10-15 Associates

“Effort and Courage are not enough without Purpose and Direction” -John F. Kennedy

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For many of us the last month feels like being stuck on the set of a movie and not being able to find the exit. What just weeks ago seemed unimaginable, we are now living; our personal freedom stripped, a daily fear for our personal and family’s health, uncertainty of what the future holds, and economic turmoil unlike any we have ever witnessed. The reaction of the government response has been of historic magnitude and yet we don’t understand if it will be enough to fight this invisible force. History can serve as a guide, but it rarely provides us with a clear path to the future. One thing has always been true in past crises of all shapes and sizes is that the resilience of the U.S. economy and the ability of the human spirit to rise to the occasion has been stronger and more vibrant than the American people are given credit for!

First, let’s review the market reality of what we witnessed over the last month. All eleven sectors of the S&P 500 were negative, with energy leading the decline down 34.97% for the month and 51.06% for the full year. Health care, consumer staples, and technology, weathered the downturn the best giving back 3.98%, 5.86%, and 8.71% respectively. It was the worst quarter for the Dow Jones industrial average since 1987 and the worst start to the year in history. Year to date, the Dow was down a total of 23.2%, the S&P 500 down by 20.0%, and the Nasdaq down by 14.18%. The yield on ten-year treasuries has fallen over 65% since the start of the year, closing out the month at just .67%. The only bright spot was gold, which managed a 1.07% gain for the month and is positive for the year.

I think it is important amid all the fear and confusion that is happening, to gain some perspective. We often remind clients that statistics can tell many different stories depending on what your timeframe is. Most recently, we can reference the full year performance of the S&P 500 in 2019 which was 28.87%. However, in January of 2019, we were just coming off the last quarter correction of 2018, which was a 14.46% decline from the September high to the close of the year. That gave us a low starting point for the calculation of the 2019 rate of return. However, if you looked at the one-year return from that September high in 2018, the market for that period was 2.09% and the 15-month return from October of 2018 to year end 2019, was 10.23%. Keeping that in mind, it should be noted that we started this year near record highs in the market. If we think about the long bull market that we had been in and take a longer-term perspective, the numbers can tell a much more normalized impact of this short-term decline. The 12-month return ending March 31st, is -8.81% and the two-year return over the same period is -2.13%, which does not include dividends. If we pull back to the 5-year return ending this past month, the total return is 24.98% or about 4.99% per year. With dividends reinvested, it is 38.41% or 6.7% per year.

The important part of this analysis for those of us that are long term investors is how that can help us think about the returns going forward. If our starting point is with markets down over 20% from where they were, the future rates of return over the next two years or 5 years have a high probability of being within normal long-term rates of return. This does not mean that we can be confident that the bottom is in or that the recovery is going to be quick. It does, however, put in perspective that the 28.87% return we saw over the 12-month period of 2019 was not a normal year, and that what we have seen over the prior quarter is also not normal. For investors that stick to their long-term asset allocation and invest prudently, returns normalize over time. Weathering these downturns does require a great effort to resist the emotion of reacting to the short term, and the courage to do what history has shown to be the right thing to do.

It is our job to remain focused and dedicated to the purpose we have always been committed to and to allow our decades of experience to continue to give us direction, even during the most difficult of times. We therefore continue to work to understand the impact of the short-term market volatility and stay focused on the long-term outlook. The timeline is still impossible to identify, but it is never too soon to look for what relief and opportunities are made available in these periods of crisis. On a portfolio basis we are strategically looking at all positions and all markets. First and foremost, an analytical review of the companies that we own, with attention to the balance sheet, is an ongoing process. It is helping us identify what companies we want to continue to own and which ones may not be as attractive if the recovery is difficult. We are also looking to take advantage of those businesses that have either held up well or benefitted from the changes the economy is undergoing right now and reviewing the opportunity to replace them with businesses that will have more upside as the recovery begins to unfold. Keep in mind that markets try to anticipate the recovery and don’t wait for it to happen, which will mean buying when it still feels very uncomfortable to do so.

Corporate bond prices have been under pressure as well. As fear mounts about the future earnings of almost every business, it impacts the yield that investors require to lend those businesses money. What this means for us as fixed income investors is that, although we have watched treasury rates drop to unpreceded levels, corporate bonds will offer rates well above the treasury rate. Although current bonds have declined in value, new purchases will offer rates well above what we anticipated just several months ago. Once again balance sheets will matter, and our focus will be to identify those companies that have a better ability to meet their obligations, even under the assumption that the recovery will take some time. With the Federal Reserve now buying not just treasury bonds, but also corporate bonds, this market offers opportunities as well.

The recovery package also brings with it some interesting opportunities that should be explored and taken advantage of. One opportunity offered to retirees is the ability to elect to skip your 2020 required minimum distribution. In an effort to help individuals preserve their assets, the CARES package has a provision that anyone required to take a distribution from their retirement account will not have to do so for this year. If you do not need the to take the money, you have the opportunity to cancel the distribution. If you are taking a periodic distribution, any monies already distributed may be redeposited if the distribution was done within the last 60 days. Those distributions can be treated as a rollover. Any distribution done prior to the 60-day window cannot be replaced. Individuals under 59 ½ may have the opportunity to withdraw up to $100,000 from a retirement plan without penalty. The distribution can be taxed over a three-year period, but you must qualify for the distribution.

Another strategy that has been very effective in the past, is to think about how we can take advantage of depressed asset prices. If you assume that the market will recover over time, consider the advantage of “moving some of these assets.” With the disallowance of the stretch provision for IRA’s that was effective on January 1st of this year, there is new merit to doing Roth conversions, to create tax free future distributions for your heirs. Roth IRA conversions can be funded with existing positions, allowing you to move assets now that are worth less than what they were just a few weeks ago, and the revaluation or future appreciation, will now be tax free. This allows you the opportunity to get a greater percentage of current tax deferred assets into a tax-free account. It is still necessary to pay the tax on the money that you are transferring, so the amount must take into consideration your overall tax situation. This can provide some long-term tax and estate planning benefits. All of our advisors are prepared and will be talking to you about anything that you should be doing that could be advantageous.

From all of us at 10-15 Associates, we hope you are safe and stay healthy!

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