Market Insights

How Does the CARES Act Affect Your 401(k)?

1. Required Minimum Distributions (RMDs) aren’t required in 2020.

If you took an RMD in the last 60 days, you can roll it into an IRA. If your RMD is set up to automatically withdraw, call BPAS at (866) 401-5272 and request to suspend your 2020 RMD. This way you can let your account balance grow and avoid paying taxes on the withdrawal amount. 

2. The maximum loan amount is temporarily doubled for 2020.

You can borrow up to $100,000, or 100% of your vested account balance. This applies to loans taken within 180 days from the bill’s date of enactment, March 27, 2020.

If you already have a 401(k) loan with repayments due between March 27, 2020, and December 31, 2020, you may delay your repayment for one year without penalty.  Subsequent repayments will be adjusted to include the interest that accrues during the delay in payments. 

3. The 10% early withdrawal penalty is waived for COVID-19 related distributions in 2020.

The distribution is still subject to taxes; but, the tax liability can be spread out over 3 years OR you can repay the distribution back to your account over the next 3 years to avoid some or all taxes.  
 

You qualify if one of the following applies:

You have suffered as a result of the health crisis, due to being laid off, furloughed, quarantined, unable to work due to childcare issues, or other issues beyond your control.
You, your spouse, or a dependent is diagnosed with COIVD-19 by a CDC-approved test. 
 

Distributions can be requested through your online account at www.bpas.com under the transactions tab.

Despite Bad News, the Markets Edge Upward

March and 1st Quarter 2020 data is coming in, and expectations are low for good reason.  In some cases, the numbers are beyond bad - like in retail sales.  Food services and drinks were off 26.5% from February.  Automotive & parts as well as furniture stores were also down over 25% - and April’s numbers are expected to be even worse.

As part of the demand slowdown, CPI (consumer price index) was down 0.40%, a rarity.  Energy price drops fueled most of it, but deflationary pressures are building as demand takes a siesta.

It’s hard to call jobless claims of 6 Million improvement, but it was - though the layoff news is far from over.  Consumer optimism for the economy continued its cliff dive, dropping to 71 from a prior month reading of 89 for the Michigan sentiment indicator.  The NY Manufacturing Index slumped to -78.2, showing a faster contraction of factory activity than expected.

The S&P Index was up 1.25% for the week; Year to date, the S&P 500 is off about 13.3%.

Is This Rally For Real?

Stocks were up sharply on the week as the S&P 500 gained 11.4%. Small caps were up 11%, while beaten-up industries had some big price gains. Treasury yields were higher at the long end of the curve as investors began considering the lifting virus sanctions. COVID-19 news flow was more positive, allowing stocks to rally more than 20% from their lows of just a couple weeks ago.

Economic data is going to be ugly, and though everyone knows it there is little to show it in stock prices. Jobless claims put in back-to-back weeks of 6.6 million following the first weekly spike up. Retail sales are expected to be up in March thanks to a huge spike in food sales, but credit card usage has fallen off a cliff. Bank of America debit and credit card data shows a drop in March that is three times the largest drop in 2008.  Earnings season is getting underway. So far most companies are reporting weak results and withdrawing guidance. Stocks are generally holding up as a negative catalyst is removed, which allows traders to re-enter positions.

Last week may have been the peak in doomsday forecasts. Wall Street seemed to be in a race to see who could make the lowest GDP forecast. US COVID-19 cases were supposed to be entering their worst phase, and with it came all the scare headlines. It was no surprise markets would stage a rally, as it was almost impossible to have worse news. Just a marginal improvement in tone sent equities surging.

The Federal Reserve (Fed) continues to roll out programs to aid the situation. Some appear to be working, as bond markets are functioning better. Corporate bond spreads are tightening for those judged  to be survivors. Corporate bond supply surged as companies look to raise cash when they can, not when they must. Previously the Fed said they would buy investment grade bonds - this week they announced they will buy bonds downgraded to high-yield after March 22 along with high-yield exchange traded-funds. Some expected this to happen eventually, but to see it implemented  shows a pre-emptive mindset, with more to come.

Business Benefits Start Raining Down

Investment markets continue to react to the COVID-19 pandemic. Wide daily swings in performance have become the norm over the last few weeks. The $2 trillion virus relief package, the CARES Act, was approved by the Senate and the House, and President Trump has signed it. Now, the Department of Treasury is figuring out how to make it happen. The expectation is for qualified individuals to start receiving checks in the coming weeks. However, one question keeps coming up. Will the fiscal stimulus be enough? It is difficult to tell, especially since the duration of pandemic lockdown is unknown.

Domestic equity markets were flat for the week. The return of -0.17 hides the daily volatility we saw this week. Defensive sectors like consumer staples and health care led in performance. The sectors recorded positive performance of 4.94% and 4.69% respectively this week.

Company earnings numbers will be coming in the next couple of weeks. This should give an initial indication of the impact the virus has had on U.S. publicly traded companies.

We are starting to see an impact on macroeconomic numbers. The big macro news from the week is the initial unemployment claims, as 3.283 million people filed claims for unemployment insurance. This is the highest this number has been since it started being recorded. The number of unemployment claims is expected to double.

However, consumers remain confident. The announcement of 120 was higher than the expected 110, but lower than the previous month’s 132.6. Consumer sentiment as measured by the Michigan Sentiment Indicator was at 89.1. This compares to the expected 90.1 and the prior month’s 95.9.