MIKE TOWNSEND: Washington is relatively quiet right now, with the city under a “stay at home” order and Congress in recess at the moment. But tens of thousands of federal employees are hard at work, keeping critical government programs running and frantically implementing new programs established as part of the new CARES Act, the massive $2.2 trillion coronavirus aid and economic stimulus law that passed less than two weeks ago. How successful they are in getting those new programs up and running is likely to make an enormous difference in how many businesses survive the shutdown of America’s economy—and how the markets react.
Welcome to WashingtonWise Investor, an original podcast from Charles Schwab. I’m your host, Mike Townsend, and on this program our goal is to help investors sift through the avalanche of news and information to better understand how this unprecedented crisis is affecting the markets.
In just a few minutes, we’re going to offer some practical advice on some of the key questions investors are asking right now. Questions like, should I just get out of the market entirely? And what if I have a financial plan, but it feels like it was made for an entirely different time?
But first, let’s do a quick check of what else is making news.
While the nation’s capital is ghostly quiet right now, like so many cities across the country, there is a lot going on beneath the surface. Today, I want to focus on two things that are getting the most attention in Washington. The first is the effort to get the CARES Act implemented, its programs operational and its resources into the hands of those who need aid the most. And the second is work that has already begun on Capitol Hill to draft the next aid bill in Congress.
A number of wheels are already in motion with regard to the CARES Act. The IRS is scrambling to get those $1,200 payments out to Americans as soon as possible. Officials have said that they will start going out as soon as April 9, though most observers believe that is overly optimistic, and that the middle of this month is more likely.
The amount of your check is based on your 2019 adjusted gross income, or if you haven’t filed your taxes yet for 2019, it will be based on your 2018 adjusted gross income. Individuals who make $75,000 or less will get the full $1,200, and couples earning $150,000 or less will get $2,400. Families will also get an additional $500 for each child under the age of 17. The amount of the check decreases by $5 for each $100 over the income threshold—in other words, if you made $80,000, then your payment is reduced by $250, and you will receive a payment of $950. The payments phase out completely at $99,000 in income for an individual. Americans whose direct deposit information is on file with the IRS will get their payments the fastest, while those who require a paper check to be mailed to them are likely to have to wait longer.
Officials are also scrambling to set up systems for other key parts of the CARES Act. The Small Business Administration launched the Paycheck Protection Program on April 3—that’s the system by which small-business owners can apply for an emergency loan from a pot of $350 billion designated for small-business loans in the new law. While the process has been clunky and plagued by technological glitches, by the end of April 6, just two business days into the process, more than 175,000 loans totaling about $50 billion had been approved.
On Capitol Hill, attention is already turning to the next rescue bill. House Speaker Nancy Pelosi, who was mostly relegated to the sidelines while the CARES Act was negotiated primarily between Senate Minority Leader Charles Schumer and Treasury Secretary Steven Mnuchin, is making it clear that won’t happen again. At the beginning of last week, Pelosi said that House Democrats were already in the process of drafting the next round of stimulus, and she outlined an ambitious plan that included ideas like a major infrastructure investment that would create jobs and help Americans get working again.
By the end of last week, however, Pelosi had changed her message. Faced with the grim reality of the pandemic, Pelosi pivoted to drafting a bill that would supplement the CARES Act. In a message to her House colleagues on April 4, Pelosi said that the bill must “double down on the down payment we made in the CARES Act by passing a CARES 2 package” It’s expected that another round of stimulus payments to Americans will be included. Much more money for states and for hospitals to fight the virus on the ground will also be needed. These provisions are likely to get broad bipartisan support.
Both sides also want to fill so-called “gaps” in the CARES Act—places where certain businesses or individuals were not able to benefit from government aid. But the two parties are likely to have very different ideas about who and what is deserving of more government assistance—and that could be the sticking point that makes negotiations on this next round of aid difficult.
Of course, Senate Majority Leader Mitch McConnell and the Republican-controlled Senate will have a big say as well. McConnell initially was cautious about endorsing another bill, saying that legislators needed time to see how the CARES Act was working. But he, too, shifted gears later last week, acknowledging that another bill would be needed quickly. And the president has endorsed that idea as well.
