MARKET UPDATE: SECOND QUARTER 2020
When this quarter began, the stock market was just beginning to pick itself up from one of the worst and quickest declines in history. The 34% decline from February 19 to March 23 this year was an indication of just how weak the economy would be in the second quarter. The economic numbers released over the past three months confirmed the story the stock market predicted. The unemployment rate peaked at 14.7% as over 20 million jobs were lost in the economic lock down. The housing market saw large declines in both starts and permits for new homes. The consumer, who had been the engine for economic growth, was essentially shutdown causing consumer spending and consumer confidence to plunge in the second quarter. First quarter GDP fell 4.8% and second quarter GDP is expected to decline by an astounding 50%. Two consecutive quarters of negative GDP growth officially qualifies as an economic recession. This will mark the first recession since 2008/2009.
The headlines reminded us how bad things were, but the market began to shed light on how good things could become. The volatility experienced in the last week of the quarter also suggested we are not out of the woods yet. Signs of a second spike in coronavirus cases seem imminent as some states are slowly or partially reversing their economic reopening plans. A therapeutic and eventually a coronavirus vaccine are still a few quarters away. The 2020 election combined with social unrest and China tension creates a recipe for continued volatility in the second half of the year.
Despite all the current news and anxiety, the stock market had an excellent quarter as it looked toward a better future. This was actually the best quarter since 1987. The technology-heavy NASDAQ led the way with returns just over 30% and surpassed the 10,000 mark for the first time. The S&P 500 and the Dow Jones Industrial Average posted gains of nearly 20% in the second quarter. International stocks also posted gains in the quarter with international developed stock markets rising 14.9% and emerging markets adding 18.1%.
The bond market entered the quarter on the heels of the Federal Reserve’s rapid move to zero on key short-term interest rates. With the interest rate floor firmly in place, rates experienced a quarter of relative quiet. The yield curve remains positively sloped and interest rates ended the quarter basically where they began.
When this year began, no one could have predicted the economic path traveled in just six short months. The next two quarters will have new surprises and the heightened volatility will likely persist. Keep yourself healthy, safe and invested at a risk level that supports your emotional and financial well- being.
IRS ISSUES GUIDANCE ON WAIVER OF 2020 REQUIRED MINIMUM DISTRIBUTIONS (RMDs)
On June 23, 2020, IRS issued Notice 2020-51 (“Notice) which provides guidance regarding the repayment of required minimum distributions (“RMDs”) under the Coronavirus Aid, Relief and Economic Security (CARES) Act. Under the CARES Act certain 2020 RMDs already taken can be repaid to a retirement account as a rollover. Generally, RMDs are not eligible for rollover. However, under the CARES Act, an RMD taken in 2020 is no longer required. It is voluntary and therefore not technically an RMD.
The Notice provides the following:
- 2020 RMDs taken on or after January 1, 2020, are rollover eligible.
- An IRA owner, employer-sponsored plan participant or beneficiary is permitted to repay distributions that would have been a 2020 RMD back into the distributing account.
- The repayment of the waived RMD can occur more than 60 days after the original distribution date provided it is made no later than August 31, 2020.
- The repayment will be treated as a rollover, except that neither the “1 rollover per year rule” nor the limitation on non-spousal beneficiary rollovers apply.
HEALTH SAVINGS ACCOUNT (HSA) – LOWERING YOUR TAX BILL TODAY AND IN RETIREMENT
Health care costs present a significant retirement risk for many Americans. According to a Fidelity research report, a 65-year-old couple retiring in 2019 can expect to spend roughly $300,000 in health care expenses throughout their retirement. When you compare the average medical expenses in retirement to what the average 65-year-old couple has saved for retirement, you realize the issue at hand.
One viable solution to the underfunding of retirement health care expenses would be a Health Savings Account. HSAs have some of the best tax benefits possible in the Internal Revenue Code; contributions to HSAs are tax deductible, as are the matching contributions an employer makes. Any gain is tax-deferred, and if the money is withdrawn to pay for qualified health care expenses, it comes out tax-free. Unused balances can be carried over from year to year and can be used to fund health care cost today and in retirement. You don’t get taxed on the money going in, you don’t get taxed on the growth and you don’t get taxed on the distribution. It’s a triple treat and the best tax-advantaged savings vehicle in the tax code.
You can open an HSA, whether through your employer or on your own, provided you:
- Are currently covered by an HSA-qualified high-deductible health plan. For 2020, that deductible must be at least $1,400 for single coverage and $2,800 for family coverage
- Do not have other health coverage
- Cannot be claimed as a dependent on someone else’s tax return
- Are not enrolled in Medicare
If an HSA sounds like it might work for you, contact us for more information.