Economic Distancing
From an investment perspective, the most important question is how quickly the economy will be able to restart after its suspension caused by shelter at home measures. Social distancing is necessary to slow the spread of the virus since this practice allows the healthcare system more time to adjust to the strain from the epidemic. While necessary to limit suffering from the health crisis, this strategy has dire economic consequences.
Roughly 70% of economic activity in the United States is generated by consumption. Economic activity for a portion of this consumption, including housing, utilities and telecommunications services will remain relatively intact. However, a very significant part of this activity depends on face-to-face interactions such as offline retailing, dining, going to the movies, etc. The abrupt stoppage of these transactions across most of the country has put the economy into a state of suspended animation.
The first indication of the impact has been visible through weekly jobless claims. At the beginning of this year, about 200,000 people were filing unemployment claims each week which was a historical low. The first week after the slowdown, claims increased over ten-fold to a record 3.3 million. This week (on April 2nd) claims doubled to 6.6 million. Please see the accompanying chart for a graphic depiction of this change.
It is impossible to determine the extent of the slowdown, but economists have estimated contractions from 15-40% during the second quarter. The impact on corporate revenues and profits is also impossible to calculate now. There will be a handful of companies that do well, but the majority will experience significant declines. Our role now, regarding stock management, is to monitor the portfolio to make sure that the companies can survive this downturn to eventually be able to participate in the rebound. As discussed earlier, our focus is on increasing the quality of the investments.
The government passed a massive $2 trillion stimulus measure (CARES Act) to limit the damage from the virus and social distancing measures. The legislation augments unemployment benefits by adding $600 per week to every check so that laid off workers can meet their needs. The act also backstops large and small businesses with loans and other support. Finally, the Federal Reserve has become a direct lender to businesses and is providing liquidity to the banks as necessary. This action indicates that the Federal Reserve is ready to backstop the economy with whatever tools are necessary.
The government’s hope is that these stimulus measures will support the economy enough so that businesses can reopen and thrive once the social distancing measures are eased. We expect that business activity will eventually return; however, the process will include major hiccups. The virus will impact various regions at different times, and those under stress now will most likely start the recovery process sooner than others.
COVID-19 is the most challenging crisis that many of us have ever faced. We can take comfort in looking both backwards and forwards. All of us are descendants of families that survived the 1918 flu, the Great Depression and two world wars. We can also look forward to the point in time when we are able to physically reconnect with those from whom we are isolated. Finally, we are all doing our best to support each other through the day-to-day challenges that we face.
The Basics
Depending on the market cycle, investors ask very different questions. During bull markets, investors want to know how much their accounts have increased and whether those figures are competitive with others. During bear markets, such as this one, the questions change to whether investors have sufficient cash, money market funds and high-quality fixed income securities to meet their needs.
We do not believe stock prices accurately reflect the long-term value of the shares due to the level of uncertainty. As discussed above, it is unknowable what the economic recovery will look like, so it is even more tenuous to try to predict future earnings, which are necessary to determine fundamental valuations.
To manage through these times, it makes sense for everyone to review the cash flows that they require to meet their expected needs over the near to mid-term. The sources of cash flow could include:
- Work
- Social Security or other benefit payments
- Pension
- Rents
- Investment Income from Interest and Dividends
Each of these sources should be scrutinized to determine how likely they are to continue if conditions remain weak for longer than expected.
The next step of analysis involves a hard look at one’s overall asset allocation to make sure there are enough assets in cash and high-quality fixed income to provide extra funds to meet one’s needs. Quality needs to be assessed since some investments (even on the bond side of the equation) may default on paying interest, and possibly principal, for a period due to financial stress.
The presence of sufficient cash flow plus reserve assets, such as cash and bonds on one’s balance sheet, will allow time for equity investments to recover. Overly optimistic and overly pessimistic outlooks, as well as short term volatility, have always been part of investing in stocks. Historically, the pattern has been for rising earnings and stock prices, which has provided investors with approximately 10% annual returns (including dividends) for the past nearly 100 years. Clearly these returns are not earned every year, nor every five or even ten years. Above average returns are followed by below average returns and vice versa. The time of recovery to a new high has depended on the depth of the decline. While the past will not foretell the future exactly, and while the current pandemic / economic meltdown may be unlike anything that people today can relate to, it too will end.