As to timing, Pelosi said that she hopes the legislation can be drafted and voted on by the House “later this month.” But the mechanics of doing that remain unclear. Congress is currently scheduled to return to Washington early in the week of April 20t. But the concerns about gathering 100 senators and 435 House members in the same place are obviously very real.
The CARES Act went about as smoothly as can be imagined—it came together quickly, it passed the Senate 96 to 0, and then the House managed to pass it unanimously without having to bring every lawmaker back to Washington. While there’s talk about crafting a bill that can be passed by voice vote in both chambers—eliminating the need for all but a handful of lawmakers to be physically present. I’m skeptical that can happen. So the logistics of getting a CARES 2 package across the finish line remain to be determined. But there’s no question that there is a growing bipartisan resolve to get another huge aid bill through Congress as quickly as possible.
In an illustration of that, on April 7, McConnell announced that it was his intention to craft bipartisan stand-alone legislation that immediately makes at least another $200 billion available for the small business loan program and to have the Senate approve that by voice vote on April 9. The House would also need to pass it by voice vote, and it remains unclear when that can happen. Now a lot of pieces still need to come together for this bill to happen. But the very fact that the idea of moving that quickly is being taken seriously by both parties is another example of what incredible times we are living in.
Turning now to my Deeper Dive, I’m joined today by Annie Liu, regional branch executive for the Pacific Northwest here at Charles Schwab. Annie oversees 15 branches—from Anchorage, Alaska; to Boise, Idaho; to Reno, Nevada—with the majority in Oregon and Washington state. Her teams have been talking with investors throughout this crisis, helping them understand how best to navigate these unfamiliar waters. Annie is joining me today to offer us some perspective on the types of questions investors are asking and how our employees in the branches are addressing those questions.
MIKE: So, welcome, Annie. Thanks so much for being with me.
ANNIE LIU: Thanks, Mike, it’s great to be here.
MIKE: Well Annie, let’s begin at a high level. Even experienced investors have never seen anything like what has happened in the last month, and for younger, newer investors, it must be particularly frightening. So how are your teams responding to questions from investors who are somewhere on the scale from nervous to absolutely panicking?
ANNIE: Ah, this is such an emotional time now because this crisis is affecting all aspects of life. Foremost, this is a health crisis and everyone is concerned about their health and the health of loved ones.
And with so much in the news about just how far-reaching the impact of the coronavirus is on the economy, it’s no wonder that the conversation we’re having with clients revolve around their fears for their investments—whether that’s their portfolios, their real estate, or their businesses. And as we talk with investors, we do a lot of listening to get to the bottom of their concerns, and then we talk through specific actions.
But there are certain actions that can apply to just about everyone.
Probably the number one thing we remind people is to resist the urge to sell based on solely the recent market movements.
Today’s downturn is largely around the latest developments with the coronavirus. Selling stocks when markets drop can make temporary losses permanent. Take into account an investment’s future prospects and the role it plays in your portfolio, rather than being guided by noise and fear. While this may be difficult to do emotionally right now, it may be healthier for your portfolio.
And it’s always helpful to keep in mind that investing is about taking the long-term view.
Markets typically go up and down, and you’re likely to experience several significant declines during a long investing career. Timing the market is nearly impossible, but all investors would do well to ignore the noise and stay focused on their plan.
MIKE: Difficult times like this also present potential opportunities. So are there pro-active steps that investors should consider.
ANNIE: So when markets get truly troubled, it is an opportunity to review your risk tolerance.
Some investors learn that they aren’t as willing to face a sharp drop in the value of their portfolio as they had assumed. Similarly, risk you took on years ago may no longer make sense given your current situation and life stage. An aggressive allocation has historically gained more over time, but at the price of greater volatility—which can be especially risky if you don’t have time to recover. Times like these may be appropriate to consider adjusting your target asset allocation. And because the market has been extremely volatile, and will likely continue to be, making adjustments gradually is a good idea.
There are some silver linings. Interest rates are at historic lows. It may make sense to evaluate the liability side of your balance sheet. There could be a great re-fi opportunity. Reducing costs on your loans could be an effective way to shore up liquidity or using credit to mitigate short-term cash crunch.
MIKE: Well, Annie, one of Schwab’s core principles is the idea that everyone should have a financial plan and that they should stick to it. But a lot of people with a plan are suddenly feeling like their plan was made for a time that no longer exists. So what do you say to people whose plan suddenly feels completely out of date?
