Petrovic Financial Services 2nd Quarter Newsletter

Navigating COVID-19: A Range of Outcomes Are Possible – Alex Petrovic, CFP^®

Most importantly, I hope you, your family and friends are healthy and managing these interesting times. All of us are greatly appreciative of the medical community struggling to fight the virus and essential workers putting their health on the line to help keep some amount of normalcy in our lives, communities, and businesses. Even in trying times, the human and American fighting spirit is admirable!

The past several weeks has swiftly brought the world a new reality. So much so, this is my 4^th market update communique in less than 2 months as events have unfolded rapidly.

Though America and the world will survive and thrive in the long-term, the short and medium-term outlook is painful. Thankfully, governments around the world are trying to do their part to blunt the economic fallout of COVID-19. Hopefully, researchers will find therapeutics and a vaccine faster than anticipated but given that COVID-19 is a new virus, these efforts may take a while (read: 1-2 years).

Though I believe the current bear market will provide investors an opportunity for long-term stock gains, more economic pain is coming. Unemployment figures this past week indicated a current unemployment rate of about 15-17%. The official rate of 4.4% is quite a bit less since it is based on information from early March, before the impact of COVID-19 became widespread. In the Great Recession of 2009, the unemployment rate peaked at 10% in October. We are well past that now and most likely going even higher. Plus, underemployment (people not able to work a full-time job) is not factored into the usual unemployment rate we usually read about.

The investment firm Vanguard recently commented that, “The strength of eventual economic recovery will depend in large part on the duration of required containment measures, the depth and breadth of unemployment, and the extent to which consumers overcome lingering fear of resuming normal activities.” https://advisors.vanguard.com/insights/ article/globaleconomieswhatweseeahead

Recessions and alphabet soup

Most likely you have heard the current and upcoming economic falloff described as another 2008/2009, or the next depression, or somewhere in the middle… or none of the above. The chart from Ned Davis Research, a respected data-driven research firm, shows its best guess at the probabilities for different types of U.S. recession and recovery paths. They guesstimate the V-shaped recovery, the best case, is only a 20% probability. The worst-case L-shaped recovery, or lack thereof, is 10%. The other two main possibilities have a combined 70% probability.

This past Friday, the Federal Reserve Bank of New York President John Williams said that even a swift resolution to the coronavirus pandemic is unlikely to bring a fast recovery to the U.S. economy:

“I don’t see the economy being back to full strength by the end of the year. It’s going to take longer to get us back to where we want to be,” he said in a CNBC interview. Mr. Williams tied the prospect of a slow recovery in part to caution by the public that is likely to outlast any social-distancing and other government restrictions.

“Even as the pandemic passes, even as the restrictions are relaxed gradually over time, people may take quite a while before they are willing to get back on airplanes, on trains, or go to the theater or go to concerts or things like that,” Mr. Williams said. “So, there are some risks it takes longer to get that recovery for the economy than just what happens in terms of the formal restrictions that are in place.”

“We’re definitely in a severe downturn in economic activity,” and “even as a pandemic passes through and the economy comes back, I expect demand to be weak and therefore needing strong monetary support, fiscal policy support as well, to get our economy back to full strength over the next couple of years,” Mr. Williams said on Thursday. https://www.wsj.com/articles/new-york-feds-williams-says-recovery-unlikely-to-be-swift-11587130541?mod=hp_major_pos1#cxrecs_s

Another perspective is from longtime JP Morgan CEO Jamie Dimon who recently commented in his annual letter to shareholders that while the bank is strong, it won't be untouched by the fallout from the coronavirus pandemic. The pandemic will be damaging to the US economy, Dimon said. "At a minimum, we assume that it will include a bad recession combined with some kind of financial stress similar to the global financial crisis of 2008," he said. https://www.jpmorganchase.com/corporate/investor-relations/document/ceo-letter-to-shareholders-2019.pdf

For the last perspective, the U.S. Federal Reserve Minneapolis President Neal Kashkari was interviewed on April 12 on CBS Face the Nation (https://youtu.be/iEixQwaL6rM). His comments indicate the downside risk to the current stock market rebound: “We could have these waves of flareups, controls, flareups and controls until we actually get a therapy or a vaccine. I think we should all be focusing on an 18-month strategy for our health care system and our economy.” Kashkari warned that, “This could be a long hard road that we have ahead of us until we get either to an effective therapy or a vaccine. It’s hard for me to see a V-shaped recovery under that scenario,” he said. https://www.bloomberg.com/news/articles/2020-04-12/fed-s-kashkari-says-u-s-may-face-18-months-of-rolling-shutdowns?sref=MAFAHS6h

So… could the economy and stock market recover in swift fashion? Yes, but it would probably take some medical breakthroughs, more government response, and a good plan (and execution) for reopening the economy. However, I still believe prudent caution is warranted. There are and will be buying opportunities for long-term investors, and I am still bullish long-term. Yet, I think consumers, who power 70% of our country’s economy, will take longer to regain their confidence and spending. This may mean a partial, yet substantial, near-term recovery once many businesses slowly reopen, but a sustained recovery after this initial bounce could be slow; similar to the slow recovery after 2009.

