The Virus/The Markets/The Economy and… Where are the OPPORTUNITIES?!

The Virus

Many experts are claiming that the number of people in the US testing positive for the virus will continue to increase, as more people get tested.   The number of new cases will peak, level, then decrease.  That’s what we’re hearing, which appears logical, however some are predicting a more dire fate…. Assuming the peak-level-decrease happens, we will then hear how to proceed with getting back to normal living.

How long will this take?  What will be the REAL impact on consumers and businesses? There are many variables…. far too many for a blog.  We simply cannot quantify the situation with accuracy at this time.  Many are starting to make predictions.  I certainly will not, but hope it’s sooner than later!  We’ll know when we get there.

The Markets

Equities are down significantly, with the speed of the decline an absolute WOW!  So much leverage tied up in margin getting unwound, which is one of the causes for the speed of the downturn.  When an investor (typically very large) receives a margin call, they are forced to sell securities immediately at whatever price is available, which is certainly a major cause of the quickness in this downturn.  Many are now panicking, not knowing the bottom.  Markets almost always overshoot to high, making people feel over confident, and overshooting to the downside, making investors feel as most do now.  At some point, we’ll realize life is returning to normal with people working, spending money, contributing towards the positive and having fun!

Rebalancing your portfolio is starting to look attractive, however hard to determine when! I’m thinking – even with a good allocation, that being a bit equity lighter could be rewarding, assuming we continue the current direction.

In addition to stocks, the bond market is suffering significant dislocation.  Even a Municipal bond has potential issues.  For example, if a Municipal bond is backed by revenue, such as a Turnpike Authority Bond and consumers are not driving or paying tolls, how is the bond going to pay its dividend and return principal back at maturity?

Most bonds other than US Treasury securities are now suffering.  Even so, do you really want to purchase a US Treasury today at these rates, with incredible interest rate risk? If rates increase sometime in the future, your bond may feel like a stock going downwards.  Keep in mind, the Treasury is going to be issuing a lot of treasury securities to finance the recovery.  Investors, in addition to our Federal Reserve, will be doing the purchasing.  I’m a little concerned about rates increasing at the incorrect time!

Where are the Opportunities?

There are 3 investment opportunities in this situation:
1. Tax-loss Harvesting in nonqualified (non-retirement) accounts
2. Rebalancing your portfolio
3. Roth Conversions.

Tax-loss harvesting in non-qualified portfolios:  Many stocks, ETFs and Mutual Funds have unrealized losses and if sold, can offset future realized gains as well as reduce your income for tax purposes going forward.  You can purchase a similar security immediately if you desire to hold your overall allocation.  This should be done at some point prior to recovery (Please make sure you understand the wash sale rules so your loss is truly recognized).

Rebalancing your portfolio: If your portfolio or account was designed to be comprised of 60% Equities and 40% Bonds, I’m sure you realize that allocation has changed, meaning the equity percentage is lower than 60%.  By purchasing equities back up to 60%, you will be purchasing stocks at current price levels which tend to be beneficial in time.  The should be done at some point during this downturn.  The question of course, is when?

Roth Conversions: Many investors would like to convert parts of their traditional IRA’s to a Roth IRA for future tax-free funds and/or to pass an asset to their children that may have tax advantages.  If you believe the stock market will be higher in the future, now is a good time to consider converting portions of your traditional IRA to a Roth.  For example if you wanted to convert 10% of your equity position in your IRA, the dollar amount today will less meaning you will pay less in income tax.  Definitely something to consider, however please make sure you consult a tax professional prior to implementing.

Monetary Policy/Federal Reserve to the Rescue? & Fiscal Rescue?

The Federal Reserve is going to pull out its full arsenal of techniques to provide liquidity to the markets and to support pricing in the Treasury, Mortgage and Muni areas.  I would not be surprised to hear the Fed will begin purchasing corporate debt as well, if needed to support that market.  We now have “QE” again, perhaps QE Infinity?

I’m finishing up writing this blog around 1:15 on Monday, and was hoping we had a positive vote on the proposed fiscal stimulus.  The only certainty I “feel” is that consumers and businesses are going to feel at least temporary pain, because the global economy is coming to a stand-still.

As with most stimulus, there are people who benefit more than others.  Hopefully that can be worked out as we continue further into this unchartered territory.  Hopefully, politics can take a back seat, at least until we’re truly moving forward.

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