentary for those concerned about securing a comfortable retirement. As fiduciaries, we are extremely proud to always act in the best interests of our clients as we deliver independent advice to help them achieve their financial goals.

If you are short on time, you may want to start watching just before the 21:00 minute mark. This part of the film highlights the importance of a well-managed, low-cost, broadly diversified portfolio and to help you understand the importance of working with an advisor who works in a fiduciary capacity.

When clicking the link above, you acknowledge that this is solely for your convenience, and does not imply any affiliations, sponsorships, endorsements or representations in any manner by us regarding third-party web sites. Bloom Financial, LLC and Mitchell Bloom is not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by featured authors are their own and may not accurately reflect those of the Bloom Financial, or Mitchell Bloom. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

https://www.pbs.org/video/frontline-retirement-gamble/

Coronavirus Update March 4, 2020

As we look at where we are, the Coronavirus has infected more than 90,000 people, and is responsible for more than 3000 deaths and is now making its way to the US. Unfortunately, when we are confronted with something like this when we don’t know what the outcome is going to be, it becomes worrisome for our well-being and our money. Especially when you see empty shelves at Costco and the 10 year treasury falling below 1% for the first time in history.

So while we have no idea of how wide this virus is going to spread, reacting out of fear typically doesn’t work out for the best. Of course, you want to make sure that you take precautionary measures to take care of yourself like washing your hands frequently, staying away from people who might be sick. You also want to seriously consider having an appropriate stock of food prescriptions and supplies in the event you are required to be isolated or quarantined at home, and for that, I have provided a couple of attachments below to help guide you on best practices.

One question that keeps coming up over and over is how should we handle the financial side of this epidemic and it doesn’t take a lot to see that these markets have become extremely volatile with stocks falling 11% at the end of February which was the worst week-long stock market drop since the 2008 mortgage financial crisis.

Now I do not doubt that after seeing the markets on its heels with the recent trade war and now the virus, there is going to be a negative drag on the global economy. This is mainly from the disruption of supply chains and global travel. But does this mean that we are going to have one of the largest recessions of all time? At this point, it’s too early to tell and it’s impossible to know how the markets will ultimately respond. But we can look to the past for some answers. And what we know from history is that markets tend to react to an epidemic and or a pandemic in the short term but tend to recover within a few months. This one could take quite a bit longer since I do not think the economy is as strong as it has been reported.

So bottom line, as long as we have had a stock market, it has always come back and I recommend that you go forward with a level head and step back and take a look at your personal and financial situation currently but panic is not going to serve you well in dealing with the Coronavirus as it spreads either on the community or national level.

Pandemic Update Video

Colorado Home Care Guide

Red Cross Home Care Guide

https://emergency.cdc.gov/shelterinplace.asp

Coronavirus On My Mind

With the Dow dropping over 1,000 points this morning to one of its worst draw-downs in history, the novel coronavirus seems to be on investors minds. As the number of infected people continues to grow, so might some of our anxiety about the spread and potential impact of the virus. While we don’t know how many people the virus will infect and the length of this viral cycle, we do know that you may have some questions about how this might impact your investments.

With that, we want to share three investment-related themes to keep in mind. First, don’t give in to the urge to take action. The news stories about the virus can be downright scary, but we need to remember that market prices react immediately to both good and bad information. To potentially make money or avoid potential losses, we would need to trade before it is news. And, of course, we don’t know the future, so any action would be a guess, and any positive result would be luck.

Second, we need to keep perspective. This isn’t the first new virus we’ve seen, and this won’t be the last. SARS, Zika, H1N1 and others have all come and gone. While the concerns at the time were the same (e.g., How quickly will it spread? Will there be a cure? Will it slow down the global economy? Will it impact my investments?), our society has figured out how to overcome past viruses, and markets have done the same.

In fact, markets have short memories regarding epidemics. Markets may initially react to the uncertainty and fear that comes with any new concern, but, for the most part, viruses get contained and investors return to corporate and economic fundamentals. We can see this pattern in the S&P 500 after epidemics like SARS, Zika, and Ebola where we saw annual gains of 20.8%, 17.5%, and 10.4% respectively. Market returns generally have been up in the six- and 12-month periods following the outbreak of a virus or disease. While this is a small sample set, we know that keeping focused on the long-term helps us keep a level head during all kinds of storms.

