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Encompass Advisors: Week in Review - May 18, 2020

What’s Happening in the Markets, the Economy, and on the Policy Front

When we compare the beginning of this year to our current state, it’s hard to believe that so much can change in just a matter of months. It has been a little over four months since February 12, when we celebrated as the Dow Jones Industrial Average (DJIA) hit its all-time high of 29,551.42. 

And then, the COVID-19 outbreak happened — and we all know what happened next, as March and early April brought some dark days for the financial markets.

Since then, it has been a rocky couple of months, filled with both ups and downs. This week proved that we know very little about what lies around the bend. After a period of remaining steadfast in the face of staggering jobless claims — which recently sent the unemployment rate up over 15% — all of the major indices struggled mid-week before making a comeback on Thursday, when the DJIA rose more than 300 points to break its three-day losing streak. 

The markets closed the week with the DJIA +0.25% higher, the S&P 500 +0.39% higher, and the Nasdaq +0.79% higher.

When thinking about what’s on the horizon, it’s interesting to hear perspective from other subject matter experts and leaders in the industry. This Bloomberg article offers an insider’s look into what some investors are thinking in terms of the markets’ current state and whether or not stocks are overvalued. At the end of the day, we truly can’t know what’s in store for the markets and how they will react. For now, we know one thing is certain: our best defense is to play the long game.

The Economic Outlook: Preparing for What’s to Come, as States Move to Reopen

 As some states move to reopen their economies, while others take a more gradual approach throughout the summer months, the nation is waiting with equal parts anticipation and anxiety to see when the economy will get back on the road to recovery. 

 When we look at the latest data, the effects of measures to stem the spread of COVID-19 are taking their toll. Weekly jobless claims rose by 2.98 million in the week ended May 9, which is slightly worse than what many had forecast. Total claims have now reached nearly 36.5 million over the past two months, which represents the biggest loss in U.S. history. What’s more, some economists have claimed that we haven’t reached the peak of unemployment yet.

 But even though the big picture currently appears grim, some reports have indicated that reopenings and government relief programs could already be working for some sectors. In a recent interview with CNBC, Luke Tilley, chief economist at Wilmington Trust, said that the construction sector, for instance, which lost just under 1 million jobs last month, “… could see a boost in employment as restrictions are lifted for workplaces where physical distancing is easier.” It’s also a sector that could see a big boost from the Paycheck Protection Program (PPP), because construction firms may be able to easily meet the requirement to spend 75% of the loan on payroll costs to turn it into a grant. Other sectors could see similar strides.

 Will the stimulus efforts by the government and Federal Reserve pay off? Will gradual reopenings help get the economy back on track? Only time will tell. In the meantime, the best path you can take is to maintain your current long-term investment strategy, and proactively communicate with our advisory team on any changes in your financial life in light of the pandemic which may affect your plan.

New Stimulus Package Proposal

 On Tuesday, House Democrats unveiled a new $3 trillion stimulus package to combat the economic downturn caused by the COVID-19 pandemic. The bill, which Democrats are calling the Heroes Act, would be the largest relief package in U.S. history. 

 The bill would provide:

  • $1,200 to individuals earning up to $75,000 a year. These payments would also include immigrants and dependents ages 17 and over who were left out of the CARES Act payments. 
  • $2,400 to married couples earning up to $150,000 a year. 
  • $1,200 per dependent with a maximum of three dependents. 
  • An extension of the $600-per-week unemployment benefit through January. 
  • $200 billion in hazard pay for first responders and frontline workers. 
  • $75 billion for increased Coronavirus testing, tracing, and isolation efforts. 
  • $175 billion in rent and mortgage assistance. 
  • $1 trillion for state and local governments. 

Some lawmakers have argued that another stimulus package is not yet needed as states begin to partially reopen their economies. As of this writing, the House is expected to reconvene later today to vote on the legislation.

Social Security Proposal

The White House is reportedly considering a proposal that would allow struggling Americans to take an advance on their Social Security in exchange for delaying their benefits in the future. The payment — which reportedly will be up to $5,000 — would be structured as a loan with a government-set interest rate. Individuals who decide to participate in the program would pay that loan back when they start collecting their first Social Security checks. Their benefits would return to normal after the loan is paid off. 

 We’ll keep you updated on the latest developments from both of these proposals in the coming weeks. 

 Understanding Coronavirus-Related Distributions (CRDs)

Stimulus checks aside, the CARES Act also provides economic relief to struggling Americans in the form of coronavirus-related distributions. Here’s a quick breakdown of what you should know:

What is a CRD?

 A CRD is a distribution that is made from an IRA or employer-sponsored retirement plan to a qualified individual (more on this below) from January 1, 2020, to December 30, 2020. Qualified individuals are allowed to take up to $100,000 from all of their eligible retirement plans without incurring the normal 10% early-withdrawal penalty. 

Do I still have to pay income taxes on a CRD? 

Unfortunately, yes, but the law allows the income taxes from these distributions to be spread out equally over a three-year period. 

Can I repay a CRD?

 Yes, the law allows qualified individuals to repay the distribution amount within three years from when the distribution was received. If you pay income tax on a distribution and then later recontribute the funds to an eligible retirement plan, you will be allowed to file an amended tax return to recover the taxes paid.  

Who qualifies for a CRD?

Under the CARES Act, you are considered a qualified individual if: 

  • You're diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention (CDC).
  • Your spouse or dependent is diagnosed with COVID-19 by a test approved by the CDC.
  • You experience adverse financial consequences as a result of being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19.
  • You experience adverse financial consequences as a result of being unable to work from lack of childcare due to COVID-19.
  • You experience adverse financial consequences as a result of closing or reducing hours of a business that you own or operate due to COVID-19.

While a CRD can provide you with short-term financial relief during this ongoing crisis, an early withdrawal from your retirement plan should always be a last resort. Contact our team today if you feel you could benefit from taking CRDs; together, we can explore all possible funding options. 

As always, we will continue to remain diligent about communicating the latest news, events, and updates you should know during this uncharted time. In the meantime, please don’t hesitate to reach out to us directly if you have concerns, questions, or want to discuss your financial situation. We will get through this, together.  

Stay safe and be well,

Jon Randolph Green
CFP®, CPA, MBA, JD
President and Founder
Encompass Advisors