Depending on which metric you look at (e.g. stock market, GDP, employment, etc.), it took about 4-7 years for the U.S. economy, and much of the global economy, to recover from the worldwide economic recession that started in 2008. Given the quick, massive U.S. government response this year, I think there is a good chance we’ll recover more quickly this time around.

It’s an old Wall Street adage…. The stock market isn’t the economy.

As we have already seen from the most recent bull market that began on March 9, 2009, stocks do not necessarily perform the same as the economy. For all of the bad economic news, and it will most likely get worse in the coming 4-8 weeks, the S&P 500 Index fell about 34% from its February 19 peak. On March 23 it bottomed and has clawed back about half of its losses. So why has the stock market rebounded so dramatically? I believe there are a few key reasons why:

1. The stock market is forward-looking. Yes, the economy and corporate earnings will be abysmal in 2Q and 3Q 2020. Yet the stock market is already trying to look past this into late 2020 and early 2021 for a recovery.
2. The biggest reason for the disconnect is the massive amount of government support from 1) the U.S. Federal Reserve to help stabilize and support the bond market and the 2) Congressional disaster relief, including the CARES Act that will inject about $2.2 trillion into the economy to help the it avoid a depression scenario. Both the U.S. Fed and Congress learned from 2008/2009 they have to act big and fast, otherwise it’s more costly and painful if they wait to act, like they did in 2008/2009. The U.S. Federal Reserve has done more in 2 months than it did in dealing with the 2008 financial crisis. And the fiscal spending by the U.S. Government is already on par with all the Congressional action from 2008/2009 (see chart). Truly, this is an unprecedented response from the government to help save the economy.
3. We, and the rest of the world, are back at ZIRP… Zero Interest Rate Policy. It took almost 7 years (2009-2015) for interest rates to move off zero after the 2008 financial crisis. I don’t know how long this current period of zero interest rates will last, but I would assume at least a couple of years (and most likely longer) given the disruptions to consumers and multiple industries, some of them severely hurt (e.g. travel and hospitality, restaurants and energy to name just a few). So, assuming ZIRP is here to stay and inflation will most likely not be an issue in the near-term given a recession, how are investors planning on making any money? In cash and bonds? No. While high-quality bonds and cash are critical to provide portfolio diversification and stability, stocks (and taking risk by owning something) could be supported by the lack of investment alternatives. This is what happened after the 2008 financial crisis. While investing in stocks has always been a rollercoaster ride, it still is the primary way we make money from our money… and low interest rates force people into stocks, since there are few alternatives for growth.

Has the stock market low already happened?

Maybe, but I doubt it. Since 1929, the U.S. stock market (measured by the Dow Jones Industrial Average Index) has broken its initial low about 70% of the time in bear markets. The percentage is higher for bear markets that coincide with a recession. The S&P 500 Index has rallied significantly over the past couple of weeks. While we hope the lows have already been made, there a few key reasons to think the stock market could fall further than it did -- down 34% from its peak in late March. The main reason is that the path, duration, and impact of COVID-19 is unknown.

According to Ned Davis Research, when coming out of a bear market, the stock market usually bottoms about 4-5 months before the economy bottoms out. After the economy finally turns the corner, months later corporate earnings finally start to rebound. Unfortunately, jobs are last amongst these four items to rebound.

This is one reason why timing the stock market is difficult. It usually turns the corner before the economy, corporate earnings and jobs do the same. This means that riding it out, and if possible, adding to stocks during a bear market is the best alternative for us.

Meetings Through Raymond James Are Safe and Secure - Ann Kloster

Several months ago, Raymond James started using Zoom for virtual client meetings. In the very recent news, Zoom has come under fire for having several security vulnerabilities.  Most of the vulnerabilities lie in the free account or “public” side of Zoom, or within Zoom features we do not use in our client meetings.  

There are additional security layers used by Raymond James and our office during client meetings:

1.   Raymond James has a corporate Zoom account using a custom URL.   When our office connects to Zoom, we use a dedicated portal through Raymond James.  An uninvited participant has to know both the custom URL and the unique meeting ID to intercept any client meeting. 

