The stock market is down more than 5% this morning and more than 15% in the last 30 days.
Let's review a few important items.
From our experience, fast and significant declines in the stock market usually don’t last long and have historically been an opportunity for investment. Long, slow, protracted declines in the market are typically more challenging and significant than a short quick decline of the type it appears we are having.
We have always understood market corrections like this will occur. Even though it’s impossible to predict what will cause a market correction, it is 100% predictable that we will have corrections in the future. This reality has influenced the asset allocation we recommended for you when we began working together, as well as the securities we selected. This correction is not changing how we invest. Rarely does a market correction lead to a change in strategy. If we review the market headlines from six weeks ago, the main themes revolved around a strong economy and low unemployment. Those strong fundamentals may have been temporarily altered but we feel they will resume when fear subsides. When we look at where the economy and the market will be in six months, we think the fear of today will be in our rearview mirror.
Although most people are tuned in to the volatility in the equity markets the last few weeks, few people are paying attention to the historically low interest rates that have materialized. The Federal Reserve lowered the short-term federal funds rate by 0.50% last week. That rate reduction will impact (lower) the amount of interest you earn from your various money market and bank balances moving forward. The real story, however, deals with the substantial reduction in interest rates for long-term bonds. The 10-year US Treasury bond has plummeted to a historic low around 0.60% and the 30-year US Treasury to a low around 1.00%. When interest rates go down, the value of your bonds funds typically go up, so the fixed income portion of your portfolio is currently doing well. Keep in mind, at some point interest rates will go up and this will serve to constrain bond returns in the future.
Mortgage rates have also plummeted. We’re seeing 30-year mortgage rates approaching 3.5%, with 15-year mortgage rates approaching 3.0% and jumbo rates even lower. Keep in mind these rates are changing rapidly so you would be well served to call us or go online in search for updated rates. If you have a mortgage rate that is more than 0.50% higher than these rates, you should consider refinancing. In addition, if you have an adjustable rate mortgage (ARM), now is a great time to consider locking into a longer-term loan.
HELOCs & Consumer Debt:
For clients with HELOCs and consumer debt, if you have a brokerage account (non-retirement account) with over $100,000, Schwab has lowered their margin interest rate to an incredibly low rate of 2.5%, defined by the current federal funds rate of 1.25% plus an additional 1.25%. If you have a HELOC or other consumer debt at an interest rate higher than 2.5%, it may be advantageous to borrow against your brokerage account and pay down this other debt. In addition, if you have short term liquidity needs in the future, you may want to consider using this margin loan instead of a HELOC. Note, there is speculation that the Federal Reserve will further lower the federal funds rate in coming months, thereby lowering this margin rate further. However, when the Federal Reserve raises the federal funds rate in the future, the margin rate will move higher; so it’s important to use this margin feature for short-term borrowing needs and to be aware of the risks.
Financial Planning Considerations:
- RMDs: For those of our clients that have begun Required Minimum Distributions (RMDs) from your retirement accounts, we had previously raised cash in the amount of your 2020 RMD; and those funds have been invested in a money market fund since before the market decline.
- Withdrawal Mode: For clients who had regular monthly withdrawals in 2019, we had already raised six months of expected withdrawals; and those funds have been invested in a money market fund since before the market decline.
- Dollar Cost Averaging: For those clients who had recently added funds to their account and who we have set up on a 3-6 month dollar cost averaging, that process is still in effect. We recommend you either stay with the designated investment program OR consider accelerating your investment time horizon. Give us a call if you would like to discuss further.
- Cash Needs: If you have more than six months of living expenses sitting in your bank accounts that isn’t reserved for an upcoming expense, and unless we have advised otherwise, the market decline has created an opportunity to invest that extra money at lower prices. Give us a call to discuss this further.
We know you are likely saturated with information on the COVID-19 virus. In addition to taking the precautions advised by the CDC, we also want to advise that, to the extent you want to learn about the virus, you are getting your information from a trusted source. Headlines are fighting for readers’ attention by “sensationalizing” the headline and first two paragraphs. If you are interested, read the facts. Understand what you can do to protect yourself, but don’t get caught in the rabbit hole of fear. We thought this website was helpful to understand where the virus is most prevalent and how many people are already recovered: https://www.arcgis.com/apps/opsdashboard/index.html#/bda7594740fd40299423467b48e9ecf6
As always, feel free to reach out if you have questions or concerns.