Westover Capital Advisors - Are We There Yet?

Are We There Yet?

– by Chip Sawyer, CFA , Chief Investment Officer

It’s about an hour’s drive from my parents’ place in Maryland back home. The weekend before last, my five-year-old daughter fell asleep before we had even left their Worton driveway. When she woke up, as we pulled safely into our driveway here in Wilmington, she looked around incredulously and asked me, “Daddy, are we there yet?”

My nine-year-old was awake for the entire trip but was so engrossed in the video on her tablet she might as well have been asleep. Neither one of them had noticed the rain, which we drove through for fifty-five of the sixty-minute trip. I remember similar experiences when I was a kid. Family road trips always went much faster when I was sleeping, rather than fighting with my two older sisters.

An investor who fell asleep as she was leaving that Maryland driveway on February 24 and who happened to wake up today in Wilmington, would look around just as incredulously. She, too, would have missed the rain. Well, that’s not entirely accurate. She would have missed a Category 5 hurricane followed by a blistering heatwave.

The S&P 500 Roller Coaster

The S&P 500 Index is currently trading at around 3,200. Since the end of February, the index has traveled more than 2,200 points, first down, then back up. First, it fell more than 1,200 points from its high in February to its low in March. That was the fastest 30% decline in market history. It took just twenty-two days. Then what do you know? It turned around and rose more than 1,000 points, bringing it to its current level today. The rise included a 20% advance in just 12 days, which was the fastest advance since 2008.

With a June unemployment rate of 11.1%, representing 17.8 million Americans out of work, and with the country currently experiencing a worrying rise in COVID-19 cases, most investors are looking at the markets today with bewilderment. It’s the same look my daughters showed when the younger one awoke from her nap, or the older one looked up from her tablet.

Policy Response and Market Construction Help Explain the Astonishing Recovery

It’s always easier to explain things after they’ve happened, but there are several reasons for the market’s astonishing recovery. The most important explanations fall under two categories: policy response and market construction.

As to the first point, the current recession was caused by a global pandemic, rather than by the excesses that accompany the typical economic cycles of markets — too much technology in 2000 and too much housing in 2008. There isn’t any moral hazard to worry about right now with the issuance of monetary relief. Accordingly, the policy response from the Federal Reserve and Washington has been MUCH more generous than in prior periods.

In 2008, the Federal Reserve responded to the financial crisis by expanding its balance sheet by about $1.3 trillion from March of 2008, when Bear Stearns collapsed, through December of 2008. In comparison, it took the Federal Reserve a mere three months to expand its balance sheet by $3 trillion from March of this year until June. That’s almost three times the response in one-third of the time.

It’s always easier to explain things after they’ve happened, but there are several reasons for the market’s astonishing recovery. The most important explanations fall under two categories: policy response and market construction.

At the end of this March, the credit markets were shaking with fears of massive bankruptcies. As a consequence, the Fed also announced they would begin buying corporate debt for the first time in history. Their response put the majority of those fears to sleep.

Congress has had just as aggressive a response. They provided about $900 billion in stimulus during the 2008 Financial Crisis, but only about $700 billion of that was spent over the following three years. In response to the current pandemic, Congress passed legislation totaling about $3 trillion. This legislation included $500 billion for the Paycheck Protection Program, $2.3 trillion for the CARES Act, and about $200 billion for the Families First Coronavirus Response Act. This fiscal response was so significant that the nation’s personal income in April increased by 10.5% in the middle of this global pandemic!

Here’s the second point: While professional investors are familiar with the outsized influence a handful of companies and sectors have on the performance of market indexes, the casual investor might not be. Even before the current crisis, a major theme was developing in the economy—the switch from brick and mortar to online and mobile. This trend has reached a real tipping point. And it went into hyperdrive over the past four months, as everything from grocery store trips to schoolwork moved online. We’re having virtual Zoom birthday parties for our kids, followed a few hours later by take-out cocktails for their parents. Heck, the NBA’s even going to play basketball in a bubble in Orlando with no fans in the stands . . . which we’ll stream, of course!

So while the casual investor might be confused by the market’s remarkable recovery, a closer look at market construction explains the reason. The companies that benefit from more online activity or virus research — Amazon, and most of the technology and healthcare sectors — are making new highs, while economically sensitive value stocks are still struggling. Amazon, Facebook, and Alphabet, combined with the technology and healthcare sectors, make up more than 50% of the S&P 500. (That bears repeating). These are the forces driving the market higher.