2.   All meetings have a unique meeting ID that is sent only to the participant by email.  We do not use a personal link or personal identification number.   Our meetings are also by invitation only.  The information is not posted for public viewing. 

3.   We are the meeting host, and limit sharing the meeting controls with participants.  This inhibits participants from inviting others to the meeting or controlling the video and audio connections.

4.   We can see all participants in our meetings.  An unwanted attendee will be visible on our screen as soon as they enter.  We then can immediately remove them.  Once a participant is taken out of a meeting, they cannot rejoin.

5.   We have the option of sending a meeting-specific password to our clients to access the Zoom meeting.  (Similar to the two-factor authentication with which most of you are familiar).  We have not used this option on a regular basis yet but are considering adding it for an additional layer of security. 

While we have done as much as possible to ensure our client meetings are protected and secured, if you are uncomfortable with conducting your meeting using Zoom, please let us know.  We are happy to securely send you the meeting report beforehand and hold a telephone conference instead.

2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act – Bryson Slater, CFP^®

The CARES Act, an unprecedented $2 trillion emergency stimulus package was passed on March 27, 2020 to help mitigate COVID-19’s impact on individuals and small businesses. This global pandemic has caused significant damage to our economy, society and daily routines. It is widely believed the CARES Act properly addresses many concerns and will provide a substantial economic boost. We are keeping a close eye on the ongoing government intervention to combat this coronavirus. Stay tuned for updates on additional phases if/when they happen.

The CARES Act is a very intricate piece of legislation. Below is an executive summary of a few items that we believe will be most applicable to many of our clients. There are multiple other provisions regarding tax deductions, unemployment benefits, small business assistance, etc. that are not addressed in this brief article.

FEDERAL AND STATE TAX FILING DEADLINE EXTENDED

• The federal income tax filing deadline for businesses, trusts and individuals is delayed until July 15, 2020.  This includes first quarter 2020 federal estimated tax payments.
• Most states (including Missouri and Kansas) have announced their tax filing deadlines will be July 15, 2020. 

DIRECT PAYMENTS TO INDIVIDUALS AND FAMILIES

• Payments will be in the amount of $1,200 for individuals; $2,400 for married couples.
• Families will also receive $500 per each child under the age of 17 (also applies to Head of Household).
• Payment will be phased out for individuals with an AGI greater than $75,000; $150,000 for joint filers.

TEMPORARY WAIVER OF REQUIRED MINIMUM DISTRIBUTIONS (RMDS)

• RMDs for IRAs, inherited IRAs, 401(k)s, 403(b)s and other qualified plans have been waived for 2020.

RETIREMENT PLAN DISTRIBUTIONS

• A penalty-free coronavirus related distribution of up to $100,000 can be made from IRAs, employer-sponsored retirement plans or a mix of both by an individual impacted by the coronavirus.

FORBEARANCE OF MORTGAGE PAYMENTS

• If your mortgage is backed by the federal government, this provision allows you to suspend payments for up to 12 months (initial 180 days with an option to extend an additional 180 days).

This is only an overview of the CARES Act. As we delve into your specific situation, we will expand on the issues that apply to you. Please do not hesitate to reach out to us with further inquiries regarding the CARES Act or any other financial planning questions you may have. For more information, please visit Raymond James’ comprehensive white paper: https://www.raymondjames.com/-/media/rj/common/resources/retirement/cares-act-individuals-pdf.pdf

• Inside & Outside of PFS

Alex Petrovic - Thankfully, Dasha, Benny and I are all healthy… as well as our families and friends. Like many of you, we have been under stay at home orders for about a month. KCMO recently announced the order would be extended to May 15, while the states of Kansas and Missouri have said May 3.

With all three of us at home, productivity is not at all-time highs! Yet, it is fun spending more time with Dasha and Benny. The spring weather has definitely helped. We try to take a walk around the neighborhood at lunch time and another before dinner. Benny has been riding his bike and scooter around the block and on the nearby trail. Hopefully, we’ll be able to take the training wheels off his bike later this year. Aside from this, we have been meeting up with friends and family in virtual video chats. We have also made a bit of progress with a few home projects. Like everyone else, our planned business and personal trips have either been cancelled or are up in the air.

We look forward to warmer weather and life getting back to normal, albeit probably slowly. ? Stay healthy, stay sane and enjoy the outdoors!

Marsy Gordon - What a strange late winter and early spring this has been! Hopefully, you and those dear to you are staying healthy and safe.

I must admit that it has been lovey to look out the window to watch my neighborhood blossom with spring trees and flowers. Most years, it seems like I just get a quick glance while driving through the neighborhood on my way to or from work. Now I get to see it mid-day, too, while working from home.

