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Commentary – 2020 2nd Quarter


This quarterly letter will be slightly different than usual due to circumstances which are, well, different and unusual. I would like to, as always, connect trends from the underlying economy to financial markets. But right now, it is impossible to look at anything in a silo. I’d also like to make this letter more personal—I am writing from my home (can you hear the barking dog in the background?) and in the first-person!

One thing that won’t be different is our philosophy. We consistently emphasize staying invested, making decisions in a big picture context, and being “in it for the long haul.” When short-term concerns are the clear and present danger, this is truly put to the test. My goal for this quarter is to pull what we can from history and experience, give some much-needed perspective, and, with any luck, play a small role in putting your mind at ease.

They say to write what you know. To that end, I hope that this letter can provide a window into how we at Planning Capital are approaching the crisis. This is first and foremost a matter of public health, but it is our job to help you understand what this all means for your money.

March Madness 2020

The bleachers are empty. The brackets do not exist. The arenas are closed, and the students are at home. This year, “March Madness” took on a whole new meaning.

It’s difficult to boil down the consequences of the COVID-19 pandemic to one concise, neatly wrapped narrative. So, I’ll start with a few major bullet points that demonstrate what the virus has meant for the markets and the economy over the past 30-60 days –

  • This is the fastest bear market on record. In March, we surpassed the crashes of 1929 and 1987 with the fastest 30 percent correction ever. Even during the Internet bubble of 2000, it took over 250 days for the market to lose 20 percent–it took just 22 days in March 2020[1].
  • This is the most volatile the stock market has ever been – during one two-week stretch in March, the Dow Jones Industrial Average experienced its best single day since 1933, as well as its two worst days since the Black Monday crash of 1987. The Dow had five of its 20 best single day returns in March 2020 as well as five of its 20 worst single-day returns1.
  • The S&P 500 is still up over 5% since the end of 2018, but bonds are now beating stocks this century. The S&P 500 drew down 33.7% off its high and the Dow Jones drew down 36.7% off its high. Since the close of trading on Dec. 31, 1999, the Bloomberg Barclays U.S. Aggregate Bond Index has netted investors a cumulative total return of 176% through the end of Q1 2020. The S&P 500, in contrast, has produced a total return of 149% this century[2].
  • A study from Moody’s Analytics showed that more than a quarter of the economy has been shut down since early March, a decline which has never happened so swiftly according to economists. Initial projections estimate that unemployment could spike as high as 30% and GDP could decrease by 15%[3].
  • As if the coronavirus and economic shutdown weren’t enough, Saudi Arabia decided to enter a price war with Russia. Markets were flooded with supply and oil prices plummeted by over 67% to an 18-year low[4].

Pandemics present an interesting set of problems. Currently, the consensus is that the costs of inaction are greater than the costs of action. Doing less may, some day, make sense. But when faced with countless models presenting evidence that a lockdown will save some hundreds of thousands of lives, it’s hard for a politician to answer, “At what cost?”

In a recent briefing, The Economist captured what I thought to be an incredibly important point:

People’s willingness to abide by restrictions depends both on their sense of self-preservation and on a sense of altruism. As their perception of the risks the disease poses both to themselves and others begins to fall, seclusion will irk them more. It is also at this point that one can expect calls to restart the economy to become clamorous.

If the clamor for a return to economic normalcy is anything like the clamor in the toilet paper aisle, then we may be in for some more emotional days on Wall Street. It will be much harder to duck the “at what cost” question when employment numbers and GDP growth fall off a cliff.

It has been my contention that these concerns are the furthest thing from most of our minds right now. Unlike 2008, this downturn was not due to nefarious lending or corporate greed run amok, and investors don’t have the same contempt for a broken system. Most of us are circling the wagons on the home front—making sure our families stay quarantined and healthy.

Furthermore, it’s easy to point to economic shutdowns across the globe as a reason for this bear market. It’s a simple explanation which doesn’t require placing blame or understanding some esoteric financial scheme. There’s also a good argument to be made that the recovery can be just as swift as the decline once lockdowns are lifted and commerce can resume. So, the “cure is worse than the disease” crowd doesn’t have a leg to stand on. But you can rest assured; the longer the shutdown wears on, the more that ongoing economic damage will become the reality even when this is over.