COVID-19 Cases and Unemployment Continue to Drive Concerns

As always, there are still plenty of concerns. There were over 73,000 new cases of COVID-19 in the U.S. on July 16. A new record. There are almost 18 million unemployed Americans. There’s massive social unrest in the country. Minneapolis, Portland, Seattle. There is an upcoming presidential election whose result, regardless of which party wins, will only make an increasingly divided country even more polarized. Predicting the long-term damage to the global economy and the speed with which it will recover seems an impossible task. The volatility we’ve seen in the market is likely to continue.

So, what’s an investor to do? Go to sleep and let us drive.

Every day is a day we get closer to a vaccine. Multiple companies are working on vaccines. Most recently, we heard that a vaccine developed by Astra Zeneca and Oxford University had produced a promising immune response in a large, early-stage human trial. We’re getting much better at managing the virus as the mortality rate in hospitals continues to decline. Daily deaths from COVID-19 spiked at 2,701 on May 6, but fell to 512 on July 19, notwithstanding a 250% increase in the number of cases — from 24,805 to 63,591 on those same two days.

You may remember that Dad wrote of the dichotomy between the present and the future, between markets and the economy, in a recent article posted to our website he called, “Now Showing in Theater Number One . . .” The market is a forward-looking indicator and is becoming more interested in 2021 earnings than it is concerned with 2020 results. Many of the companies held in Westover portfolios are beneficiaries of those accelerating trends we described above. You don’t realize it when you’re a kid, but the best part of being a passenger is not having to worry about driving through the rain. We are honored and actually enjoy driving our clients through both the storms and the beautiful vistas of investing. So if you are so inclined, go ahead and look out the window and enjoy the pretty parts of your drive, but feel free to close your eyes when the weather turns bad. We’ll get you safely to your destination.

Please visit our video page for more information and additional commentary.

Westover Capital Advisors - Movie Theatre

Now Showing in Theater Number One …

– by Murray Sawyer, JD, Founder and CEO

What is going on? What in the world is going on?

Last week I visited Garry Lyons, my local dentist. While lying in my dental chair, mouth wide open and unable to speak, his hygienist Andrea asked me the question on everybody’s mind, to wit: How come the market is going up when the economy is going to hell?

Twenty-one million Americans were unemployed as of May, and more than 40 million Americans were unemployed as of April. That’s one in every four American workers. Those unemployment numbers are the worst since the Great Depression. In May, only 53% of our population was employed while 47% were not working. That is the lowest number of working Americans since the measurement of this statistic began in 1950.

The good news, if I can call it that, is that 80% of those who are unemployed today expect to be recalled to their jobs. In other words, their layoff is temporary. That compares to an average of only 20% thinking they would be called back to the workforce in previous downturns.

A Tale of Two Headlines

On June 9, I read two different headlines. One was at the Wall Street Journal while the second was online at CNBC. The first reported on the economy; the second on the markets. The Journal reported the National Bureau of Economic Research just announced we were officially in a recession, which started in late February. According to them, two facts characterize this recession. First, it’s the deepest recession since WWII, and secondly, it’s possibly the shortest.

The coronavirus pandemic triggered 95% of the US economy being put into shut down mode from late March through early June. COVID-19 caused the unemployment rate, which had been at a 50-year low in February, to balloon to 14.7%, which was its worst post-World War II showing in history.

Folks, these things aren’t supposed to happen. And you certainly wouldn’t expect them to occur in an economic pandemic which was the most impactful since the Spanish Flu pandemic of 1918, and possibly since the Black Death pandemic in the Middle Ages.

It ended a 128-month expansion that was the longest post-World War II bull run in history. Markets fell 45% from their all-time highs in just one month. According to the NBER, our decline in employment and production was unprecedented. And it stretched across the entire country. Economists project US GDP will post its worst quarterly decline in history when the second quarter ends, possibly dropping more than 50%.

No recession has lasted less than six months, going back to the mid-1800s. Will this be an outlier? Nobody knows for sure.

The market’s performance is about as likely as lightning striking a Powerball winner. Any yet here we are. So how to explain?

And yet, with all that bad economic news, CNBC reported that the market is on a tear. Yesterday, June 9, the NASDAQ was at an all-time high. That’s not high for the year; that’s a high for history. The S&P 500, which was off as much as 32 plus percent earlier this year, is back near positive territory for the year. The Dow Jones Industrial Average recently completed seven straight days of positive gains; it’s up 45% from its March 23 low. In the last three weeks, all three indexes posted positive returns.