ANNIE: Yeah, Mike, we have seen that for sure. In just three short weeks, we’ve seen unemployment claims hit record highs. So there are people whose situation may have changed completely. For example, losing a job and not being able to land something quickly due to the current environment. There could be situations where a complete new plan is warranted. Or at least a temporary new one.
On the other hand, many people have a sound plan, but their fears are getting the better of them. In those cases we want to make sure that we take a step back and think about what the long term goals are.
Right now, we just don’t have a road map for this level of disruption to the economy. So we want to be careful.
MIKE: Let’s talk for a minute about the bond market. Last week The Wall Street Journal ran a story that said bonds have outperformed stocks since the beginning of the 21stcentury. But, if you’re looking to add bonds to your portfolio, you’ll find that today some bonds have negative yields and even Treasuries are at their lowest yield ever. If investors want the safety of bonds where should they be looking?
ANNIE: Yeah, Treasury bond yields are low and prices are high because they have done very well.
The article you mentioned, Mike, was comparing returns from the S&P 500® to its equivalent benchmark on the bond side—that’s the Barclay’s Aggregate Bond Index, or the Agg, as it’s known, which is made up of higher-quality bonds. And if you look back from 2000 to today, the total return for Treasuries is higher than stocks. The total return is comprised of the income you earned plus the price change. For bonds, most of the total return is income.
But now, Treasury yields are very low—near zero—and that’s a common question, do you buy them when yields are so low?
And the answer lies in, why are you buying bonds?
Income is often at the top of the list, but bonds still have other purposes than strictly income.
Remember that Treasuries and investment grade corporate or municipal bonds are historically much less volatile than stocks, and that gives you diversification from stocks. When stocks go down a lot, historically Treasury bonds go up. And then there is capital preservation—you’re going to get your principal back in the end.
And one more thing: You don’t only have to own Treasuries. You can own investment grade corporate bonds, which yield more than Treasuries, without taking a lot of extra risk. Or investment grade municipal bonds, which are exempt from federal taxes and sometimes state and local taxes. And barring a default, you can get some income that way.
MIKE: Annie, let’s shift gears for a moment and talk about the CARES Act, the huge coronavirus aid and stimulus package that was approved by Congress less than two weeks ago. One of the provisions of that new law is that it waives required minimum distributions for retirement accounts. Can you explain what that means?
ANNIE: Happy to, Mike. You are absolutely right—the CARES Act waives the required minimum distribution, or known as RMDs, for 2020. This includes any retirement accounts subject to RMDs, including traditional IRAs, 401(k)s, Roth 401(k)s, and inherited accounts.
This can be especially confusing right now because another recent act—the SECURE Act—deferred the age for taking RMDs to 72 for people who turned 70 ½ as of January 1 of 2020.
But the CARES Act supersedes the SECURE Act and applies to everyone who is taking RMDs now. So even if you have been taking RMDs, you don’t have to in 2020.
The benefit here is that RMD amounts are based on the value of your account at the end of the previous year. Because most accounts have seen a steep decline in 2020, the amount of the required withdrawal would have been a much larger percentage of a retiree’s account than was intended. The new law lets retirees keep that money in their account, potentially recouping some of the market losses when the economy turns around.
MIKE: But the important thing to know here is that while retirees aren’t required to take any money from their account, they are certainly still able to do so. What is your advice for people who need cash now but are paralyzed about what to sell in a down market?
ANNIE: Yeah, it’s a tough situation. And I would suggest having a financial consultant review your portfolio and help you come up with a plan on what to sell. It’s important to have a plan that is coordinated with other aspects of your finances. Also, it’s important to note that even if you’re going to take money out of your retirement account, you can just take the amount needed and not your entire RMD.
MIKE: What if I already took my RMD earlier this year—if I don’t need that money, can I put it back in my account?
ANNIE: Under normal situations, the distribution can’t be reversed. That said, based on our current understanding of the CARES Act, if a distribution was within the last 60 days, we believe that you can re-contribute the amount back into your retirement account—assuming the distribution qualifies for a rollover. You can’t reverse the tax withholding, but depending on other factors in your tax situation, the IRS could refund the withholding when your 2020 return is filed.
