Edward Jones email with advice from Investment Strategist Craig Fehr (It’s a great read and confidence booster!)

An Upside to This Down Market

It often feels like the stock market takes the stairs up but the elevator down. The latter rings true currently, with stocks falling more than 20% from the peak, crossing the official threshold of a bear market for the first time in more than a decade. And they did so in record time: U.S. stocks sat at record highs less than one month ago.

As unsettling as this selloff may feel, don’t lose sight of that staircase. Even with this decline, the stock market is:

• Back where it was in early 2019
• Still 5% higher than during hte pullback in December 2018
• Up 20% (including dividends) over the past 5 years(an average annual gain of 4%) and 345% over the past 11 years (a 12% annual gain)(1)

The velocity of this selloff and the magnitude of the daily swings are a reflection of the unique risk of this human health crisis and the unprecedented efforts to contain the virus’ spread, which raise the uncertainty around the ultimate timeline and impact. Market selloffs are fed by fear and are eventually exhausted when extreme pessimism is priced in and investments become re-anchored to the broader outlook for fundamentals.

We think investors can take comfort that:

1. There appears to be a high degree of pessimism already in the market at these levels
2. The health of the economy entering this unique situation will play a key role in fostering its rebound as the virus runs its course
3. Diversified portfolios aren’t mirroring the stock market decline (see Five Keys, below)

How Long Will This Last?

Volatility is unlikely to end soon. We think the bottoming process may require the following:

• A peak in the rate of new confirmed cases of coronavirus in the U.S. – The pace of new cases will need to slow before a sustained rebound can occur. Experiences in China and South Korea suggest an inflection point when new cases peaked.
• An effective and sizable fiscal policy response – Washington is evaluating tax cuts, support for impacted workers and business loans/funding. This won’t fully solve the challenges, however, full-scale fiscal stimulus will likely be needed to bridge the gap for the economy and market confidence.
•  Further monetary policy stimulus, with the Federal Reserve cutting rates near zero – Rate cuts won’t solve a human health crisis. However, the Fed will likely cut rates near post-financial crisis levels to add at least a pillar of support to financial markets. If this happens, we’ll emerge from the brunt of the virus slowdown with incredibly stimulative monetary policy settings, which we think will help supercharge the economic and market rebound.
• Downward corporate earnings revisions – It’s unclear just how punitive this will be on corporate earnings in the next quarter or two, but we think earnings estimates for 2020 will need to come down dramatically. This will be another metric that will help markets stabilize and look ahead to the future rebound in profits, which are the long-term guide for stock prices.

The range of unknowns raises the uncertainty around the timing of a rebound. While we don’t attempt to time the market precisely, as a long-term investor, you should take comfort in the advantage of time in the market, not timing the market.

However, we remain confident that a rebound will take shape. It may take a while longer to materialize, but we think it will be robust and fueled by a return of confidence in the post-virus outlook. Long-term investors don’t need to capitalize on the pullback all at once but should consider opportunities to benefit from this decline. Consider:

•  Rebalancing – Trimming overweight allocations and filling gaps in underrepresented asset classes and sectors
• Systematic investing – Taking advantage of the ongoing volatility by systematically investing at regular intervals, reducing the “timing” aspect as the selloff plays out

Lessons from History: Light at the End of This Tunnel
Within a matter of weeks, markets have dropped to a level that to us is pricing in a U.S. recession, an economic outcome that looks increasingly likely, in our view. In a consumer- and service-oriented economy, widespread containment efforts make a contraction in GDP a self-fulfilling process:

•  Historically, the stock market peaks on average roughly six months before a recession emerges, with economic conditions decelerating before eventually falling into contraction. Current conditions are anything but typical, given the unprecedented measures being taken to limit contagion. The flipside to this story, from an economic and market perspective, is more encouraging, however.
• The market has declined by roughly 25% from the recent highs, nearly in line with the average bear market decline. It’s uncertain at this stage if this experience will be similar to past bear markets, but this suggests a substantially negative economic and earnings outcome is being priced in to stocks already.
•  Given the root of the slowdown, we think the downturn will be temporary. This is not, in our view, a repeat of 2008/2009. The financial and banking system is on firm footing, and we don’t anticipate unemployment to experience a sustained spike, as is the case in traditional recessions and a root cause for a more slowly developing recovery. Given the economic foundation, we think a recovery in economic activity and investment can be faster and more vigorous than normal.

Looking back at bear markets (a decline of 20% or more) since 1955:

•  The average total decline was 26%
• The time from the initial 20% drop to the bottom of the market averaged 86 days.
• The stock market returned an average of 25% over the next year and 32% over the following three years.

Five Keys to Navigating Pullbacks Successfully

1. Avoid the temptation to panic. This pullback, just like those before it, won’t last forever. You’ll want to be invested when the rebound takes shape.
2. Measure your progress against your goals, not the peak value of your portfolio or short-term fluctuations. If your goals haven’t changed, your strategy to achieve them shouldn’t either.
3. Put time on your side. You’re investing for the long term, so use that to your advantage.
4. Leverage the power of diversification. A balanced portfolio of 65% stocks and 35% bonds has held up better, dipping roughly half as much as the Dow.*
5. Lean in to volatility. History shows the best times to be opportunistic are when it feels toughest to do so.

