Confidence in a Crisis
/Below is a summary of our recent webinar, "Confidence in a Crisis", originally aired on May 5th, 2020. The Gilbert & Cook team shares insight on the current economic state and explore some financial and investment opportunities. Even though we are in uncertain times, we believe that you still have choices and we believe in finding confidence in those opportunities. Please know that every situation is unique and we encourage you to speak with your Advisor regarding your individual situation.
The Corona-virus Aid, Relief and Economic Security (CARES) Act
Recently the $2.2 trillion CARES Act was signed into law in hopes of helping those most impacted by the COVID-19 pandemic. This brings far-reaching implications for both families and businesses, as well as many opportunities and planning strategies to consider.
Increased Charitable Deductions:
As you might expect, charities are in great need. Charitable donations of cash up to $300 may be as an "above-the-line" deduction when determining your Adjusted Gross Income ("AGI") in 2020. The Act also provides for higher limits (in calendar year 2020) for cash contributions by taxpayers who itemize deductions.
Individual taxpayers will be allowed to deduct cash donations up to 100% of their 2020 AGI - that is up from the limit of 60% in previous (and subsequent) tax years. Corporate taxpayers will by allowed to deduct up to 25% of their taxable income in 2020 - up from 10% in previous years. One caveat here is that the increased limit does not apply to donations to private foundations or donor advised funds - AND to use the increased limits your contributions must be made in cash, directly to the charity.
Qualified Charitable Distributions
Another popular strategy that has often been considered is a Qualified Charitable Distribution ("QCD"). This year, however, you may need to rethink that strategy. Due to the unlimited charitable deduction allowed for cash gifts, IRA holders can utilize cash distributions from their IRAs and give the proceeds to their favorite charity. If you are itemizing deductions for income tax purposes, you can deduct this charitable distribution (subject to reductions in total itemized deduction based on your level of AGI). This may result in a much larger deduction available than in years past, (which was limited to $100,000 (QCDs from IRA accounts)). This may be the only year this strategy can be utilized. We encourage you to talk to your tax preparer and Advisor to determine what strategy is right for you.
Retirement Plan Distributions
Those who have inherited either 401k or IRA accounts in the past will not be required to take distributions in 2020 under the CARES Act. Additionally, if you would have normally had a Required Minimum Distribution ("RMD") from a retirement account in 2020, those have also been suspended for 2020. RMDs are the distributions that you are required to take from your qualified retirement accounts and IRAs at age 72 (formerly age 70 1/2 prior to the SECURE Act passed at the end of 2019). Many people use these retirement plan distributions for their day-t0-day cashflow, while others have just had to deal with the required distributions as part of their annual personal tax planning. Again, every situation is different so please consult with a qualified tax professional if you have questions about your specific tax situation.
Prior to the CARES Act, if you were under the age of 59½, typically you paid a 10% penalty to take a withdrawal from a retirement account. In calendar year 2020, however, if you are under 59½ AND affected by COVID-19 (specific requirements in the Act must be met), those withdrawal penalties are waived for distributions up to $100,000 (or 100% of your account, if less). Keep in mind that you will still be required to pay income tax on the withdrawal amount, just the 10% early withdrawal penalty is waived. Note: There are also provisions that the withdrawals will not be taxed IF the amounts are returned to the retirement account(s) within specific time-frames. Again, consult with your tax advisor as it relates to your personal tax and financial picture.
Timely Tax & Investment Strategies
Tax Loss Harvesting
You may have heard the saying, “when the market is down, you don’t lose any money until you sell the investment and recognize the loss.” So why would you want to sell at a loss?
We are NOT recommending that investors get out of the market. We always challenge investors to think about investment strategies that may be beneficial for their overall individual tax and financial situations.
Tax Loss Harvesting occurs when selling a security at a price less than you paid for it in order to use the recognized loss to offset other recognized gains and/or ordinary income for the current or future tax year. Harvested capital losses can be used to offset capital gains later in the year or possibly decrease your other taxable income (up to $3,000 per year). Any net capital losses (over the $3,000 annual maximum that can be used against ordinary income) can be carried forward to future years. It is important to 1) consider the financial plan you and your Advisor have put into place; 2) review your specific portfolio; and 3) see if there are some losses that it makes sense to harvest. Once again, we encourage you to talk with your Advisor and tax professional to see what is best for you.
Roth IRA Conversions
What is a Roth Conversion? Basically, it is when you take money out of your traditional IRA and move it into a Roth IRA. In doing that, you are trading tax deferred dollars inside your traditional IRA for completely tax-free growth and tax-free withdrawals in the future in a Roth IRA. As the original account owner, you are not required to take RMDs from Roth IRAs, and the Roth IRA is a great legacy asset to leave for the next generation(s).
There are tax considerations to keep in mind, though. You DO have to pay income tax on the value of the assets that you convert from “traditional” to Roth. Although Roth IRA contributions do not provide immediate tax benefits like traditional IRAs, there is more flexibility in the future when it comes to withdrawing the funds and planning for taxes. This could be an opportune time to take advantage of this simple tax strategy (the Roth Conversion). Be sure, however, to consult with your tax advisor to determine your specific income tax implications.
Frontloading Contributions
If you are a long-term investor, there can be some good opportunities when the market is down. We have encouraged many of our clients to make their annual 401(k) or IRA contributions while the market is down (thereby providing an opportunity to buy into portfolios at a lower cost).
