Market Update – March 25, 2020

THE WEEK ON WALL STREET:  Upbeat comments by the Federal Reserve Chairman and more signs of an economic turnaround combined to help fuel a powerful rally in the stock market last week.

• Dow Jones Industrial Average rose 3.29%
• Standard & Poor’s 500 advanced 3.20%
• MSCI EAFE index gained 3.87%.(1)

STOCKS CHEER FED SUPPORT: The markets surged higher to open the week, buoyed by a Sunday night “60 Minutes” interview with Fed Chair Jerome Powell, who said that the Federal Reserve would do everything necessary to support economic recovery. Rising oil prices and more states lifting restrictions added to the overall improving investor outlook.

After a day of digesting those gains, stocks moved another leg higher on stronger than expected earnings from big retailers and growing optimism over the global economic recovery. Stocks drifted in the final two days of trading as investors worried about heightening tensions between the U.S. and China.

As we finalize this column, equities are moving strongly higher on the first trading day of the week, driven by positive news on re-opening the economy as well as continued progress in developing a C-19 vaccine.

DIFFERENT VIEWS ON THE ECONOMIC RECOVERY: Treasury Secretary Steven Mnuchin and Fed Chair Powell testified last week before the Senate Banking Committee, providing Senators with two different views of the nation’s economic outlook.2

Secretary Mnuchin suggested a wait-and-see approach before moving ahead with additional fiscal measures.  Mnuchin wants to pause new spending in order to first assess the impact of the already-approved stimulus programs. He believes that the economy will experience a “V-shaped” recovery.(2)

On the other hand, Fed Chair Powell expressed worries that waiting too long for additional fiscal measures could hamper the fragile economic recovery and potentially do long-term damage. It was the third time in a week that the Fed Chair lobbied for further spending by the government. (2)

In addition to Secretary Mnuchin and Fed Chair Powell, there is widespread debate about the need for further federal stimulus right now. The following are just some of the many issues that go into wrestling with this issue: 1) We have yet to see the full impact of either monetary or fiscal policy work their way into the economy. 2) How will businesses and consumers respond to the re-opening of the country? 3) What will the potential effect be from a second wave of the virus? 4) What progress will be made with testing, therapeutics, and the development of a vaccine? 5) How long will it take for the economy to “normalize?”

Given the breadth and the magnitude of these uncertainties, our investment committee remains cautious about the near-term prospects for an unfettered recovery.

PERSONAL SAVINGS RATE JUMPS: The percentage of disposable personal income being saved by US consumers jumped to a five-year high of 9.60% at the end of Q1 from 7.60% at the end of 2019. The below chart is another sign of how consumers react to upheaval in the US economy by hoarding cash in order to hunker down—moves that are good to shore up family balance sheets but are a reminder of how difficult it is to stimulate spending even with liberal fiscal and Fed policy. Since consumer spending accounts for about two-thirds of our GDP, an ongoing, higher savings rate could dampen the recovery. (3)

RMD’S CANCELLED IN 2020 – THINGS TO CONSIDER: As we have discussed in this space several times, the CARES ACT cancelled required minimum distributions (RMD’s) for this year. Given the recent decline in stocks, this was done to stabilize the markets and not force retirees to withdraw monies from their IRAs based on high, year-end 2019 values. According to Pimco consultant Tim Steffen during an interview with Morningstar, retirees who don’t need the RMD from their traditional 401(k)s and IRAs would benefit from skipping the mandatory withdrawal this year. By taking this option they may be better able to reduce their taxable income and could also lessen future capital gains taxes. Another option would be to convert some of their traditional assets into a Roth IRA, which, “gives [them] kind of a double benefit: tax-free growth going forward plus smaller RMDs into the future.” (4)

KEY DATA ON TRAVEL, ALL OF WHICH SURPRISES NONE OF US: