Wealth Management

Did you miss our virtual session on the importance of having a long-term care plan last week?

You can listen to the replay now by Clicking Here!

This session was a discussion about health, lifestyle, family and how you want to be prepared for the unexpected. We couldn't think of a better time than now for a conversation like that.

Our partners at Ash Brokerage touched on important considerations such as:

• Why long-term care planning is about more than money
• The importance of having a written plan
• Understanding why Medicaid and Medicare should be your last choice
• Considerations and goals when choosing a funding source and insurance options

If you are interested in learning more about whether long-term care insurance makes sense for you, contact your advisor. We'd be happy to go over any questions you may have. 

© The Axial Company. All Rights reserved. 5 Burlington Woods Dr, Suite 102 BURLINGTON, Massachusetts 01803 United States781.273.1400

© 2020 Commonwealth Financial Network^®

© The Axial Company. All Rights reserved. 5 Burlington Woods, Suite 102 Burlington, Massachusetts

Disclosure: Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. It excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners. The Bloomberg Barclays Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Bloomberg Barclays government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities. The Bloomberg Barclays U.S. Corporate High Yield Index covers the USD-denominated, non-investment-grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below.

The Importance of Having a Long-Term Care Plan
SPECIAL VIRTUAL SESSION
APRIL 30 | 4 p.m. EDT

We know you’re watching the market and wondering – like so many of us – “Will I be ok?” It’s too early to predict the long-term impact the coronavirus will have. But even before the current market decline, there’s one financial planning challenge that extends far beyond your income and assets: longevity.

Living longer has changed financial planning. And while we’ve done a lot of financial modeling, we’ve never finalized your plan for a long-term healthcare event.

This is a discussion about health, lifestyle, family and how you want to be prepared for the unexpected. I can’t think of a better time than now for a conversation like that.

We've put together an exclusive virtual session with our partners at Ash Brokerage to talk through important considerations such as:

• Why long-term care planning is about more than money
• The importance of having a written plan
• Understanding why Medicaid and Medicare should be your last choice
• Considerations and goals when choosing a funding source and insurance options

Click Here to Save Your Spot Now!

Please make time to join us for this important event. If you can’t make it this time, make sure to let us know so we can schedule another session at a time that works better for you.

We suggest testing your mobile or computer devices ahead of time to ensure they're working properly. If you need any help getting started, please contact our office and we'll be glad to walk you through.

We look forward to hosting you for this call!


© The Axial Company. All Rights reserved. 5 Burlington Woods Dr, Suite 102 BURLINGTON, Massachusetts 01803 United States781.273.1400

In these uncertain times, doing something with an impact on others can offer a sense of purpose and meaning. As you’ve likely heard, there is a shortage of protective masks within the medical community. Grassroots efforts have been popping up across the nation to provide alternative masks to health care professionals should they need to use them at some point.

Whether you sew regularly, or you’re simply looking for a way to keep busy—what better time than now to break out the old machine?

Here’s some information on how you can get involved:

• Masks can be sewn using this simple pattern.
• JOANN Fabric and Craft Stores has posted an informational page that includes video and photo tutorials.
• JOANN recommends using 100 percent cotton fabric. You can easily order supplies on JOANN’s website and have them delivered. JOANN is also offering curbside pickup at its store locations.
• A working list of institutions accepting finished product via mail or delivery can be found here.

Axial will be doing our part among our employees and staff as well, to support the dedicated healthcare workers and first responders on the front lines of this pandemic.

We hope that you and your family are staying safe and healthy!

Best regards,

The Axial Team

© The Axial Company. All Rights reserved. 5 Burlington Woods, Suite 102 Burlington, Massachusetts

Q & A: Understanding the New CARES Act

Presented by The Axial Company

On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) into law. The CARES Act has been enacted as a direct response to the COVID-19 pandemic and is intended to provide immediate and ongoing economic relief to individuals and businesses affected by the crisis.

The following Q&A covers key questions you may have about the legislation.

Recovery Rebates

Q: Will I get a stimulus check? How much will it be?

A: Due to the passage of the CARES Act, individuals and families with incomes below certain thresholds can expect to receive a check (or direct deposit), known as a “recovery rebate,” from the government.

The amount of the check will be based on your adjusted gross income (AGI) from your 2019 income tax return, if filed, or, if not yet filed, your 2018 tax return. Most individuals can find their AGI on line 7 of your 2019 Form 1040. For 2018, your AGI will be listed in the following location, depending on which form you filed:

• Form 1040-EZ: Line 4
• Form 1040: Line 37
• Form 1040-A: Line 21 

For individuals who receive social security benefits and do not file taxes, the government will use information from their social security statement to determine eligibility. For many Americans who are not on social security and who also do not file income tax returns, the bill will effectively require those individuals to file a return to become eligible for a stimulus check. Nonresident aliens, individuals claimed as dependents on someone else’s return, and estates and trusts are not eligible for payment.

The following chart shows how much individuals can expect to receive, depending on their AGI and tax filing status.

In addition, families will receive an extra $500 per child younger than age 17.

Taxpayers with AGI above established thresholds will set their payment amount reduced by 5 percent of the income exceeding the threshold ($5 of every $100 in income), which means certain individuals will not receive a stimulus check, as outlined below.  

*Add $10,000 to AGI per child to determine complete phaseout amount for filers with children younger than 17.

Q: I am retired and no long working. Will I still get a check?

A: As long as your income is under the threshold and you are not claimed as a dependent on someone else’s tax return, you should be eligible for a recovery rebate.

Q: When will I get my check?

A: The timing of the checks is still undetermined; the law simply states that payment is to be made “as rapidly as possible.” If the last time Americans received checks as part of an economic stimulus package is any indication, individuals and families could expect the cash in two to three months, as that was the time frame in 2008. Under that package, however, taxpayers were required to file their most recent tax return before becoming entitled to the funds, which is not the case with the CARES Act. Government officials have expressed an intent to have the payments sent out in mid to late April.

Retirement Accounts

Q: Do I have to take my required minimum distribution (RMD) this year?

A: No. Under the CARES Act, all RMDs for 2020 are suspended. This includes individuals who turned age 70½ in 2019 and were waiting until 2020 to take their first RMD.  

Q: What if I already took my RMD?

A: If you took an RMD within the last 60 days, you may be able to return it to your retirement account without penalty before the expiration of 60 days. If you took your RMD more than 60 days ago, then it is likely you will need to qualify for a COVID-19-related distribution (as discussed in the next Q&A) in order to be able to return the distribution to the account without penalty.  

Q: I need to access funds from my retirement account because of the crisis. Will I be penalized?

A: Individuals are permitted to take a penalty-free distribution of up to $100,000 from their retirement account if they, or a spouse or dependent, are diagnosed with COVID-19 or if they experience negative financial consequences (e.g., job loss) as a result of the pandemic. In addition, individuals may elect to spread the taxation of the withdrawn amount over the next three tax years, rather than including the full amount as taxable income in 2020. Individuals may also recontribute any amounts withdrawn under this provision at any time over the three-year period, tax free, even if the amount being returned exceeds the annual plan contribution limit.

Q: What if my money is in an employer-sponsored plan (e.g., 401(k), 403(b)), and I’d prefer to take a loan?

A: The borrowing limit from an employer-sponsored retirement plan has been increased from $50,000 to $100,000 for the 180-day period following the bill’s enactment.

Contact your employer’s Human Resources department or the retirement plan administrator for more information on plan loans.

Taxes

Q: When do I need to file my taxes?

A: The deadline for filing federal taxes has been extended to July 15, 2019. Some states have extended their deadlines as well, but be sure to consult with your tax professional to ensure that you comply with official filing and payment dates.

Q: Does the delay in the tax filing and payment deadline mean I can delay contributions to my retirement account?

A: Yes, the contribution deadline for IRAs has been extended to July 15 as well.

Q: How does the bill encourage people to give to charitable causes (e.g., to help organizations aiding in the crisis)?

A: For the 2020 tax year, taxpayers can take an above-the-line charitable deduction of up to $300 for certain charitable contributions. Typically, charitable contributions are deductible only for individuals and couples who itemize rather than use the standard deduction. Contributions to a donor-advised fund are not eligible for this treatment.

In addition, for 2020, the deduction available on cash contributions to charitable organizations has been increased from 60 percent of a taxpayer’s AGI to 100 percent. (Contributions to donor-advised funds are not eligible.) For corporations, the deductibility of cash contributions has been increased temporarily from 10 percent to 25 percent of taxable income.

For answers to more specific questions related to IRS deadlines and payments, visit the IRS’s Filing and Payment Deadlines page. The IRS has also established a special section on its website dedicated to Coronavirus Tax Relief.

Student Loans

Q: How does the bill affect my student loan payments?

A: Borrowers of federal student loans will not be required to make student loan payments prior to September 30, 2020, and interest on the loans will not accrue during such time period.

For more information, visit the Department of Education’s Federal Student Aid website, which provides guidance for students, borrowers, and parents during the coronavirus outbreak.

Economic Hardship and Job Loss from COVID-19

Q: I lost my job or my ability to make an adequate living as a result of the crisis. How will the CARES Act help?

A: In addition to any weekly unemployment compensation available to an individual under state law, unemployed individuals are entitled to an additional $600 per week for a period lasting until July 31, 2020, termed “Federal Pandemic Unemployment Compensation.”

In addition, although states typically do not fund an individual’s first week of unemployment, the bill provides federal funding for such first week of unemployment compensation for any state that chooses to participate.

Certain individuals would also be entitled to “Pandemic Emergency Unemployment Compensation,” which could fund an additional 13 weeks of unemployment compensation if their benefits under state law are exhausted, provided they meet certain requirements.

Each state has its own unemployment system. CareerOneStop, a site sponsored by the U.S. Department of Labor (DOL), offers information on how to file for unemployment across all states. You may also visit the DOL’s Coronavirus Resources page for additional information for employees.

Q: What if I am self-employed or otherwise not typically eligible for unemployment benefits?

A: Individuals who self-certify that they have been adversely affected by the COVID-19 pandemic, including individuals who typically are not otherwise entitled to unemployment compensation under state law (e.g., self-employed), may receive unemployment compensation for a period of up to 39 weeks commencing January 27, 2020. The amount payable to self-employed individuals will be calculated based on 50 percent of the average weekly compensation in that individual’s state. The amount will also include the $600 Federal Pandemic Unemployment Compensation noted above.

Q: What if I can’t afford my mortgage or rent?

A: The CARES Act has provisions affording individuals the ability to defer mortgage payments under certain circumstances. This relief is limited to loans backed by the federal government. Individuals affected by the COVID-19 pandemic may seek a forbearance of payment on their federally backed mortgage for a period of up to 180 days. Owners of multifamily homes with a federally backed mortgage may seek forbearance of payment for up to 90 days, provided they do not attempt to evict a tenant or charge late fees.

Lenders of federally backed mortgages are prohibited from instituting foreclosure on a borrower for a 60-day period commencing March 18, 2020. Landlords who have federally backed mortgages are prohibited from initiating eviction proceedings against tenants for the 120-day period following the enactment of the CARES Act.

More information and resources on mortgage payment relief is available from the Federal Housing Finance Authority.

Small Business Loans

Q: My business has been economically harmed by the COVID-19 crisis. Am I eligible for a loan?

A: Small businesses (in most circumstances, defined as employing 500 or fewer employees) will be eligible for forgivable government-backed small business loans under the “Paycheck Protection Program.” Borrowers may be allowed to defer payment of such loans for up to one year; the amount of forgiveness will depend on expenses and the number of employees retained during the crisis, as further described below.

The Small Business Administration is required to provide guidance for lenders on the deferral process within 30 days of the enactment of the bill. The interest rate on such loans cannot exceed 4 percent. You can contact your local Small Business Development Center for help in determining access and eligibility for the Paycheck Protection Program.

In addition, the CARES Act increases the accessibility of an SBA Economic Injury Disaster Loan (EIDL) related to the COVID-19 crisis to more recipients (e.g., ESOPs and sole proprietors). It also eliminates the requirement of personal guarantees for loans of less than $250,000, the provision that businesses must have been operating for more than one year, and the “credit elsewhere” requirement.

For further information on eligibility, including how to apply, please visit the SBA’s Disaster Assistance page and the Small Business Guidance & Loan Resources page.

Q: How much can I get?

A: For a Paycheck Protection Program loan, the total maximum allowed loan amount will be calculated based on the average monthly payroll expenses of the business over the prior year, not to exceed $10 million.

Q: How much of the loan amount could be forgiven?

A: An employer recipient of a COVID-19-related SBA loan may seek forgiveness for a portion of its Paycheck Protection Program loan amount for expenses incurred for maintaining payroll, group health insurance, and certain preexisting debt and utility obligations during the eight-week period following the origination of the loan. The amount of forgiveness will be reduced if there is a decrease in the business’s total number of employees and/or a significant decrease in compensation to employees during the period of February 15, 2020, through June 30, 2020.

Q: What other parts of the bill are helpful to businesses?

A: Small businesses may also be interested in the following provisions:  

Tax credit for wages. Businesses that were forced to suspend operations due to the COVID-19 pandemic and experienced a significant decline in gross receipts as compared to the prior year may be eligible for a payroll tax credit of up to 50 percent of wages paid during the crisis. Only the first $10,000 of wages per employee would qualify for this credit. Eligibility for this credit depends on a number of factors and can be affected by how many employees the business has.

Delay of payment of employer’s share of FICA tax. Employers will be allowed to delay payment of their share of payroll taxes due from the time of the passage of the bill until December 31, 2020. Fifty percent of the amount otherwise due for the 2020 tax year will be due by December 31, 2021, with the balance payable by December 31, 2022.

Modification of NOL rules. With the Tax Cuts and Jobs Act of 2017 (TCJA), businesses were limited in their ability to use net operating losses (NOL) to offset income. Under the CARES Act, NOL arising from the tax years 2018 and later may be carried back five years to offset income in such years. The legislation also temporarily removes the income limitation on using NOL to offset income. As a result, some businesses may be able to amend past tax returns and generate tax refunds that were otherwise unavailable.

Enhanced ability for noncorporate taxpayers to use losses. For the years 2018 through 2020, passthrough entities and sole proprietors may use excess business losses. The TCJA had disallowed noncorporate taxpayers from using excess business losses to offset income until 2026. The CARES Act carves out the ability for such entities to access those losses and potentially increase liquidity.

Increase in ability to deduct interest expense. The cap on a business’s ability to deduct its interest expenses is increased from 30 percent of the business’s adjusted taxable income to 50 percent for the years 2019 and 2020.

Acceleration of corporate AMT credits. Businesses with leftover alternative minimum tax credits can accelerate the recovery of such credits.

Stay Up to Date

The stimulus bill provides wide-ranging assistance to individuals and businesses that have been or will be negatively affected by the COVID-19 pandemic. As this crisis represents an unprecedented interruption in people’s lives and in the economy, more legislative action and government intervention may be forthcoming. Be sure to connect with your tax professional for a greater understanding of how the CARES Act may affect you.

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.

© 2020 Commonwealth Financial Network^®

© The Axial Company. All Rights reserved. 5 Burlington Woods, Suite 102 Burlington, Massachusetts

Congress Steps Up For The Economy

Posted by Brad McMillan, CFA, CAIA, MAI, Mar 25, 2020

Presented by The Axial Company

The Fed stepped up early and hard for the coronavirus crisis. It cut interest rates essentially to zero. It eased restrictions on banks to enable faster and more business lending. Plus, the Fed has taken unlimited measures to support the financial system as a whole, restarting programs from the last crisis to purchase bonds and inject money into the system. Unlike 2008, the Fed has been consistently ahead of the crisis, determined to choke any instability as quickly as possible before the medical crisis transmutes into a financial one. It largely looks like the Fed has been successful. The Fed and monetary policy have done what they can do so far, and they are poised to do more as needed.

What’s missing?

Monetary policy—think interest rates and bank regulation—can only do so much, however. What has been missing, until now, has been direct policy support (i.e., writing checks) for workers and businesses. Spending money, known as fiscal policy, is the province of Congress. Last night, the two parties appear to have agreed on a stimulus deal aimed at providing financial support—checks—directly to workers and businesses. This deal is the missing piece in the needed policy support for the economy, and it should significantly mitigate the damage.

The package totals about $2 trillion, or almost 10 percent of the economy as a whole. It also includes provisions to enable the Fed and commercial banks to add up to another $6 trillion in temporary financing. This is real money, larger than what was done in 2008. Although it took longer, Congress has now gone big and hard to get ahead of the damage. And, like the Fed, there is likely more there if needed.

Where will the money go?

Nearly half of the package is direct payments to both people and firms. Individuals will get a $1,200 check, with an additional $500 per child, up to an income limit. Loan guarantees are available to small businesses, which convert to grants if the businesses maintain their payrolls. Unemployment insurance is now for 100 percent of lost wages for up to four months. There is also money to support the health care system, as well as state and local governments. Finally, a significant part will go to large businesses affected by the crisis, such as airlines.

In other words, there is something for pretty much everyone here. While there will undoubtedly be mistakes, it provides the framework for getting the economy through the crisis until something like normality returns. This program is what is needed to mitigate the long-term damage from the crisis.

Will we survive the slowdown?

What this package, and the Fed’s actions, will not do is prevent a significant short-term drop in the economy. The second quarter will be terrible, and the third quarter won’t be great either. With the lockdowns in place, with people unable to work or spend, preventing that decline is impossible.

What can be done—and what the package is designed to do—is allow people and companies to survive during that period, despite that slowdown. People will be able to pay their rent and buy food, first with the initial check and then with the expanded unemployment insurance. Companies will be able to pay their rent, other expenses, and, in many cases, their people. Critically, with that support, both individuals and companies will be around to start working and spending again when the lockdown eases and when the economy starts up again—which is the goal.

There will certainly be collateral damage here. People will suffer, and some companies won’t make it through. But this program will help minimize that damage and help ensure that we have a functioning economy in a couple of months when the virus is brought under control.

Between the Fed and the proposed congressional action, we will have the policy response in place that we need to get through the next difficult weeks. There will still be damage, and there will likely be a need for additional policy response. If that’s the case, the signs are that both the Fed and the government will do what is needed, when it is needed.

What’s the message?

There are two messages from the stimulus package. The first is that the money will be there, which is critical. It will support confidence from consumers and businesses, and it will help preserve both the capability and the confidence needed to keep the economy going.

The second, and in some ways more important, is that the U.S. government is up to the challenge of this crisis. That position will also help preserve confidence, which will help more than anything to resolve this crisis as quickly as possible.

Authored by Brad McMillan, CFA®, CAIA, MAI, managing principal, chief investment officer, at Commonwealth Financial Network®. © 2020 Commonwealth Financial Network®

© The Axial Company. All Rights reserved. 5 Burlington Woods, Suite 102 Burlington, Massachusetts

Bryan Robinson, Forbes Contributor

When you're not used to working at home, distractions can cause lack of focus, procrastination and lower productivity.

During the COVID-19 outbreak, many companies are suggesting—even requiring—that more employees work from home. Working from home can be a lonely enterprise in this era of social distancing, but it doesn't have to be. For those who are not used to working at home or who don’t have an organized work station, distractions can disrupt your productivity. After all, you’re in your personal space, not your usual professional environment. Laundry needs to be done, dishes washed and the house cleaned. Plus, maybe you want to see The View since you’re always at the office when it’s on, or there’s a good movie on Netflix you’ve been longing to watch. Your pooch needs to go for a walk or you want to snuggle with him. And your spouse keeps yelling questions from another room, causing you to keep loosing your train of thought. Or on the flip side, maybe since being at home 24/7, you find yourself toiling overtime on the job long after you usually would have called it quits at the office. On top of it all, cabin fever could be sneaking up on you.

Posted by Brad McMillan, CFA, CAIA, MAI, Mar 19, 2020

Presented by The Axial Company

Yesterday, we talked about how the coronavirus pandemic itself can be brought under control, and how in many countries it already has been. Here in the U.S., we are not there yet, but we can reasonably expect to get there in the next month or so. That is the good news.

But when the virus is brought under control, our problems will not be over. At that point, we will need to reckon with the damage that has been done to the U.S. and global economies, and that damage will extend well beyond the end of the pandemic.

That damage is real—it exists now and is getting worse every day. But much of the current discussion is focused more on the possible downside than the most likely outcome; that is, it has been focused on what could happen, rather than what likely will happen. Today, I want to think through what is likely to happen with the economy. We won’t ignore the could happen—it is important to understand the downside risk—but we also will not assume the end of the world.

9/11 or 2008?

The base question here is whether the pandemic is more like a 9/11 event (where a sudden shock derails the economy that then takes time to recover) or a 2008 crisis (where the system itself seems to be falling apart). The could-happen commentary assumes this situation is a 2008. It could be, and I can draw a path to that outcome. But so far at least, I don't think so. I think this is more like a 9/11 event.

Let's think about what 9/11 really was, from an economic standpoint. There was an exogenous shock, a sudden event that nobody had thought was coming. It shook everybody's behavior, shook everybody's actions, and there was a sudden collapse in demand as people stayed home. Looking back, many people stayed home for at least two weeks after 9/11 because no one knew what else was going to happen. And even after that, they were more cautious. The economy slowed until people recovered their confidence.

A crisis of confidence

A sudden, terrifying event. People staying home and not spending. Does this scenario sound familiar? It should, because it is exactly what we're seeing right now. Further, it’s going to last until, first, the pandemic is brought under control and, second, until people regain confidence.

Given that, the economic impact is going to be greater and longer lasting than 9/11. But once again, we have a similar situation where most of the economic damage comes from the fact that people are scared, and they're pulling back. Once we know the virus is under control, economic activity and confidence will eventually come back. In 2008, the system itself was threatened with collapse. But right now, we have a massive crisis in confidence, and that's something that can come back over time. That is why I say, right now, it looks more like 9/11.

Could it become 2008?

Yes, and there are two main ways. First, we are likely to see much greater unemployment than we saw after 9/11. With the lockdowns, large parts of the restaurant and hospitality industry are now shut down. That’s a lot of jobs. Add in airlines, retail, and all other public-facing jobs, and you have potentially millions of people who suddenly have no income. You also have millions of businesses that are suddenly out of business. Every day of that is a tragedy for them and real damage for the economy. If it lasts beyond a couple of weeks—as it likely will—that alone could bring down the economy. Second, if that economic damage led to sustained disruptions in the financial system, that would make the crisis directly like 2008. We might be seeing signs of that in the bond market right now.

So yes, the current 9/11 situation could evolve to a 2008, and we should consider that possibility. The question is whether that is the most likely case or whether (like the pandemic itself) there is something that can be done that would avert that worst case. Once again, there is, and signs are that what needs to be done is in fact being done. We could see a 2008 but we're not there yet. In fact, because of the lessons learned 12 years ago, the likelihood is that we won't get there.

Can we avoid long-term damage?

Well, first of all, we need the Fed to support the financial system. As of last Sunday, the Fed just went all in to do just that. It cut interest rates to near zero in an unprecedented move, it arranged to push capital into the financial markets to stabilize the system, and it changed the rules to let banks lend more to businesses in need. In other words, the Fed said very explicitly, whatever it takes, we're going to get in and we're going to get in early before a 2008 collapse can even start.

Here is the big difference from what happened in 2008. Back then, nobody knew what was happening with the financial system. Nobody really believed a collapse could happen. When it threatened, both the Fed and Congress balked at doing what was necessary. This time, they know what might happen and are determined to prevent it. On monetary policy, the Fed has done everything it can do—and it is prepared to do more.

But monetary policy can only do so much. For the suddenly unemployed, and for businesses that were just shut down, we need fiscal support from the government. Here again, the news is good. Congress is on board and is in the process of changing policies to help the people and businesses in trouble. While the details are not yet finalized, there is a clear decision from both the House and the White House that what is needed will be done. It looks like the government will mandate money for people who can't work and is talking about sick leave for people who need to take sick leave. These actions won’t eliminate the damage, but they will help contain it. Other countries around the world are doing the same thing.

Just as with the pandemic itself, with the economic damage we know what the problem is. We know how to manage the problem, both fiscally and monetarily, and we are working on it. We're not there yet. It depends on politics, but again, this is eminently a solvable problem and we're on track to solve it. There will be economic damage, but right now it looks far more likely to be short term and limited rather than long term and systemically threatening. Just as with the pandemic itself, the situation is far from ideal—but certainly solvable.

What about the markets?

Which brings us to the third part: market reactions. Markets understand that the problems can be contained (which explains the sudden recoveries), but they also recognize the real damage being done and have doubts about the ability to execute solutions (which explains the drawdowns). Tomorrow, we will take a deeper look at what the pandemic and the economic damage will likely mean for markets.

Authored by Brad McMillan, CFA®, CAIA, MAI, managing principal, chief investment officer, at Commonwealth Financial Network®. © 2020 Commonwealth Financial Network®

© The Axial Company. All Rights reserved. 5 Burlington Woods, Suite 102 Burlington, Massachusetts

Posted by Brad McMillan, CFA, CAIA, MAI, Mar 18, 2020

Presented by The Axial Company

Yesterday, we talked about the big picture around the coronavirus crisis: the pandemic itself, the likely economic effects, and, last but certainly not least, the market reactions. Next, I want to start a more detailed discussion of each component. We will deal with the pandemic today, the economy tomorrow, and the markets on Friday. Although the big picture provides valuable context, there is also quite a bit to be gained by diving deeper into each component.

What we know

Let's start with the virus itself. There’s a real sense out there, among a lot of people, that this virus is basically a judgment or an apocalypse and that we're all going to die as a result. I don’t think so. More important, that is not what the data is saying. As much as they call me Eeyore, I'd like to think I’m a rational Eeyore, and we know a couple of things.

First, the virus started in China, and it got a real foothold there before the government acknowledged the magnitude of the threat. If the virus was going to be uncontrollable anywhere, it would have been in China. In fact, China did bring it under control, as you can see in the chart below, available on the Worldometer website. (All charts in this post come from the appropriate country pages on that site.)

Another good example is South Korea. It had a very bad outbreak, largely because of one super spreader. But as you can see below, South Korea has also brought the virus under control.

All of this data shows something very clearly: the virus can be brought under control. Plus, Taiwan and Singapore—two of the closest countries to China that you would think would be most affected by the virus—managed to control it very quickly and very early on. So, it’s not inevitable that the virus will spread uncontrollably. Even if it starts out that way, as in China and South Korea, it can be controlled.

The data from all of these countries also reveals that both globally and especially here in the U.S., this is a solvable problem. That is an important point—and one that we need to keep in mind as we move forward.

Controlling the outbreak

So, how do we control the outbreak? The simple answer is to keep the virus from spreading to new people. Viral spread is defined by how many people catch it off each carrier, known as R0 (pronounced R-naught). If that number is greater than one, where each carrier infects more than one other person, the virus spreads. If it is below one, the disease dies out. It really is that simple. Right now, that number seems to be about three for the coronavirus, in the absence of social restraints, which explains the rapid spread and the panicked headlines. Left to itself, the virus will indeed continue to spread. Fortunately, most countries and governments are no longer leaving it to its own devices.

How do we limit the spread and reduce R0? Keep people away from one another. This is the idea behind school shutdowns, restaurant and bar closures, and all of the other policy measures out there. If people are not together, they can’t spread or catch the virus. Simple in theory, and as noted above, we know it has worked in both China and South Korea.

We are also seeing signs it is working in Italy, where new cases look to be stabilizing as the lockdown enters its third week. Yes, the numbers are still way too high. But they have to stabilize before declining—and that is what is happening.

The lesson here is that the coronavirus can and has been stopped in many countries, including those with the most severe epidemics. To control the virus, it is necessary to push R0 down. We see it can be and has been pushed down in multiple countries.

We also know how to do just that, through physical isolation (a term I prefer to social isolation). We know it worked with extreme measures in China, we know it worked without extreme measures in South Korea, and we're finding out it works in Italy. This approach is working. There's a reason we're doing what we're doing.

The U.S. outlook

What does this data mean for us here in the U.S.? The good news is that, starting a couple of days ago, we are taking the measures that work. The fast growth in virus cases that we've seen thus far has been because we had not yet imposed the restraints that limit viral spread. We are now implementing the policies that have been proven to work. Restrictions at the state level will certainly help, and the national emergency declared by President Trump puts those restrictions in bold.

Once again, Winston Churchill was right when he said that you can always count on Americans to do the right thing, but only after they've exhausted all the other alternatives. Well, we've exhausted the alternatives. Now we're doing the right thing, and we're probably past the point of maximum danger.

Unfortunately, we are not past the point of maximum impact and certainly not past the point of maximum headlines. Not only will the improvements from the restrictive policies not show up in the data for weeks (as we saw in Italy), but the reported data may get worse. With increased testing, it will look like more and more new cases showing up. That doesn't necessarily mean that there are more new cases; it just means that all of a sudden we know about them. As testing gets better, and as we know more about how many cases there really are, things could look worse even as they're getting better. Expect to see this story in the headlines, and be prepared for it. Which brings us to the final question: how will we know when things are finally getting better?

Keep an eye on new cases

We’ll know when the chart below shows a decrease in new infections. Right now, the U.S. chart looks scary, but so did the charts for the other countries before they put the appropriate policies in place. Plus, there is reason to believe the actual results may be better than we saw in other countries.

As I said, we are probably close to the point of peak actual infections, now that restrictive measures are in place for a large part of the population. But we don’t know that, and we don’t know when the curve will bend down. The first sign will be when the reported new cases first stabilize, then roll over, and then start to decline. Keep an eye on this chart.

We are not at that point yet. Now, we see disease growth combined with better reporting appearing to spike the case count. But if China, South Korea, and Italy are good guides, we should see that point in the next month. That will be when things are getting better, even if the headlines continue to get worse. Expect to see that, and understand that the underlying situation is likely improving, even as the headlines get worse.

On our way to solving the problem

We are already at or close to the maximum public perception of risk. When all of the professional sports seasons were cancelled, pretty much everybody in the country started to realize what was going on. With that, and with all the follow-up coverage, people know what the problem is, they know what to do, and by and large they are doing it. This awareness is what is needed to beat the virus. The public reaction has been a good sign because it has enabled governments to take the measures that they need to. We wouldn't have had a national emergency without that public perception of risk. We would not have had the restrictions that we're seeing right now, which will solve the problem over time, without that public perception of risk. The panic has been a key part of solving the problem. While we are not there yet, we are on the way.

Other reasons to be optimistic relate to the simple fact that the U.S. is a very spread out country. Most of the outbreaks have been in very concentrated populations, where people live on top of one another and have multiple exposures (e.g., daily public transit use). That describes China, Italy, and South Korea, as well as the major outbreaks in the U.S., such as New York, Seattle, and Boston (where I live). In less concentrated areas, we see much less spread. We still need to isolate to control, because we don’t want to see that spread start there, but we are in a much better position to do so.

Some good news . . .