How to Keep Score During COVID-19
As we started into the economic understanding of this pandemic just two months ago, the world had three big, real-time scoreboard numbers that everyone was watching: 1) the number of new COVID-19 cases; 2) initial unemployment claims; and 3) the stock market. And ALL the numbers were bad! We are still getting constant doses of “Breaking News” and the latest stock market fluctuations. Since our March article, “What Turns a Healthcare Crisis into a Financial Crisis”, we’ve seen the following play out: forced shelter in place, forced business shutdowns, business revenue loss, job loss, economic contraction, debt and rent delinquencies, state and local governments strained, etc.
So, let’s call it what it is, the US is in the midst of a recession. We were due, after the longest run in history of uninterrupted economic expansion. Recessions, as a matter of course, are normal parts of the economic cycle. However, we couldn’t have predicted a recession due to a forced closure of vast parts of the economy due to a global pandemic. So how bad is this recession compared to others?
Gross Domestic Product (GCP)
In the 1st Quarter of 2020, it was reported that US goods and services were down -1.2%. That of course is -4.8% on an annualized basis – which is the reported number for the headlines. Estimates now for the 2nd quarter – April, May, June – are worse yet. Depending on how quickly the economy reopens, probably down somewhere between 20 – 30% on an annualized basis. That would mean that in the first two quarters of the year, the GDP would have contracted somewhere between 6-9%.
To put that into perspective, the entire 2008-2009 contraction was -4%. And it took six quarters to play out. The first half of 2020 will be a number that, most likely, far surpasses that. From a single quarter perspective, if we hit the 6-9% contraction level in the second quarter, we are basically retracing our steps to 2016 GDP levels.
Bear Market Drawdown and Recovery
From the highpoint on February 19th, to down -34% on March 23rd took 23 trading days. Let’s look at how quickly, and compressed, that market recovered so far. On May 5th, we are up more than 28% from that bottom - a very compressed recovery time of only six weeks. So, what happened? The government has stepped in and provided various supports for our economy, including bond market backstops and the CARES Act as mentioned above.
The US Stock Market is a regenerating, rejuvenating mechanism. After a financial crisis, we find that opportunities emerge, and new ideas replace the old. The economic world is always evolving and adapting, and the stock market is the best way to participate in that. As investors, we have to be focused on the long-term nature of the market. If the recovery takes longer than expected, the markets will likely react negatively. We will need to be patient in terms of our expectations for stocks and GDP output.
Resetting Expectations
As we look at our current economic situation, we must reset our future expectations upward. 2020 saw Gilbert & Cook start the year with relatively conservative stock and bond expectations. We were at historic highs in the stock market and historic lows in interest rates. We will admit, we did not anticipate a pandemic and recession in 2020. But given that, all stock categories and debt categories (except US Treasuries) now have better long-term expectations from where we sit today. In this pullback, we do hit a reset button to some degree. In periods of crisis and downside like this, it is not the correct time to stray from the long-term financial plan we have put into place.
Keeping Score
Initial jobless claims are a score-keeping mechanism for the economic downtown and recovery. Since the shutdown at the beginning of the COVID-19 crisis, in the last six weeks we’ve seen 30 million people file for initial unemployment claims at their state's unemployment office.
What we truly believe here is that those jobs are not gone – they are in hibernation. Out of isolation – when safe, those workers will return to their jobs and businesses will once again be back near full-capacity. Part of the government stimulus program increased weekly unemployment benefits. In most states, the additional stimulus makes the average replacement wage equal or greater than 100%. Therefore, the impact to individual households will be much more tolerable than in previous economic crises. We are more focused at this time on the number of continuing unemployment claims. In just the last 2 weeks, we saw more workers going back to work than the number of new claims filed.
Risks
The sole villain in this drama is the Coronavirus itself. If you eliminate that enemy, you see the markets react very positively. The risks are:
A virus relapse causing the economic resuscitation taking longer than anticipated. How much uncertainty will people tolerate? As we go back to work, are we willing to trade possible loss of life? Will the country go back to work, or will there be a fear of further contamination? A recovery is dependent on bringing jobs and consumers back out of hibernation and reinvigorate the economy as quickly and as safely as possible.
Dividend Payouts – Certain providers in energy, retail, and real estate sectors are cutting their dividend payouts.
Opportunities
Know yourself as an investor. The stock market will reinvent and regenerate itself. Lean into your Gilbert & Cook team to help you know your course and follow your plan.
We believe that American ingenuity and resilience will persevere. The world health and science communities are smarter and better funded than at any time in history. Ever.
We believe the debate is around when the virus will end, not if. And that COVID-19 is the only enemy. If the virus is contained then all those other issues that we are talking about will begin to dissipate.
We believe that life after the virus will be different. In the same way that 9/11 changed our way of life forever, this pandemic may also. But we will figure it out. And every day, all across the world - people get up, they go to work, and they make the lives of their families and communities better.
Be safe & healthy. Please reach out to your Gilbert & Cook family if there is anything that you need.
Disclosure: This event is for informational purposes only. Gilbert & Cook, Inc. does not offer tax or legal advice. You should consult with an attorney for legal advice and a qualified tax professional for tax advice. Gilbert & Cook, Inc. is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where Gilbert & Cook, Inc. and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Gilbert & Cook, Inc. unless a client service agreement is in place.
