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  • Michael Handy

2020 Q1 Newsletter

FIRST QUARTER 2020 – The coronavirus seriously affected the returns for the first quarter of 2020. Equities were down 19% to 32%, with large cap companies faring the best. Real estate was down 23%. Bonds were down 2% and our 60/40 allocation of 60% equities and 40% bonds was down 16%. The market had record volatility for the quarter due to the fear factor and indiscriminate selling.

What’s ahead for the market – The coronavirus coupled with uncertainty and unemployment are the story for the market going forward in 2020 and 2021. The traditional metrics of price earnings ratios, projected future sales and earnings have less validity since they are based on substantial unknowns. The market will continue to be highly volatile as negative financial information is reported.

Unemployment will continue to rise until workers can return to their jobs. High unemployment has a double negative affect in that many people are not producing leading to lower sales and profits. Those unemployed are receiving unemployment compensation putting a strain on insurance and government plans. Small businesses likely are hurt the most needing loans to keep their businesses solvent.

Every time it’s different – There is an old market saying that the worst four words are “this time it’s different” Each time the market turns down dramatically, it is caused by different factors. During our investment career we’ve had the 1987 market drop, the savings and loan crisis, the oil embargo, and recently the dot.com bubble and the 2008 recession. Along the way we’ve also had milder but numerous market corrections of 10% to 20% when equities are overvalued. In each instance, the market has corrected and increased in value.

This time we have a virus with many unknowns as to when it will be arrested and when we may have effective treatments and vaccinations.

Behavior Modification – Three behaviors are happening during the brief period of February and March as we are dealing with the virus:

· We the staying in our residence more

· We are ordering more things online

· We are spending less money

All three of these behaviors have profound influence on the economy if they persist. Time will tell us if these behaviors persist after we have remedies for the virus. Or we go back to our prior behaviors, perhaps more cognizant of those around us in social situations.

Investing – The literature on investing now and in the future has been interesting. The fortunes of many industries are obvious. Airlines and cruise lines are not doing well. Online companies like Netflix are doing well. Utilities and health care are still considered safer harbor investments. Real estate is in flux because the market worries about tenants making their rent payments.

Our approach will remain as it has been to invest in a widely diversified portfolio to reduce risk.

Your investments As we have gone through your portfolios, we like your investments now as we did in February before the virus took hold. You have the best in class institutional fund investments with Dimensional for equities and Pimco for bond investments. We use Vanguard for select bundle investments like utilities and increasing dividend companies.

For our larger portfolios with individual equities, we use excellent companies like Johnson & Johnson, Microsoft and Berkshire Hathaway. Individual equities are part of the US company allocations. The strategy with individual equities is the same strategy as for asset class investments, long term. With all investments we rebalance from time to time.

Going forward The market valuations are always forward looking. The difficulty now is substantial uncertainty. As the condition with the virus improves with fewer onsets, effective treatments and a vaccination, the unknown factor will lessen and the market will become more predictable.

It is unknown when the impact of the virus will be behind us. Several articles indicate the market will be affected for 2020 and 2021. If things improve more rapidly, great.

Finally, I recall the stoic words of Winston Churchill during the dark days of WWII when it was uncertain if England would survive as a country.

To paraphrase for our current challenge,

Chin up, stay safe and carry on.

July 15th Tax Deadline – With the dramatic effects of the coronavirus the IRS and Oregon had no choice but to push the traditional April 15 deadline back to July 15. This was an automatic extension of payment and filing with no action needed by taxpayers. For those individuals who pay quarterly estimates the IRS also extended both the 2020 first quarter and second quarter payment due dates to July 15. However, Oregon has not granted the same extension for quarterly estimates.

Stimulus Checks – For those of you who may qualify for an Economic Impact Payment, the IRS has rolled out a new web tool at: www.irs.gov/cornovirus/get-my-payment. The intent of the site is to allow taxpayers to check the status of the payment and update banking information to allow for direct deposit. To date, the web tool has had numerous problems and not worked at all for many people.

Covid-19 Related Federal Tax Relief Measures – In addition to the deadline extension, the CARES Act delivered many tax relief provisions. Here are just some of the measures applicable to individuals:

· The deadline for making IRA and HSA for the 2019 tax year was postponed to July 15.

· Waiver of Required Minimum Distribution (RMD) for 2020. This waiver also applies to inherited IRAs.

· Waiver of 10% early withdrawal penalty from IRAs for many individuals.

· Certain retirement plan distributions are allowed to be spread over 3 years for taxable income purposes. In addition, within the 3 year period the taxpayer may recontribute some or all distributions and have them not counted as taxable income.

· Taxpayers are allowed an ‘above-the-line’ deduction for up to $300 in charitable donations for 2020. This means you can receive a tax benefit for charitable donations up to $300 even if you don’t claim itemized deductions.

Many important details on the specific provisions are yet to be seen.

Thank you to all of our tax clients for your patience and support as we continue to find new ways to go about our business. Your patience as we work through changes is truly appreciated.

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