While it is unusual to have all our client meetings held by teleconference or phone, it seems to be working well, as many of us are working remotely now. All of us have had to learn how to make our parts of the meeting work, even as we ask you to do the same.  Electronics can seem like a pain in the neck sometimes, but they certainly offer us viable options for meeting safely.  Our out-of-town clients have known this all along, of course.

Hopefully, it will be safe to host meetings in the office again before too much longer. In the meantime, please continue to take good care of yourself and those around you. 

Ann Kloster - Stay smart. Stay safe. Stay well. Stay home. Thank you!

Jim Stoutenborough - Like you, my daughter and I are sheltering in place.  I can tell I am watching more TV because my Netflix account no longer solely recommends my daughters favorite shows, such as, Pretty Little Liars, Riverdale and multiple cooking shows.  Some action movies and documentaries are starting to appear on the recommended list.  One cooking show we both enjoyed was “The Final Table” on Netflix.  It brought chefs from over the globe on teams of 2, with a team being eliminated every show – we binged through that pretty quick. And since it was starting to recommend for me a little more, Netflix gave me the gift of the movie, “Bloodsport”, one of my favorite action movies of all time.  Supposedly, actually, maybe, loosely based on the real-life events of U.S. soldier Frank Dux.  Jean-Claude Van Damme, the Muscles from Brussels, in I think his first starring role as Frank Dux, traveling to Hong Kong to fight in the Kumite, a secret and violent martial arts competition.  Also, of note in the cast, Bolo Yeung as the villain, Chong Li, Donald Gibb as Ray Jackson (better known for Ogre in the Revenge of the Nerds movie) and a young Forest Whitaker.  Not an Oscar contender by any means – but one of my absolute favorites.  Plus I have been catching up on my podcasts, and if you like podcasts, I would recommend “Make Me Smart” with Kai Ryssdal and Molly Woods – it is always interesting and in one three episode stretch they covered – quantum computing, veggie burgers and income inequality – so the show can go a lot of different directions but always relevant.

Jeannine Shaffer - I hope everyone is healthy and being safe.  Like me, you are probably missing your families. Thank goodness for facetime and ZOOM.  Social distancing started by Facebook years ago is now the place to find information and humor in all this. We had our first virtual cocktail partly with friends recently, which was fun and much too short.  I must say attending church remotely, while still in our pajamas and drinking our morning coffee is not near as rushed as our usual Sunday mornings. 

No doubt you have probably cleaned out every closet or at least the garage and have finally gotten to those painting projects you’ve been meaning to do.  Our son, who is an essential worker at a local hardware store, told us how busy the paint department has been. We finally started painting the inside of our screened in porch.  Why does a simple project like painting some walls turn into a major ordeal? After power washing the walls, the overspray stained the ceiling and popped the tape in the joint, so now it has to be repaired and painted too.   

Spring fever is kicking in too and we are getting anxious to plant something and clean up the yard. The flowering trees were so pretty this year, but way too early.  Thankfully that last cold snap with the freezing temperatures didn’t do too much damage. Our daughter, who works in the greenhouse at a local nursey said they are very busy too.

If you’re like me and can’t handle shopping on-line, be careful out there. Hopefully, you have several facemasks, which are this year’s newest fashion accessory.

When all of this is behind us, we are hoping to meet some of those neighbors we have never seen before who are walking by with their dogs and kids.

Marilyn Brohm – My new best friend! I’ve been working from home due to worries about my health (I have an underlying health condition) and live alone, so thought it would be a perfect time to get a puppy. He’s a 3-month-old standard poodle I’ve named Brownie. I’ve had 2 standard poodles over the years, and they are smart, sweet and wonderful pets. He’s so cute and adorable! He’s really lifted my spirits and we enjoy going for a long walk every day.

Other than that, I really miss seeing the grandkids and my mother, who is on lock down at a local assisted living facility. We talk every day and I take Brownie to her window often. We look at each other through the window and talk on the phone and send hugs and kisses.

Bryson Slater - Like everyone, COVID-19 has turned my life upside down! Multiple vacations have been cancelled. Family functions, birthdays and happy hours have transformed into virtual Zoom meetings. We did not realize how good we had it in the pre-Corona days!

One activity I have been able to maintain throughout this pandemic is golf. I did not previously realize that golf courses were considered essential business, but I am not asking any questions! To the courses credit, they are going the extra mile to promote social distancing. They limit all person to person interaction and have modified the equipment on the course to reduce touching common surfaces without proper sanitization. I have played every weekend since Kansas City’s lockdown started. Unfortunately, my scorecards have not reflected my dedication to the craft. It looks like I am going to need some more practice. Oh darn!