This is the real takeaway for the pandemic itself: it is real, it is serious, and we need to react. The good news is that we are doing just that—and that will bring the virus under control. This situation is not the apocalypse, but rather another solvable and survivable challenge. That’s the good news.

Now we need to consider next steps, however, because there will certainly be economic damage. How much, and what that will mean, is what we will discuss tomorrow.

Until then, stay healthy!

Authored by Brad McMillan, CFA®, CAIA, MAI, managing principal, chief investment officer, at Commonwealth Financial Network®. © 2020 Commonwealth Financial Network®

© The Axial Company. All Rights reserved. 5 Burlington Woods, Suite 102 Burlington, Massachusetts

Presented by The Axial Company

Posted by Brad McMillan, CFA, CAIA, MAI, Mar 17, 2020

With everything that is happening in the world, now is a good time to step back and think about where we are and where we might be going. There is a tremendous amount of information available. But what’s missing is a framework for that information that would help clarify the big picture.

What I want to do today is outline how I see that big picture, which will hopefully provide a framework to understand where we are headed. In the next couple of days, I plan to go into more detail on the individual components.

Breaking down the news

First, we have to break down the news. There are three different issues that we need to consider, and the news often conflates them. The issues are (1) the virus itself and the pandemic, (2) the economic impact of the pandemic, and (3) the financial market implications of that impact. By considering them individually, we can gain some clarity.

The virus itself. The base question is whether the virus is controllable or not. And the answer is yes. In the absence of restraints, the virus will spread—as we saw in China, in Italy, and in the U.S. But when proper restrictions are put into place, it can be brought under control. This idea has been proven in China and South Korea, and Italy is now reportedly stabilizing. Here in the U.S., we understand what has to be done, and we are now doing it. This is the end of the beginning.

Unfortunately, we are not out of the woods just yet. Everyone now knows what to do and why, as well as what the stakes are. If we just stay home, things will eventually get better. But there is usually a lag of about two weeks between the time that restrictions are put into place and when new cases stabilize. So, we can expect the news here to get worse for a while. We are likely past the point of maximum danger, but we are not past the point of maximum impact. Even as the rate of spread slows, expanded testing will make it look like things are getting worse. Expect to see that story in the headlines.

The economic impact. The economic damage is certainly real. But going forward, the question is whether the next year will look like it did after 9/11—or like 2008.

Right now, the resemblance to 9/11 is much greater. The pandemic is an outside shock to the economy, which has generated fear and will slow consumer and business spending, much like 9/11. As such, like 9/11, the economic impact could pass once the fear does. That is the base case: real damage, but then a recovery as confidence returns. The economic impact will, however, likely be worse than after 9/11. The slowdown in spending is very likely to be worse and longer lasting this time, which could (over time) turn the 9/11 into another 2008.

This scenario is something we must keep in mind, but whether it happens will depend on whether government policy is sufficiently supportive to both workers and businesses affected by the drop in demand. Here, the news is good. The Fed acted fast and hard to provide monetary stimulus. Unlike 2008, the Fed has clearly stated it will do what it needs to do in order to avoid a crisis. The federal government is also in the process of responding with economic support. While that process is not yet complete, signs are that any necessary support will be available, minimizing the chances of another 2008. There will be economic damage, but with proper policy support, it is likely to be limited.

Financial market implications. Finally, when we look at the markets, we see a clear expectation that the pandemic will continue and that the economic damage will be substantial. While that still may end up being the case, policy actions both here and around the world have made that substantially less likely in the past week. Signs are that the pandemic will be brought under control and that the economy will get enough support to weather the storm. Make no mistake, there will be damage. But from a market perspective, the question will be whether the damage is greater than markets now expect, or less. Signs are that the damage will be less, which should support markets going forward and eventually enable a recovery.

What happens next?

The crisis is not over. We can certainly expect the headlines to keep screaming and even get worse over the next couple of weeks, which could keep markets turbulent. We know, however, what is needed to solve the problem and that those measures are largely in place. By keeping the framework discussed here in mind, we will be prepared for those headlines and able to see the gradual improvement underneath them.

This is a difficult time for everyone, and worries are surging. Although those worries have allowed for the necessary policy changes to solve the problem, worry is always difficult. As we move forward, keep in mind that while the concerns are real, so is the policy progress. In the not-too-distant future, we are likely to see the virus brought under control here just as we have seen in other countries. Keep calm and carry on.

Authored by Brad McMillan, CFA®, CAIA, MAI, managing principal, chief investment officer, at Commonwealth Financial Network®. © 2020 Commonwealth Financial Network®

© The Axial Company. All Rights reserved. 5 Burlington Woods, Suite 102 Burlington, Massachusetts

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