Depending on the market cycle, investors ask very different questions. During bull markets, investors want to know how much their accounts have increased and whether those figures are competitive with others. During bear markets, such as this one, the questions change to whether investors have sufficient cash, money market funds and high-quality fixed income securities to meet their needs.
We do not believe stock prices accurately reflect the long-term value of the shares due to the level of uncertainty. As discussed above, it is unknowable what the economic recovery will look like, so it is even more tenuous to try to predict future earnings, which are necessary to determine fundamental valuations.
To manage through these times, it makes sense for everyone to review the cash flows that they require to meet their expected needs over the near to mid-term. The sources of cash flow could include:
- Work
- Social Security or other benefit payments
- Pension
- Rents
- Investment Income from Interest and Dividends
Each of these sources should be scrutinized to determine how likely they are to continue if conditions remain weak for longer than expected.
The next step of analysis involves a hard look at one’s overall asset allocation to make sure there are enough assets in cash and high-quality fixed income to provide extra funds to meet one’s needs. Quality needs to be assessed since some investments (even on the bond side of the equation) may default on paying interest, and possibly principal, for a period due to financial stress.
The presence of sufficient cash flow plus reserve assets, such as cash and bonds on one’s balance sheet, will allow time for equity investments to recover. Overly optimistic and overly pessimistic outlooks, as well as short term volatility, have always been part of investing in stocks. Historically, the pattern has been for rising earnings and stock prices, which has provided investors with approximately 10% annual returns (including dividends) for the past nearly 100 years. Clearly these returns are not earned every year, nor every five or even ten years. Above average returns are followed by below average returns and vice versa. The time of recovery to a new high has depended on the depth of the decline. While the past will not foretell the future exactly, and while the current pandemic / economic meltdown may be unlike anything that people today can relate to, it too will end.
The nearby chart shows the history of the stock market through recessions, the Depression, wars, inflation and deflation. Stock prices depend on investors’ confidence in the future and on earnings of the companies in which they invest. As the economy stabilizes and begins to grow again, confidence in the future will also return. For the next few months, investors must live with uncertainty, both in terms of when the pandemic will be controlled and what level of earnings power companies can attain. Markets are always forward-looking and the market bottom will precede what happens in the economy. We see no reason to believe that future long-term returns will be much different than those earned in the past.
CARES Act – Financial Planning Considerations
On March 27, 2020, the U.S. House of Representatives joined the United States Senate in passing a financial stimulus bill known as the Coronavirus Aid, Relief and Economic Security Act (CARES Act). President Trump signed the Act into law on the same day. A significant number of provisions help individuals as well as both large and small businesses. We will address below those provisions most likely to assist a broad number of individual taxpayers.
Individual Federal Income and Gift Taxes
- Delayed Tax Filing until July 15th: 2019 Federal Income Tax filing and payment deadlines have been extended from the customary April 15th due date to July 15th 2020, without penalty or interest. Many states are now following the federal due date extension but be certain to check with your state tax department to ensure that your state of residence is following the federal extension.
- Tax Rebates: As previously announced by Treasury Secretary Mnuchin, certain taxpayers will be eligible to receive a federal income tax cash rebate equal to the sum of $1,200 per taxpayer ($2,400 for married filing jointly), plus $500 for each qualifying child of the taxpayer. A pro-rata phase-out exists on eligibility to receive the rebate based on a taxpayer’s Adjusted Gross Income (between $75,000 – $99,000 for single taxpayers; between $150,000 – $198,000 for taxpayers married filing jointly) as reported in either a 2018 or 2019 federal income tax return.
Retirement Planning Provisions
- Required Minimum Distributions are waived for 2020; typically, individuals who would have been required to take distributions from 401(k), 403(b), Traditional IRAs and Inherited IRAs by December 31, 2020 may elect to forgo this year’s required distribution. Forgoing RMDs this year may provide planning opportunities for those individuals willing to consider partial Roth conversions up to their RMD amounts.