This point is not lost on Jamie Dimon, CEO of JPMorgan Chase. In his annual letter to shareholders, he warned of a “bad recession” at least through the end of this year. “We are exposing ourselves to billions of dollars of additional credit losses as we help both consumer and business customers through these difficult times,” Dimon wrote.

This comes just after the Federal Reserve, almost without hesitation, introduced what essentially amounts to QE Infinity—the plan to print unlimited money and buy an unlimited amount of bonds on the open market, promising to do “whatever it takes” to keep the economy afloat.

As if those ominous headlines weren’t enough, Treasury Secretary Steven Mnuchin casually announced that the U.S. government will likely be taking equity stakes in airlines! Commercial airlines!

It’s obvious that nobody can predict the course that the virus will run, making it hard to say whether the worst of this is in the rearview mirror. What we do know is that global economic issues, coronavirus or no coronavirus, are far from over.

President Trump Wants You to Know He CARES

It’s not just Wall Street getting a bailout—the CARES Act (Coronavirus Aid, Relief, and Economic Security Act) was signed into law by President Trump on March 27, 2020, pledging $2.2 trillion of relief funds. This is the largest relief act in US history; over twice as large as the $831 billion relief package that was enacted during the financial crisis.

The Act allocates 75% to companies, industries, and hospitals, and 25% to individuals below a certain income threshold. The largest amount, $532 billion, is designated as loans to hard-hit industries such as airlines, and to some hard-hit cities and states[5].

There is also a slew of deadlines which have been delayed, rules that have changed (or suspended), and programs that have been set up. It’s not quite as simple as “everyone gets a check” and the planning implications are vast. I will spare you the commentary on this subject and get right down to brass tacks. Here are the major changes from the CARES Act –

Stimulus checks: Taxpayers who fall below the minimum income will receive a one-time check of $1,200 for individuals and $2,400 for couples (reduced by $5 for every additional $100 of income above the minimum). If you make more than the maximum income, then you will not receive a check. The income ranges are $75,000 to $99,000 for single filers and $150,000 to $198,000 for joint filers. If you are eligible, you will also receive an additional $500 for each child under the age of 17. Payments will be made based on 2019 income (or 2018 income if you haven’t yet filed your 2019 tax return).

Beefed up unemployment benefits: People who are eligible to collect unemployment in their state will get an extra $600 a week in benefits for up to four months.

Help for small businesses: The relief package sets aside $377 billion for loans and grants to small businesses through the Paycheck Protection Program. Small businesses with less than 500 employees, self-employed individuals, independent contractors, and sole proprietors are all eligible for loans, some of which may be forgivable. Qualified businesses can apply until June 30, 2020 through any lending institution that is approved to participate in the program through the US Small Business Administration. From personal experience, I can tell you that the banks were not ready for the initial surge of applications and are incredibly lacking in the guidance department.

Required minimum distributions: RMDs from 401(k)s, 403(b)s, and IRAs are waived for 2020. This will give retirees’ account balances more time to recover before RMDs resume in 2021.

Early retirement plan withdrawals: For people who are impacted by COVID-19 (sickness, layoff, furlough, reduced hours, etc.), up to $100,000 can be withdrawn from their retirement plan in 2020 without incurring the 10% early withdrawal penalty. The income tax owed can be paid over three years, or those distributions can be re-contributed to a retirement plan within three years and won’t count toward the annual limit on contributions.

Loans from qualified plans: Participants in 401(k) plans who are impacted by COVID-19 may borrow up to $100,000 from their plan balance and those who have existing loans will be allowed to delay their loan repayments by up to one year.

Social Security payroll tax: Employers and the self-employed can delay the payment of the employer portion of the Social Security payroll tax for the remainder of 2020 and pay back the amount owed over the next two years.

Real ID: The original deadline to get a Real ID for airline travel and access to government buildings was October 1, 2020 and it has been pushed back to October 1, 2021.

2019 federal tax and IRA contribution deadline:  This technically wasn’t part of the CARES Act, but I’m including it here anyway. The deadline for filing 2019 federal taxes and submitting tax payments, as well as the deadline for making 2019 IRA contributions, has been extended to July 15, 2020. Be sure to check your state’s deadline—some states have pushed back their tax filing deadline and some states have not.

Pandemic Politics and Policy

It’s ludicrous to me how anything can be made political nowadays. I’m often reminded of an episode of The Simpsons titled “Tennis the Menace.” Homer installs a tennis court in his backyard but is threatened when his wife, Marge, finds a new doubles partner due to Homer’s ineptitude. His daughter Lisa, ever the academic, plays psychiatrist for Homer to help him cope. The two do not see eye-to-eye, and have the following exchange after a particularly tense makeshift therapy session –

Lisa: Dad, I think you’re overreacting.