The third and final idea we want to share is to be on alert. Believe it or not, the Securities and Exchange Commission had to issue a public warning that fraudsters are attempting to play into our natural emotions of fear and greed during this period of uncertainty. There have been reports of social media posts and online ads promising a huge profit by investing in companies that have supposedly found a cure for the novel coronavirus. We’re sure we sound like a broken record on this topic, but there are no sure things or get-rich-quick strategies when it comes to investing.

Our advice remains the same, to stick to your long-term plan and tune out the noise. We invest client money in a way that isn’t dependent on lucky guesses or get-rich-quick schemes. We use investment strategies and prepare financial plans that assume events like these will come and go. So, please, stay positive and focus on your family and your health. If you want to think about the virus, send positive thoughts toward those infected by the virus.

If you have any questions about your investments, need to inform us of family or work-related changes, or want to discuss your financial planning needs, please reach out. We are here to help you reach your financial life goals!

Is this a SARS repeat?

By now, you’ve probably heard about the coronavirus outbreak in the Chinese city
of Wuhan. As of this writing, there have been about 2,900 confirmed cases, with over 80 deaths.¹ Most cases have been within China itself, but the virus has spread to a small number of individuals in over fifteen countries.

As you can imagine, the outbreak has put global markets on edge. On Monday, the Dow dropped over 450 points due to concerns about the virus’s spread.² While there’s no reason to be alarmed, this is a good opportunity to remind ourselves why taking a longer view is so important. I’ll explain what I mean with a brief Q&A:

Q: I’ve been ignoring the news. Can you tell me what’s going on?

Quick recap. Coronavirus is actually a group of viruses that cause respiratory infections. For most people, these infections rarely amount to anything worse than a common cold. But sometimes, certain strains can be either more virulent, more transmissible, or both. Remember the SARS outbreak of 2003? That was also a type of coronavirus.

A new strain of coronavirus is behind the current outbreak. First identified in Wuhan at the beginning of the year, the virus is transmittable from person to person and can cause severe pneumonia, especially in the elderly and people with weak immune systems. The outbreak seems to have worsened in recent weeks, with travelers from China carrying the virus to multiple countries. In response, Wuhan has gone into lockdown, and many countries have evacuated their citizens.

Q: Okay, so why are the markets worried about this?

The immediate concern is what the outbreak will do to China’s economy. As the second-largest in the world, whenever China sneezes, other economies feel the wind. With a virus outbreak, analysts are worried about both slowing consumption and production, as well as dramatically reduced travel to and from China. All these things could impact the bottom-line of those countries and corporations that do business with China. (Which, of course, is most of them.)

The other concern is what will happen if this outbreak turns into a worldwide pandemic. I’m not a scientist, but that seems more like
a scenario for Hollywood screenwriters than investors. On the other hand, China’s decision to put a city of 11 million people on lockdown is a good indicator that they are taking the problem seriously and don’t want it to get worse.

As always, the real culprit here is uncertainty.

No one knows for certain how long the outbreak will last, how bad it will get, how far it will spread, or how it will impact economic growth. The natural instinct, then, is to shut the doors, draw the blinds, stick the money under the mattress, and wait for the storm to blow over. That’s exactly what we’re seeing some investors do right now.

Q: Is that what we should do?

No! While natural instincts are great if you’re trying to avoid getting eaten by tigers, they’re not so helpful with making investment decisions.

Make no mistake, viral outbreaks can have an impact on the global economy. Certain sectors of the markets, like travel, energy, and retail, could be in for a few weeks – or months – of headaches. For example, let’s go back to the SARS outbreak of 2003. In that case, SARS is estimated to have cost the world economy $40 billion.³ The S&P 500 dropped 8.3% during that time, and many other stock markets suffered large losses, too.⁴

But there are two things to remember here.

First, the current outbreak is nowhere near what SARS was. Back then, nearly 800 people died in 17 different countries, and over 8,000 people were infected.³ As of now, this virus is neither as widespread nor as deadly. Furthermore, humanity’s ability to respond to it is much greater than it was 17 years ago. The situation can change, of course, but until it does, it’s important we keep a sense of perspective.