Folks, these things aren’t supposed to happen. And you certainly wouldn’t expect them to occur in an economic pandemic which was the most impactful since the Spanish Flu pandemic of 1918, and possibly since the Black Death pandemic in the Middle Ages.

The market’s performance is about as likely as lightning striking a Powerball winner. Any yet here we are. So how to explain?

The Economy and The Market Are Siblings, But Not Twins

When I was able to speak to Andrea, her dental instruments no longer exploring my mouth, this is what I told her. First, I started by reminding her about one of Westover’s fundamental tenets, one we remind clients of every day. That is, the economy and the market are siblings, but they’re not twins. Any parent who has had children knows that each one is distinct and different. Yes, there are common characteristics, but there are also equal and sometimes strong differentiators, making each unique. We would never confuse one for the other.

Second, I also told her that the economy deals with the here and now. In contrast, the stock market deals with its prediction for the future. It predicts where it believes the economy will be sometime in the future, 12 or 18 months from now. Ask yourself this question: where do you think we will be vis a vis our present health and economic situation in twelve to eighteen months?

I Survived COVID-19, the Movie

So, here’s how you might think of it. There is a movie you and I want to see. It’s a popular film showing in Wilmington’s Riverfront theater. The title of the movie is “I Survived COVID-19, the Coronavirus Pandemic of 2020”.

This two-hour movie is so popular that it’s shown on two screens. To control the crowds, the films start on each theater screen an hour and a half apart. We show up at the same time. You go into theater #1, getting the very last seat, as the movie is just about to begin. As you take your seat, the crisis is about to implode. The world, as we know it, is about to crash and burn.

I can’t be seated there, and so I must go to theater #2, which is showing the same movie. However, theater #2 started the film an hour and a half earlier, and so when I walk in, I start 30 minutes from the end.

At the film’s ninety-minute mark, I learn that, according to the World Health Organization, the asymptomatic spread of the coronavirus is “very rare.” This critical conclusion you did not know at the movie’s beginning. I also learn that notwithstanding the overall unemployment miasma, the May numbers added 2.5 million jobs, astounding forecasters, and giving hope to investors.

The movie goes on. Its June 9, and these three things happen: The NASDAQ composite hits an intra-day record 10,000 mark for the first time and ends up 45% ahead of its March 23 low. Amazon closes at an all-time high, up 50% from its March lows. So, too, does Tesla. It hits $949 per share, while you could have bought it for $361 on March 18.

I am watching the market version of the movie in theater #2 while you are viewing the economic version of the same film in theater #1. That’s how you must look at the markets and the economy. If this market is correct, then grab your Pepsi and buttered popcorn. Settle into that comfortable lounge seat because the movie still showing in Theater #1 is going to have a happy ending.

And as they say, That’s What’s Going On.

Westover Capital Advisors - COVID-19 Symptom Tracking App

Let’s Get Back to Normal

– by Murray Sawyer, JD, Founder and CEO

Earlier this week, Westover hosted its very first webinar featuring Dr. Benjamin Starnes, Professor and Chief of the Division of Vascular Surgery at the University of Washington School of Medicine entitled “Battling COVID-19 on the Frontline.” Dr. Starnes shared his very personal experience battling the COVID-19 crisis in his home state of Washington. If you weren’t able to join us during the live broadcast, I invite you to watch the replay on-demand at https://westovercapital.com/videos/.

One of our webinar attendees reached out to share news of a recently developed COVID Symptom Tracker app aimed at rapidly collecting information to aid in the response to the ongoing COVID-19 pandemic. The app, developed by a consortium of scientists with expertise in big data research and epidemiology from Massachusetts General Hospital, the Harvard T.H. Chan School of Public Health, King’s College London, and Stanford University School of Medicine, collects daily information from individuals in the community about whether they feel well, and if not, their specific symptoms and if they have been tested for COVID-19.

Over 3.8 million people are contributing to the study right now. The word is that if we get 43 more people in New Castle County using this app, we will be able to get real-time results on COVID-19 trends specific to our area.

To learn more, visit https://covid.joinzoe.com/us and download the app.

Thanks to our viewer for sharing this information, encouraging us all to do our part to help lift the lockdown and get back to normal.

Westover Capital Advisors - Record Album - What's Going On?

What’s Going On?

