While the Covid-19 pandemic has stalled the US economy to a near halt, any doubt remaining about the prospect of recession should be eliminated with the burgeoning unemployment numbers released over the past few weeks.
This economic rout was brought on by a grim cost and benefits analysis considered by nearly every state and local government across the US; Americans must either be put out of work through distancing measures or many more will die.
As such, the longest-ever expansionary period in domestic history has come to a halt, placing the American economy in an artificially-induced coma. Save the corpus and stall the spread, seems a reasonable mantra for these strange times.
The Macro View
In the end of a typical expansionary cycle equity valuations often extend beyond each firm’s capacity to produce profits to justify their cost. Traditional economic downturns are preceded by an overheating economy, and by many measures, this had not been the case when the novel coronavirus hit the US.
In typical market downturns that either precede or occur in tandem with an economic contraction, value stocks (relative to growth stocks) have been reliably defensive positions in many portfolios. Given the exposure of the value market to the energy sector, the dramatic losses in this sector, led by a decline in oil prices, have created an unfriendly environment for investors relying on securities, which are widely seen as somewhat protected from dramatic losses.
Meanwhile, the stocks that led the bull market — growth stocks — typically viewed as more volatile during times of economic distress, have been surprisingly defensive in the bear phase. Growth stocks have performed better while markets have slid given their exposure to technology, pharmaceuticals, and other sectors which are expected to remain resilient during this unique market environment.
Finding Opportunities: Planning and Investing
Through all of this, let’s not forget that losses in the markets and a downturn in the economy can create planning opportunities.
Roth Conversions: When markets lose value in such a precipitous way, savvy investors often look to their Traditional IRA balances for opportunities to convert some of those assets to a Roth IRA.
Pre-tax Traditional IRA savings have lost a bit of their luster in the wake of the passage of the SECURE Act late last year as it diminished the tax benefits of leaving pre-tax assets to younger beneficiaries. Now consider the fact that a greater holding in Roth IRA assets well into retirement can help to lighten the burden of required minimum distributions beyond age 72 since Roth IRAs don’t require minimum distributions.
When asset values become depressed, income from those assets may also decrease. Since conversions to Roth IRAs are taxed at ordinary income tax rates many investors are able to ameliorate the pain of a conversion by doing so while markets are down.
Converting a diminished Traditional IRA to a Roth IRA before the next uptick in the markets might cost less from an income tax perspective while creating the same benefit by the time the market rebound has occurred.
Gifting depreciated assets: Under some of that same logic, it may make sense for some high net worth investors to consider using some of their $11.6 million lifetime exclusion by gifting a markedly depreciated asset that is expected to appreciate dramatically. Because of the asset’s recent devaluation, much less of the exclusion will be used when markets are down for the same number of share of a security.
Another reasonable estate planning consideration during uncertain times like these is to pay close attention to beneficiary designations and ensure that estate plans have been reviewed recently by an estate planning attorney.
Embracing aggressive savings strategies: For those still saving regularly into their 401k, 403b, SIMPLE IRA or other investment plan, an economic downturn and the attendant loss in market valuations represents an opportunity to consider “buying low.”
In a profit sharing plan, for instance, many participants are able to allocate their current balances differently than their future contributions to the plan. With regards to the current balance, investors are encouraged to consider investing the balance in line with their own timelines for using the money and shifting that allocation in accordance with market movements may not serve many participants well.
It may make sense to some investors to consider allocating future contributions to very aggressive equity positions. It is these same positions that have lost considerable value in the downturn and that kind of volatility just means that an investor is able to buy something dramatically less expensive than it had been, in this instance, just a month or two ago.
Anthony M. Conte is managing partner at Conte Wealth Advisors based in Camp Hill. He can be reached at [email protected]
Registered Representative Securities offered through Cambridge Investment Research Inc., a broker/dealer, member FINRA/SIPC. Investment Advisor Representative Cambridge Investment Research Advisors Inc., a Registered Investment Advisor. Cambridge and Conte Wealth Advisors LLC are not affiliated.