Market Commentary - March 2020

By Walter Koon, , CFA® CFP® and Evan Fruits | | 3.26.20

SUMMARY: The markets were shocked and sent into panic mode by the surprise COVID-19 virus as it spread to pandemic status from China during the first quarter 2020. I am reminded of the book by Nassim Taleb in which he discusses the occurrence of “Black Swan Events” which are rare and unpredictable outlier events (in terms of probability theory). As of this writing, at the end of the first quarter 2020, we are still in shock and in seclusion to abate the spreading of the virus.

The impact of the global economic shutdown, even temporarily, will be far-reaching, dramatic and significant.

BUT, we are convinced that our way of life has not been nor will be destroyed by this event and the eventual resumption of a normal life will restore the unbelievable value lost in this most recent panic.

Another book that is a good reminder of the longer-term perspective is Manias, Panics and Crashes: A History of Financial Crises, by Charles Kindleberger. If you have some time, you may want to give this a look (not a particularly easy read).

In this Market Commentary we devote time to the financial options created when markets nosedive in panic. To that end: WHAT CAN WE DO NOW?

  • ROTH CONVERSIONS: Traditional IRA market values have declined sharply and now is an opportunity to CONVERT a portion of that traditional IRA into a TAX FREE ROTH for the future.
    • Any amount converted from your TRADITIONAL IRA is added to your taxable income. The amount converted, though, goes into an account that ALL future distributions will NOT be added to your taxable income.
    • This strategy is worth discussing with your tax preparer and with us to understand the details for your specific situation.

  • REALIZING TAX LOSSES: Realizing taxable losses (in taxable accounts only, so this is not applicable for IRA’s, 401k’s; 403b’s; or other tax-deferred or tax-free accounts) can help offset large realized gains from recent sales in your portfolio or if large capital gains may be expected from mutual fund holdings.
    • Certain rules apply that must be carefully assessed so that the losses are recognized. Selling securities to harvest losses and the subsequent reinvestment of the proceeds must comply with IRS ruling.

  • PLAN FOR CASH NEEDS: For clients who require distributions from their portfolios we plan to cover potential negative markets such as this for up to three years. Market recoveries have, historically, required fewer than 24 months for significant recovery of market value.
    • For clients who have not relied on their portfolios for living expenses, we have and will overweight equities in those portfolios. We can identify opportunities to raise needed funds without locking in substantial portfolio losses if necessary for clients with equity-weighted allocations
    • Avoid realizing losses to raise funds if possible. Consider drawing on excess emergency funds if necessary, to supplement living expenses.

  • INCREASE RETIREMENT PLAN CONTRIBUTIONS: We suggest considering increasing your retirement plan contributions (IRA’s; 401k’s; 403b’s, etc.) during periods of market weakness. Buying into weakness is a tried and true strategy among long-term successful investors.
    • Avoid the temptation to stop or reduce your contributions.
    • Capturing all of your employer matching funds and taking advantage of market opportunities will result in much better long-term performance.

  • CONSIDER REFINANCING DEBT OBLIGATIONS: If you are currently paying long-term debt such as a mortgage, investigate the chance to refinance at a substantially lower interest rate and perhaps shorten the remaining term on your obligation

Refer to our recent BLOGS on our Website: for our current thoughts about the markets and the impact of the COVID-19. In the COVID-19: Market Update March 17 we share insights into significant historical market events and the recoveries following each.

Our advice is to remain calm, avoid panic, and stay safe during these stressful times.

We have already identified potential opportunities to reallocate available cash positions and a portion of fixed income/bond positions into the equity markets when we believe the time appropriate.

We will keep you advised as we see those opportunities arise.