Craig Fehr, CFA
Investment Strategist

*Source: Morningstar Direct. Equities represented by the S&P 500 Index; bonds represented by the Barclays Bloomberg US Aggregate index. Edward Jones calculations.

1 Bloomberg, S&P 500 index, as of 3/12/2020.

Past performance of the markets is not a guarantee of how they will perform in the future.

Diversification does not guarantee a profit or protect against loss in declining markets.

******

You’re welcome to share this information with friends and family members who you believe may find it of interest.

Sincerely,

Scott Lovejoy, AAMS® Financial Advisor

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Typically, this time of year is filled with graduation ceremonies and celebrations. But with the coronavirus pandemic, not much has been typical lately. Eventually, though, things will return to normal and schools will reopen for in-person learning. And if you have young children, you may want to save for their higher education, whether that be college or trade school. At the same time, though, you’re moving ever closer to retirement. Can you save for your kids’ education and a comfortable retirement for yourself at the same time?

It is indeed possible, although you may need to prioritize somewhat. Specifically, you may not want to put off saving for retirement in favor of education. But by viewing these goals together and investing as early as possible in each of them, you can take advantage of one of your biggest assets – time. 

Of course, you’ll still have to budget your resources. You want to invest as much as you can, but not so much that your monthly cash flow is crimped. Consequently, you may have to consider retiring later, contributing less to your child’s education, or a combination of the two. But in terms of logistics, you can make saving and investing easier. 

First, consider your retirement accounts. If you have a traditional 401(k) or similar plan, your contributions come out of your paycheck before you even see the money – so it’s about as painless a way of building your retirement fund as possible. Put in as much as your budget allows and consider increasing your contributions when you receive a raise at work. You can also direct your bank to move money each month from your savings or checking account into your IRA. 

Now, let’s move to your other key goal: education. Several education funding vehicles are available, but one of the most popular is the 529 plan. Your earnings grow tax-deferred and withdrawals are free from federal tax, provided the money is used for qualified higher education expenses. (529 plan withdrawals not used for qualified expenses may be subject to federal and state income tax and a 10% IRS penalty on the earnings.) Furthermore, your 529 plan contributions may earn a state tax deduction or credit if you participate in your own state’s plan.

You can set up recurring contributions from a bank account to a 529 plan. And you don’t have to fund your 529 plan on your own. Instead of gifts for birthdays, holidays, graduations and other occasions, why not ask friends and relatives to contribute to the 529 plan you’ve set up for your child? They’re all eligible to participate – and their contributions may earn them tax benefits if they live in your state and you’ve invested in your own state’s plans.

A financial advisor can help you plan for more than one goal, understand the benefits and tradeoffs of your decisions, and make the process of saving for those goals easier. So, get the help you need to stay on track – or rather, two tracks – toward the important objectives of education and retirement. 

This article was written by Edward Jones for use by the local Edward Jones Financial Advisor, Scott Lovejoy.

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There’s certainly been plenty of volatility and uncertainty the past few months, but one aspect of your financial picture has probably remained stable: your need for insurance. And since National Insurance Awareness Day is observed on June 28, now is a good time to review your overall insurance coverage to determine if you and your loved ones are well-protected.

You might be surprised at the lack of protection among your fellow citizens. Less than 60 percent of Americans have life insurance, and just about half of those with insurance are underinsured, according to LIMRA, a research organization. 

Of course, you might think the reason so many people don’t have insurance is because they don’t need it. But just about every age group can benefit from life insurance.

• If you have a house and a family … Your insurance needs are obvious: If something happened to you, could your mortgage payments still be met? How about your car payments? Doctor’s bills? College for your children? Even if you have a spouse or partner who earns a decent income, your family could still have big trouble paying its bills if you weren’t around.
• If you’re young and single with no family responsibilities … If you’re in this group, why would you need life insurance? For one thing, perhaps you owe money together with someone else – you might, for example, be a joint debtor on a mortgage. If you passed away, your co-debtor would be responsible for the entire debt. And just because you don’t have family responsibilities now, it doesn’t mean you never will. If you have a family history of serious health issues, which may eventually affect you, you could have trouble getting life insurance later, or at least getting it without paying a lot. Now, when you’re young and healthy, the coverage is available and may be more affordable.
• Your children are grown and you’re retired … If you retire with debt or have a spouse dependent on you, keeping your life insurance is a good idea, especially if you haven’t paid off your mortgage. Plus, life insurance can be used in various ways in your estate plans.

Even if you recognize the need for life insurance, though, you may be uncertain about how much you require. Your employer may offer insurance, but it might not be sufficient for your needs. And, perhaps just as important, if you leave your job, voluntarily or not, you’ll likely lose this coverage. If you purchase a private policy, what’s the right amount? You might have heard you need a death benefit that’s worth seven or eight times your annual salary, but that’s just a rough estimate. To determine the appropriate level of coverage, you’ll need to consider a variety of factors: your age, income, marital status, number of children, and so on.

Still, even after you’ve got the right amount in place, it doesn’t mean it’s set in stone. You should review your coverage regularly, and especially when you change jobs, get married or remarried, have children or experience any other major life event.