Homer: I think you’re UNDER-reacting.

Lisa: This session’s over.

Homer: This session’s UNDER.

Lisa: Goodbye!

Homer: BAD bye!

Virtually indistinguishable from the dialogue between Democrats and Republicans! Whimsy aside, this isn’t far from the truth—a Pew Research Center study released last month found that 59% of Democrats, and 33% of Republicans, viewed the coronavirus a major threat to U.S. health. The same survey found that 12% of Democrats believe President Donald Trump is doing a good job handling the crisis and 23% believe Vice President Mike Pence is doing a good job. Republicans were far more generous, with 82% saying Trump was doing a good job, and 78% giving those same marks to Pence[6].

However, from The Wall Street Journal to The Washington Post and from Tucker Carlson to Anderson Cooper, everyone seems to agree that “normal” may be different in a post-lockdown world. It is a rational thought backed by substantial historical precedent, shown in research just published by the San Francisco Federal Reserve last month.

The study looked at fifteen epidemics, from the Black Death in 1348 through to the H1N1 flu of 2009, which claimed at least 100,000 lives (as of April 14, COVID-19 death toll is approximately 125,000 worldwide). The academics also re-ran their data excluding the Black Death (by far the most lethal) and the Spanish flu of 1918 (because the Great Depression following a decade later might have skewed results). Regardless of size or timing, the study found similar results. In the decades after a pandemic, the following invariably occur[7]

  • Labor gains power over capital: What this means is that wages increase, and shareholder returns decrease. The Black Death, one of history’s truly extreme events, cut Europe’s population by some 40% in less than two years. Naturally, that strengthened the hand of the surviving workers. No other epidemic has had so great an impact, and neither will this one, but similar patterns are emerging. Governments are subsidizing wages and paying workers not to work. Workers who had previously been prepared to accept poor pay and conditions are becoming much more assertive. Most famously, Amazon workers who have long complained about warehouse practices gathered in protest about being forced to work near colleagues who had contracted COVID-19. Amazon responded by making 80,000 new hires.
  • There is no economic recovery: Pandemics are not like wars. Buildings and machines are not destroyed, and so there is nothing to rebuild. From a consumer perspective, the canceled flights can’t be taken, and you can’t retroactively go out to eat. That spending is gone.
  • Interest rates decrease: Wars lead to higher real interest rates, which imply greater economic activity that needs to be controlled. Pandemics are followed by lower real rates, implying sluggish economic activity. The intuition behind this is that there is no shortage of capital that needs to be replaced, as there would be after a war. Further, there is a tendency to save, rather than invest or spend, meaning slower economic growth.

The Federal Reserve swiftly reduced interest rates as a precautionary measure, so you can check that box already. But globally, governments are hell-bent on propping up economic growth. Spain’s prime minister is already calling for a “new Marshall Plan,” referencing the enormous program of investment with which the U.S. supported the reconstruction of western Europe after World War II. The Fed announced unlimited money printing and unlimited bond buying. The U.S. government will take an equity stake in the major airlines. Democrat or Republican, the politicians see the writing on the wall. The question remains whether these measures will be effective.

We hope you enjoyed our comments. If you have any questions, please do not hesitate to contact us. We welcome the opportunity to discuss our thoughts in greater detail. Thank you for your continued confidence in Planning Capital Management.

[1] Matt Topley, “The Black Swan Has Landed”, View from The Top, April 1, 2020

[2] Caitlin McCabe, “Bonds Are Now Outperforming Stocks”, The Wall Street Journal, April 2, 2020

[3] Josh Mitchell, “Dire Economic Numbers Intensify Debate”, The Wall Street Journal, April 9, 2020

[4] Amrith Ramkumar, “Energy Crisis Intensifies as Oil Tumbles”, The Wall Street Journal, March 30, 2020

[5] Hartford Funds, “10 Things You Should Know About the Relief Package”, Client Conversations, April 1, 2020

[6] Susan Milligan, “The Political Divide Over the Coronavirus”, US News and World Report, March 18, 2020

[7] Alan Taylor, “Longer-Run Economic Consequences of Pandemics”, The San Francisco Federal Reserve, March 2020