– by Murray Sawyer, JD, Founder and CEO

Some long-term clients and friends will remember that when I used to write Westover newsletters regularly, I always had a section titled “Listen to the Music.” That was the title of a song recorded by the Doobie Brothers in 1972. I intended my comments in that section to serve as a reminder that we should Listen To The Music, that we should pay attention to what was happening to the subject matters of our lives — be they political, economic, financial, athletic, musical, or something else.

With this latest musing, I return once more to a music theme. But this time to What’s Going On?, a record and studio album of the same name. It was released in 1971 by Motown and recorded and written by one of my all-time favorites, singer-songwriter Marvin Gaye. Its subject was a returning Vietnam War warrior who was observing the angry tension that conflict brought to the streets of our country. It’s an apt metaphor for the polarization and intractability we still see today. The more things change the more they stay the same.

I’m going to use What’s Going On? as the take-off point for my present-day ramblings. I intend to write them on an irregular basis, addressing my observations and providing you with information you might not otherwise know about the world of politics, Wall Street, the economy, and anything else that suits my fancy.

‘What’s Going On?,’ written and recorded by Marvin Gaye, was about a returning Vietnam War warrior who was observing the angry tension that conflict brought to the streets of our country. It’s an apt metaphor for the polarization and intractability we still see today.

I have three goals: (1) to inform and engage you, (2) from time to time, to respectfully challenge you to reconsider long-held opinions or be more understanding of the views of folks on the other side of your issue; and (3) to entertain. This kind of blog will evolve over time and likely will ultimately be part of a new, more formalized Westover newsletter to which both Matt and Chip will contribute in the future.

But for now, I hope you’ll enjoy What’s Going On.

Washington and Investment Advice Deductibility

Do you remember way back before the passage of the 2017 Tax Cut and Jobs Act that investment advisory fees could be deductible, provided they exceeded 2% of your adjusted gross income and were not for retirement accounts? That little perk was erased in the avalanche of so-called tax reform. Well, all the big hitters in the financial services industries are trying to bring this back. And more.

The Investment Advisor Association, the group to which Westover belongs as a registered investment advisor, has joined hands with the CFP Board, the Financial Services Institute, the National Association of Personal Financial Advisors, and the Financial Planning Association. Collectively we are asking our congressional representatives to restore the deduction for advisory fees charged for professional investment.

“Thanks” to the COVID-19 pandemic and recognizing that a crisis is never something to be wasted, our group is also asking that the deduction be broadened to assist all taxpayers at all income levels who need help getting access to competent financial advice. The argument here is that the 2% threshold serves only to help the high-income folks at the expense of middle-income ones.

Let’s see what happens. I give it maybe a 10% chance of passage. But then that’s the odds I gave Donald Trump’s chance of election when I was asked by Stan Diver the night before the 2016 election. Shows you what kind of a prognosticator I am. Let’s stay tuned.

Speaking of Washington

Nancy Pelosi has unveiled a massive $3 trillion-dollar COVID-19 stimulus bill. There are 1,815 pages to this report if you can believe it. It was introduced on Tuesday and is expected to be voted on this Friday. Thank goodness Sunday is a day of rest! I’m sure each one of our representatives will be relying on their Evelyn Wood speed reading skills to take in and understand all of its details.

Included within the bill are matters dealing with aid to marijuana growers as well as curbs on President Trump’s ability to fire whistleblowers. Neither one of those two has a Tinker’s-dam to do with the issues of this pandemic, but then I guess her attitude is, “Why not load ten pounds of stuff into a five-pound pandemic bag and see what falls out?”

There is no doubt that we need to get help to the states and localities which are in desperate need of payments. Some of the other proposals, however, need more thought.

For example, another proposal is to add another round of helicopter-dropped stimulus payments: $1,200 to individuals, $2,400 to couples, and $1,200 to dependents (up to three) regardless of need. My late mother-in-law, who died in 2018 and whose estate I settled last year, just received her first stimulus check. Alas, I returned it. Her urn was already paid. I don’t think she really needed it. And I’m absolutely certain she doesn’t need a second.

The House also wants to continue with the $600 unemployment checks through the end of the year. They are scheduled to end on July 31. This is free money that supplements existing unemployment payments. Query: Is this manna from Washington Heaven a disincentive to job-seeking and job-returning? If so, is it not a detriment to the idea of getting our economy back on track by restoring able-bodied folks to the workforce?