- Pre-59.5 withdrawals of up to $100K will avoid the 10% early withdrawal penalty if made for Coronavirus-related purposes – defined as a positive diagnosis for account owner, spouse of account owner, or dependent, or due to adverse financial consequences from being quarantined, furloughed from work, lack of child care prohibiting ability to work, or from having work hours reduced. Amounts withdrawn would be income taxable but allowed to be allocated to gross income in 2020, 2021, & 2022 to minimize the income taxation bite. Optionally, amounts withdrawn for these purposes can be recontributed without being subject to income taxation if recontributed within 3 years of withdrawal.
- Loans from 401(k) & 403(b) plans normally restricted to the lesser of $50K or 50% of account balance depending on size of account balance will be temporarily increased to lesser of $100K or 100% of account balance.
Expansion of Charitable Distributions
- Deductible Charitable Contributions: Since passage of the Tax Cuts and Jobs Act (TCJA) in late 2017, only taxpayers whose itemized deductions, including charitable contributions, exceeded the standard deduction threshold based on filing status were able to secure an income tax benefit for making charitable contributions of property or cash. Beginning January 1, 2020, individuals who otherwise claim the standard deduction and wish to make cash charitable contributions will receive an “above the line” (itemization not required) deduction against Adjusted Gross Income (AGI) of up to $300.
- Removal of AGI Itemized Deduction Limitation on Certain Qualified Charitable Contributions of Cash: Under the CARES Act, the 60% of AGI limitation has been increased to 100% of AGI for charitable contributions made in cash during calendar year 2020 to qualifying charities. Taxpayers opting to make cash charitable contributions of this magnitude must elect 100% of AGI treatment on the tax return reporting the deduction. The 100% of AGI limitation dollar amount is to be reduced by any other charitable contributions made during the calendar year (for example, gifts of appreciated securities). Further, the term “qualifying charity” does not include cash contributions to private foundations, supporting organizations or donor-advised funds.
Corporate Taxpayers, Small Businesses and Entrepreneurs
- Small Business Tax Credit: An Employee Retention Credit (ERC) has been adopted for corporate taxpayers that have fewer than 100 employees and that do not apply for/receive a Small Business Interruption Loan under the CARES Act. The ERC pertains to all wages paid between March 13, 2020 and December 31, 2020 to employees of firms with fewer than 100 employees whose business (1) was fully or partially suspended by any governmental authority that limits travel, commerce or group meetings due to the Coronavirus, or (2) experienced a “significant decline” (to be defined by Treasury) in gross receipts due to the Coronavirus.
- Medium Sized Business Limitations: Additional thresholds exist for employers with more than 100 employees. Payment of Social Security Taxes (FICA & Medicare) by employers and self-employed individuals due between March 27, 2020 and December 31, 2020 is partially deferred, requiring 50% of payroll taxes to be paid by December 31, 2021 and allowing the remaining 50% of such taxes to be paid by December 31, 2022.
- Added Tax Relief: Other provisions exist regarding a temporary increase allowable for business interest deductions, a suspension of business interest loss limitations applying to calendar years 2018, 2019 & 2020, and the carryback for up to five years of net operating losses incurred during calendar years 2018 through 2020, as well as an acceleration of the corporate minimum tax credit.
The above is only a quick summary of those parts of the act that are most impactful. This legislation is extremely broad and will help many individuals and businesses save thousands of dollars. As always, we recommend that you consult with your tax professionals prior to implementing any strategy or tax law change.
Tribute to the Front Lines
The struggle to confront the Coronavirus epidemic has been analogized to war and we believe this comparison. However, in this war, the front-line soldiers are the healthcare workers, first responders and many people in the service economy. These include the grocery store checkout clerks who keep us fed and the UPS/FedEx drivers who deliver our Amazon packages. These brave individuals are putting their own health and safety on the line every day. We all have friends and family who are engaged in these vital jobs.
THANK YOU!