On the other hand, the treatment for inherited retirement accounts is slightly different. Inherited retirement accounts are not generally eligible for a rollover; therefore, assuming the IRS offers no other guidance, distributions that have already been taken can’t be re-contributed.
Now, broadly speaking, for inherited IRAs or for those that have taken a distribution more than 60 days ago—if you can demonstrate a coronavirus impact or if the virus negatively affected you financially, such as making you unable to work, or getting laid off, you may be able to count the distribution as COVID-19 related and recontribute.
MIKE: That’s excellent advice, Annie. Obviously there are a lot of moving pieces for this new law and I agree that it’s important to check with a financial advisor to make sure you understand how to take advantage of these new rules. Another aspect of the new law that I wanted to ask you about is that individuals can make special penalty-free withdrawals from their retirement account. So how does that work?
ANNIE: Yes, it is a penalty-free early access to retirement account assets. People younger than 59 ½ who have been adversely affected by COVID-19 will be permitted in 2020 to withdraw up to $100,000 of their retirement account without penalty. Taxes will still be due on any distributions. And here are three key points to know:
First, the income from the distribution can be spread over three years. By default, the income from a COVID-19 distribution is split evenly over tax years 2020, 2021, and 2022. A taxpayer can elect to include all of the distribution in their 2020 income; however, if this is done, there is no going back to the three-year rule.
Second, the withdrawal can be repaid over three years. On the day after a COVID-19 related distribution is taken, the client will have up to three years to pay back the amount in total or in part. The repayment can be made in a single amount or in multiple amounts during the three-year period.
Third, no withholding is required. Normally, there is withholding on distributions from retirement accounts—generally speaking, 10% on IRAs and 20% on 401(k)s. However, the CARES Act temporarily removes this requirement.
While it’s nice to know that this option is there for people who need it, we believe that clients should only use it as a last resort. First consider other potential resources of funds before withdrawing from your retirement savings. Using this option could put a person’s retirement saving goals at risk. Using these assets for a loan takes that money out of the market, potentially forgoing the gains it could make if the market recovery occurs soon after this crisis or in coming years.
MIKE: Well, there are a lot of people who don’t need the money now, but they’re so anxious that things are going to just get a lot worse that they feel like they should just get out of the market completely. What guidance can you offer them?
ANNIE: If the head-for-the-exits feeling is familiar, you may be the kind of investor who would benefit from a more conservative portfolio—as part of your long-term strategy, not as a response to a market upset.
While we can all agree that it does feel different this time, our research shows that, over time, being invested beats sitting on the sidelines.
So let me give you an example that really brings this point out. Let’s assume that you save $2,000 a year for 20 years. If you just keep your money in cash, at the end of 20 years, you would have almost $65,000. But if you invest that same $2,000 a year, even if you somehow end up investing each year at the height of the market, so absolutely the worst time to invest, you would still have $142,000 after 20 years*, and that’s more than twice as much, so don’t let fear cause you to be overly conservative and keep you from reaching your goals.
MIKE: Well, what suggestions would you have for investors who have reassessed their plan, perhaps rebalanced their portfolio, but still want to take an even more defensive stance in the face of the ongoing market uncertainty?
There are other minor adjustments that you might make. And specifically, you could increase your holdings of less-risky asset classes and then trim your long-term allocation to riskier ones.
For example, cash, generally speaking, your upside with cash is limited, but it retains its value in the face of even the steepest market declines. And cash tends to not move in lockstep with changes in the prices of other kinds of assets. Cash is the ultimate defensive asset, plus it’s a great way to hold an emergency fund.
Even aggressive investors should consider keeping at least 5% of their portfolios in cash.
And then there is consumer staples, health care, and utilities. When the economy slows, companies that sell products most people need regardless of the state of the economy—think of food, prescription drugs, and other household necessities—tend to lose less value than those that produce nonessential products. So, owning these and other so-called defensive stocks can be a great way to potentially capture at least some of the market gains while remaining relatively protected from its bigger swings.
And then, also consider gold. The precious metal has a history of holding its value—and even rising—when other asset classes are under pressure. In fact, it was one of the few investments with positive returns during the worst days of the 2008 and 2009 financial crisis. Keep in mind, however, that while gold and other precious metals can shine when market conditions are uncertain, their prices can also be volatile.
