March Tax Reminder! We are approaching the one-month mark away from the tax deadline for filing 2019 individual returns. If our VNFA Team is preparing your 2019 tax return(s), please send us your tax documents as soon as possible – even if you are still waiting on certain items. You can deliver them to our office or post digital copies to your secure eVault Client Portal.
by Connor Darrell CFA, Assistant Vice President – Head of Investments If readers of The Weekly Commentary should take one thing from this week’s edition, it should be the following: Hang in there. It’s scary, but it will normalize.
It was another week of uncertainty-fueled swings in financial markets as evidence continued to mount suggesting that the global spread of COVID-19 has accelerated. Equity investors gained a brief respite from the selling on Wednesday following Joe Biden’s better than expected performance in Super Tuesday primary voting, but the positive sentiment quickly evaporated, and stocks ended the week with just small gains. However, what positive sentiment that remained on Friday quickly eroded over the weekend after the Italian government placed about a third of the country’s population under quarantine and oil prices declined precipitously due to OPEC’s failure to reach a consensus for how to address the demand shock stemming from the spread of COVID-19.
Resilience and Discipline Remain Key The volatility we have observed over the past two weeks has been extraordinary, with daily market moves over the past 10 trading days having averaged close to 3 percent per day. On Monday morning, trading on the NYSE was halted for 15 minutes as part of procedures that have been in place since 2013. These procedures are designed to provide traders with time to take a deep breath and digest all available information, which is in fact exactly in line with what we have been recommending to investors. With that as a backdrop, we believe it is essential for investors to understand what we are seeing in markets and why.
Across both stocks and bonds, the spread
of COVID-19 has prompted the market to reassess the way in which it views risk.
The reason for that is relatively easy to pinpoint; if people are unable or
afraid to leave their homes, then there is likely to be a substantive impact on
economic activity, productivity, and manufacturing. As such, markets have begun
pricing in a much higher probability that the impacts of COVID-19 will lead to
an economic recession of some kind. Fear tends to compound on itself, and the
collective memory of 2008 still weighs heavily on investors’ minds. The
fluidity of the situation has also exacerbated volatility because news flow has
been quick and fast. In our view, this makes short-term trading even riskier
and the importance of discipline even greater.
At this point in time, it appears abundantly clear that the virus will not be “contained,” and that we will continue to see the number of cases rise around the world. What that means from an economic perspective is still unknown, and that uncertainty will continue to fuel volatility in the weeks ahead. The good news is that the U.S. economy is facing this threat from a position of strength. The catalyst is not fragility in the financial system, and it is not an asset bubble. Additionally, it is difficult to find a point in history where the U.S. consumer was healthier than it is now, and while the recent decline in oil prices has put some areas of the market under pressure, it should translate to savings for the vast majority of Americans. As such, our advice to investors remains the same. A properly constructed, diversified portfolio is equipped to balance risk and return in this environment. Panic is not an investment strategy and attempting to time markets is more akin to gambling than investing; a distinction that is incredibly important since gambling has a negative expected return over time and investing does not.
THE NUMBERS Sources: Index Returns: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized excluding dividends. Interest Rates: Federal Reserve, Freddie Mac
U.S. ECONOMIC HEAT MAP
The health of the U.S. economy is a key driver of long-term returns in the stock market. Below, we grade 5 key economic conditions that we believe are of particular importance to investors.
US ECONOMY
CONSUMER HEALTH
POSITIVE
The consumer has been the bedrock of the US economy through much of the current expansion but is likely to be challenged by the rising fear associated with COVID-19. We are reducing our grade from VERY POSITIVE to POSITIVE and will be watching consumer spending data closely in
the coming weeks.
CORPORATE EARNINGS
NEUTRAL
Corporate earnings growth was weak throughout 2019 as a result of slowing in the global economy and trade policy uncertainty. However, analysts are expecting mid to high single digit earnings growth in 2020, which will be important to sustaining recent levels of equity returns.
EMPLOYMENT
VERY POSITIVE
Hidden amid all of the volatility last week was the February jobs report, which once again exceeded consensus expectations. At this point in time, we still view the potential for permanent job losses as a result of COVID-19 as very low.
INFLATION
POSITIVE
Inflation is often a sign of “tightening” in the economy, and can be a signal that growth is peaking. Recent inflationary data has increased slightly, but inflation remains benign at this time, which bodes well for the extension of the economic cycle.
FISCAL POLICY
POSITIVE
The Tax Cuts and Jobs Act of 2017 lowered the effective tax rates for many individuals and corporations. We view the cuts as a tailwind for economic activity over the next several years.
MONETARY POLICY
POSITIVE
With the potential threat that COVID-19 poses to the economy, attention is now turning to whether the Federal Reserve will take action following its March policy meeting. Markets are beginning to anticipate a rate cut from the Fed, which would provide support for market in the
near-term.
GLOBAL CONSIDERATIONS
GEOPOLITICAL RISKS
VERY NEGATIVE
Our geopolitical risks rating is now VERY NEGATIVE as there is more evidence of the coronavirus spreading outside China. However, we think it is important for investors to disentangle the public health concerns over the near-term from the expectations for markets over the long-term. The
outbreak remains a near-term issue at this time.
ECONOMIC RISKS
NEGATIVE
As discussed in our weekly commentary, COVID-19 represents a real threat to economic activity globally. However, we simply do not yet have the data to support a full analysis of the economic impacts of the disease and quarantine efforts. We plan to continue keeping tabs on a variety of
leading indicators and will update our outlook accordingly.
The “Heat Map” is a subjective analysis based upon metrics that VNFA’s investment committee believes are important to financial markets and the economy. The “Heat Map” is designed for informational purposes only and is not intended for use as a basis for investment decisions.
In
the last several weeks, interest rates have moved to record low levels. As
a result, mortgage interest rates (which tend to closely follow long-term
interest rates), have also moved to historic lows. According to Freddie Mac:
“The average rate on a 30-year fixed mortgage was 3.45% during the week through
Feb. 27, down from 4.35% a year earlier. The average rate on a 15-year mortgage
fell to 2.95% from 3.77% a year earlier.” With rates trending down, you may
want to consider refinancing existing mortgages. This choice will not be right
for everyone. Please take the time to consider your individual financial
situation and personal factors – for example, if you are at the tail end of
your existing mortgage the refinance costs may be greater than the benefit, or
it may not be in your best interest if you are possibly planning on moving in
the next 5-7 years. Make sure you take all of your planning into account and
consult with professionals before making any decisions. A good place to start
would be running your numbers through the mortgage
refinance calculator on our MyRetirementPro.com website.
“When one door of happiness closes, another opens; but often we look so long at the closed door that we do not see the one which has opened for us.” – Helen Keller