The second thing to remember is that the effect SARS had on the market was temporary. After hitting its low in February of 2003, the S&P then went on a tear, finishing up 26% for the year.⁵ This is in keeping with how global events usually affect the markets: A short, sometimes steep slide as investors try to figure out what’s going on, followed by a longer climb. Generally speaking, it takes long-term trends, or major changes to the economy’s fundamentals, to make long-term changes in the direction of the markets.

Q: So, what should we do about all this?

For the people directly affected by the outbreak, and for the heroic men and women combatting it, coronavirus is a serious issue. For us, this is an opportunity to remember why we shouldn’t overreact to headlines. While headlines can be unsettling, they very rarely require us to make changes to our investment strategy. For that reason, the best thing we can do is to mentally prepare ourselves for more volatility should this outbreak worsen. Of course, mental preparation and emotional discipline are two of the best things we can practice as investors, in rain or shine, in sickness, and in health. But in the meantime, for us here at BLOOM, it’s business as usual. I hope it is for you, too.

¹ “Tracking coronavirus,” BNO News, https://bnonews.com/index.php/2020/01/the-latest-coronavirus-cases/

² “Dow Drops Over 450 Points on Coronavirus Fears,”
The Wall Street Journal, https://www.wsj.com/articles/global-stocks-slide-on-coronavirus-fears-11580119666?mod=hp_lead_pos2

³ “SARS wiped $40 billion off world markets,” NBC
News, https://www.nbcnews.com/business/markets/sars-wiped-40-billion-world-markets-what-will-coronavirus-do-n1122151

⁴ “A History of Coronavirus Outbreaks and the Stock
Market,” Yahoo Finance, https://finance.yahoo.com/news/history-coronavirus-outbreaks-stock-market-204520997.html

⁵ “S&P 500 Historical Annual Returns,” Macro
Trends, https://www.macrotrends.net/2526/sp-500-historical-annual-returns

One Heck of a Decade

As we start the 2020s, we thought it would be interesting to look back at the major themes that defined the 2010s. We’ll skip the geopolitical factors, the rise of social media and the evolution of smartphones to focus on investment themes. The following four investment themes do a fairly good job of summarizing the factors that influence our portfolios:

1. U.S. stocks popped. The U.S. stock market generated substantially higher returns than virtually all other asset classes and delivered those returns with markedly low volatility compared to more typical periods. In fact, looking at every decade from the 1930s through the 2010s, the 2010s had the highest risk-adjusted returns of all nine decades.

2. Non-U.S. stocks flopped. Consequently, international developed and emerging markets stocks generated much lower returns than the U.S. stock market. Over the 2010s, the U.S. market generated annualized returns of 13.6% while international developed and emerging markets stocks earned annualized returns of 6.3% and 4.8%, respectively. Of 49 country stock markets tracked by MSCI, a well-known index provider, the U.S. market had the highest return.

3. Value not as valuable. Value stocks, which are stocks that trade at relatively low price-to-earnings ratios, earned meaningfully lower returns than growth stocks, which are stocks that trade at relatively high price-to-earnings ratios. This contrasts with the longer-term academic evidence showing that value stocks have tended to generate higher returns than growth stocks.

4. Interest rates limboed lower. How low can they go? Apparently, the answer was lower. Interest rates remained low over the entire decade, leading to relatively low returns on most fixed income investments. The 10-year Treasury yield started 2010 at 3.85% and ended 2019 at 1.92%.

This list reminds us there are no guarantees when it comes to investing. Think back to January 2010. The U.S. had just experienced a lost decade—where the U.S. market lost money over the decade—and most investors feared low equity returns or a double-dip recession as we entered the new decade. Neither happened. In fact, quite the opposite occurred.

What will the next decade hold? Since there are no guarantees when it comes to investing, the honest answer is that we don’t know. And, we don’t think we should rely on so-called economic or market experts to tell us.

We handle market uncertainty differently than most. We use academic research and real-world evidence to help us develop an investment philosophy that takes a lot of the guesswork out of investing. This philosophy aligns our investments with factors of return that can potentially add value to our portfolio and diversify into multiple asset classes so we can potentially avoid some of the extremes that accompany investing. In our mind, it allows us to reap the potential benefits of uncertainty.

If you have questions about your investments, need to inform us of family or work-related changes or want to discuss your financial planning needs, please reach out. We are here to help you reach your financial life goals! We wish you and your family a very prosperous new year.

« Previous 1 2 3 4 Next »

Archive

Coronavirus On My Mind