And lastly, I would say Treasuries. This is backed by the full faith and credit of the U.S. government—these are the safest fixed income investments you can own. Short-term Treasuries, which mature in a year or less, or intermediate-term Treasuries, which mature in less than 10 years, can provide decent income with low risk. Longer-term Treasuries may offer even more income, though their prices could take a hit if and when interest rates start to rise.
MIKE: Well Annie, this has been some great material, great suggestions on how people can play a little more defensively if they are feeling concerned. Finally, this might seem kind of odd at the moment, but do you see opportunities out there for people who are rebalancing and might be looking to buy?
ANNIE: I absolutely do, Mike. So preferred securities are beginning to look more attractive for investors looking for higher yields in the currently low-yield environment. That said, we expect volatility to remain elevated, and potential price declines are possible if the economic outlook deteriorates further due to COVID-19 concerns.
We suggest that those considering preferred securities today have a long-term investing horizon and focus on higher credit ratings and simply diversify.
MIKE: Well, Annie, you’ve given our listeners the kind of real-world, practical thinking that I think is exactly what’s needed right now. So thanks very much for joining me.
ANNIE: Thanks for having me, Mike.
And now, I want to wrap up this episode with the Election 2020 segment. The coronavirus pandemic has wreaked havoc on almost every aspect of American life, and that includes the 2020 presidential election. Fifteen states have now postponed their primaries, leaving the month of April almost completely devoid of elections. I say almost because one state—Wisconsin—held its primary earlier this week in one of the most chaotic and unfortunate situations our political system has seen in many years.
Over the last three weeks, Wisconsin has been stuck in a stand-off over how and whether the date of an election can be changed. The Democratic governor called for the primary to be postponed, but the Republican-controlled legislature disagreed. The governor encouraged absentee voting and, indeed, Wisconsin saw record applications for absentee ballots. But the in-person primary on April 7 remained on the calendar.
Last week, the governor called an emergency legislative session and asked the legislature to delay the election. But lawmakers refused to take a vote on the proposal.
On April 6, the governor issued an executive order delaying the primary—just four days after saying publicly that he did not have the authority under state law to unilaterally change the date of an election. Republicans in the legislature quickly challenged the executive order in court, and the Wisconsin Supreme Court, and later the U.S. Supreme Court, agreed, ruling against the governor just hours before polls were scheduled to open.
Making matters worse, the uncertainty around whether the election would or would not be held, combined with the state’s “stay at home” order, meant that there was a severe shortage of poll workers. And that led communities to consolidate to a smaller number of polling locations—which only increased the potential for crowding. Milwaukee, for example, had just five polling locations open on Tuesday—it typically has 180 polling stations.
The chaos left hundreds of thousands of Wisconsin voters with an awful choice—risk heading outside and endangering their health or the health of others or skip voting.
My worry is that this is just a preview of more battles to come, in other states. And if the pandemic lingers into the fall, and throws into question the November election, then a constitutional crisis could occur. That may seem dramatic now, but it’s not out of the question.
Some have advocated that the November elections go to all mail-in balloting. But there are legitimate questions about the cost, and the security, and the feasibility of doing that.
All of this raises concerns that election integrity and election security could be one bit of “collateral damage” from the pandemic of 2020. I’ll be following this issue throughout the campaign season in the months ahead.
Well, that’s all for this episode of WashingtonWise Investor. Please take a moment to subscribe so you don’t miss an episode. And if you like what you’ve heard, please leave us a rating or a review on Apple Podcasts or your favorite listening app—those ratings and reviews really do matter.
For important disclosures, see the show notes or schwab.com/washingtonwise, where you can also find a transcript.
I’m Mike Townsend, and this has been WashingtonWise Investor. Wherever you are, stay safe, stay healthy, and most importantly, stay home, and keep investing wisely.
*Source: Schwab Center for Financial Research. Investors waiting to invest in the stock market put their yearly contributions in T-bills. This example shows average 20-year ending wealth over all 20-year periods between 1926-2017. The stock market is represented by the S&P 500 Index with all dividends reinvested. The example is hypothetical and provided for illustrative purposes only and the example does not reflect the effects of taxes or fees. Past performance is no guarantee of future results.