On January 2, 2020, the S&P 500 index started the year at 3,357.85. On March 23rd, the index dropped to 2,237.40 for a loss of -33%. On August 7th, it recovered to 3,351.28 for a year to date gain of 3.73%.
This is interesting indeed, because the last time I checked, unemployment is still over 10.2%, the country is still in the grips of a recession, and there is not a vaccine for the coronavirus. We have riots in many areas and partisan politics is nastier and more divisive than I ever have seen it.
What’s going on? I am not referring to the song by ‘4 Non Blondes.’ Instead, I am going to give you my view of why the markets are doing as well as they are. Let me break it down Barney style.
1. Confidence that a vaccine is coming any day.
2. The personal stimulus checks are keeping us going.
3. The Feds are buying everything under the sun.
I think you get the first 2 points. We know there are vaccines in stage III.
Development, and 2 trillion dollars were spent on individuals and businesses since the crisis started thanks to the ‘Cares Act.’ But what do we mean when we say the Feds are buying everything?
The Federal Reserve, our country’s central bank, controls the currency. Since they make the money, they have an endless supply of it. When the Federal reserve buys bonds (debt instruments of government and corporations) it adds cash to the banking system and decreases the availability of these investments for investors to buy (shrinks supply). How much are we talking about? How about 2.9 trillion dollars!
This quote from Yahoo Finance says it best.
“In the capital markets, a rising tide lifts all boats. By hoovering up hundreds of billions of dollars in bonds, the Fed is essentially freeing up capital that will have nowhere else to go but to the stock market. This isn’t news, of course. The Fed’s interventions and the promises of more interventions are the primary reason that the stock market has been on fire since late March.3
In addition to the Fed’s actions, company earnings are a mixed bag with Technology and Consumer Goods doing well, and Real Estate and Income Equity underperforming the S&P 500. Is a giant crash coming? We don’t see that on the horizon but a pull back from these levels would not be unreasonable. We don’t like to stray into politics, however, there is a risk that if we see a change in the presidency, you might expect a major reset in the markets. Think Bush in 2000 and Obama in 2008. How deep might the sell-off go? I’ll leave that to you to speculate on.
Converting to Roth IRA
Will taxes be higher or lower in the future? Is your income lower this year? These questions are important to think about. Frankly, tax rates are near all-time lows. With the US debt at 26 Trillion dollars, well, yeah taxes will have go up unfortunately. When you get close to retirement, Social Security benefits are affected by income if you claim before full retirement age. Included in that income is tax-free bond interest! After full retirement age, your benefits are taxed depending on your marital status and amount of income.
One way to reduce these taxes and benefit reductions is to fund your retirement (even partially) with a ROTH IRA. Distributions are tax free. If you die, your family will also inherit these funds tax-free! Converting some of an IRA (forever taxed) into a ROTH IRA (never taxed) is a smart money move. It may make sense to convert only part of an IRA annually to keep tax rates low.5
Call us to discuss converting a IRA to a ROTH IRA or to start a Roth IRA.
Family Income Protection
In these times, many people are considering the impact their death or disability will have on their family. There are 3 ways to financially protect your family.
1. Life Insurance. We can help you get quotes from A-rated insurance companies. Since we are Independent Insurance agents, we can shop for a policy that benefits your individual situation. Benefits are paid out tax-free to beneficiaries. For this reason, there may be benefits in moving large sums of money into life insurance policies. We can discuss the estate planning and family protection benefits of Life Insurance.
If you carry specific illness insurance (like cancer policies or hospital only plans), there are life insurance policies that offer critical and terminal illness coverage with living benefits wrapped all in one. This could be less expensive than what you are currently doing.
2. Income Protection. If you become disabled and unable to work, this replaces your income. The benefits are usually tax-free. My first client (in 2000) was a dentist that was confined to a wheelchair due to MS. He had Income Protection before his confinement, so the $80k a year of tax-free income made a difference in his and his wife’s life. But there are nuances to policies that can affect how you qualify for benefits and if you can even continue to work. If you have a policy, let us review it. We recently saved a surgeon client $100,000 in lifetime payments and the ability to continue working as a professor, consultant, or etcetera if he gets injured! If you don’t have one, we can help you get a quality customized coverage plan that protects your income.
3. Long Term Care Financing. The reality of needing care as we age can’t be understated. According to people who add stuff up, you have a 68% likeliness of needing long term care after 65.6 LTC could be at home, in Assisted Living Facility, or at a nursing home. So how do you pay for it without draining your retirement accounts and raising your tax bracket?
LTC insurance is one option. Option two is Life insurance with critical illness benefits and a third option is a Long-Term Care Annuity. If you currently have an annuity, you can exchange for an LTC without paying any additional taxes or charges and get up to 3 times the value in LTC benefits if needed! Each option as pros and cons. Call us to discuss your individual situation.
Sources Citations Bibliography:
⦁ Source Bloomberg.com this is price only without dividends.
⦁ I refer to the lovable purple dinosaur ‘Barney’. The term originates with Craig Alanson, author.
⦁ https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.html
⦁ https://finance.yahoo.com/news/fed-buying-etfs-now-140623575.html
⦁ Converting IRA funds into a ROTH IRA is taxable. Consult with your tax advisor before converting.
⦁ American Association of Retired Persons (AARP). Beyond 50.2003: A Report to the Nation on Independent Living and Disability, 2003, (Washington: AARP 1 Jan 2005).
Supplemental Disclaimers:
This article is informational only and is not investment advice. This is not an offer to buy, hold, or sell investments like securities or insurance products.
Securities and Investment Advisory Services are offered though Toro Bravo Investment Advisors, LLC. Life Insurance and Annuities sold as an insurance broker are not a fiduciary relationship and are not offered by Toro Bravo Investment Advisors, LLC.
Securities or Insurance are not FDIC/SIPC insured and investments contain risk plus could be subject to loss.
Losses could be short term or permanent. Numbers and figures illustrated are hypothetical in nature and past performance is not a guarantee or indication of future results/performance.
We are not affiliated with the Social Security Administration (SSA), Internal Revenue Service (IRS), or any Governmental Agency.
Do not rely solely on the Legal, Tax, or Financial information presented for it may not be suitable for your individual situation.
Consult your legal, tax, and/or financial professional before acting on any strategy or recommendation (i.e. major changes or before initiating the purchase, hold, or sale of any investment or investment strategy).
Every individual’s strategy can differ depending on current circumstances and goals.