Did you know that more than 50% of those presently receiving unemployment checks are now receiving more money for sitting on their sofa watching Michael Jordan and the Chicago Bulls in The Last Dance than for working 40-hour weeks? How many of those folks do you think will be incented to return to work for the rest of this year if they are getting $600 weekly federal unemployment checks on top of their existing state unemployment checks? I know I wouldn’t. This strikes at the heart of the tension between the free market and the welfare state. The big question is where do you set that fulcrum?

There is no doubt that we need to get help to the states and localities which are in desperate need of payments. Some of the other proposals, however, need more thought.

I’m sure this will pass the House and equally sure it will be slow-walked by the Senate Republicans, who are controlled by Mitch McConnell.

That said, my guess is that come the summer, maybe around July, we will see this bill grant several trillion dollars, but not three, to some Pelosi-named beneficiaries. But sadly, instead of being a bill supported by all, it’s going to be used as a first-shot election campaign bomb.

Stay tuned for the fireworks. Fingers will be pointing. That’s what’s going on.

Westover Capital Advisors - Suspension Bridge

Don’t Look Down

– by Murray Sawyer, JD, Founder and CEO

Last May, Randy and I went to western North Carolina to celebrate our grandson’s graduation from college at Appalachian State in Boone. While there, we took a trip to Grandfather Mountain. At 5,946 feet, it is the tallest peak on the eastern side of the Blue Ridge Mountains, renowned for its breath-taking cliffs, hidden caves, and some of the highest surface wind speeds ever recorded, with unverified but reported speeds of more than 200 mph.

Its most famous attraction is the Mile High Swinging Bridge. This 288-foot span is the highest suspension footbridge in America. Sitting almost at the apex of Grandfather Mountain, it traverses an 80-foot chasm more than one mile above sea level. As you can imagine, the views are spectacular. Randy and I gingerly walked across the bridge on a windy spring day. Before I could get to the far side, I glanced down. Immediately, I felt queasy and seasick.

Once we got to the other side and had explored that part of Grandfather Mountain, we reversed our course and returned to the bridge. This time I did not look down. Walked straight across, head held high. No queasiness, no pit in the stomach. Same span, same stimuli. The geologic formations below and the engineering marvels permitting its suspension hadn’t changed. My reaction to them did. It’s not the event, but our response to the event, which informs our thinking about it.

In about a week, you will receive your portfolio statements for March from your custodians. If you look down, i.e., open them, I can promise you you will think you’re on that bridge staring at the ground below. With apologies to Robbie Robertson, Levon Helm and the rest of The Band, my advice is Don’t Do It.

It’s not the event, but our response to the event, which informs our thinking about it.

Here’s the reality we all know. Things will get worse before they get better as COVID-19 continues its virulent attack on our health, welfare, and productivity. Statements will be horrifying for March, April, possibly into May, maybe even June. But here is something else we all know — COVID-19 will end. You will outlive COVID-19, and so will your portfolio. It will repair itself as surely as our economy and the health of our citizens become healed. And the markets will go up, as will your portfolio statements, before COVID-19 is eradicated.

Of Golf Holes, Ponds, and Sand Traps

Earlier this week, I received an email from a delightful, long-time client who had just looked at her February statement. Being single and in her 70s, she was concerned about how much her portfolio had “lost.” I pointed out to her that it had not “lost” anything. True, the values of her holdings had diminished when compared with the previous month, but she was not cashing in her chips, calling it a day, and walking away. I pointed out to her that her investment horizon is still a good ten or more years. Her portfolio will recover.

The 4th hole of the South Course at Wilmington Country Club is a par three. It is bordered on the left-hand side by a pond and protected on the right-hand side by several sand traps. The green is narrow and double-tiered. Back when I used to play this game, if I hit the ball left of the green into the pond, that ball was lost. However, if I hit the ball to the right into one of those traps, I could continue to play with that ball. Your portfolio is that golf ball.

Recently all of our portfolios have landed in that trap. Plugged. Under the lip. Sure, it will take us a stroke or two to hack our way out of that challenging predicament, but ultimately we will blast our ball on to the green and knock it into the hole.

In mid-February, all three U.S. equity indexes reached all-time highs. Not just highs for 2020, but historical highs! That’s the equivalent for me of hitting my very best all-time shot on #4. That didn’t happen every time I played. It’s beyond unrealistic for me to have expected that all of my tee shots on #4 would be that good. (Come to think of it, I remember my all-time best shot. It ended up eighteen inches above the hole, on a slick green that curled menacingly to the right. Missed the sucker).

Similarly, we shouldn’t expect that every time we play # 4 hereafter, that our ball will land in that trap, plugged and under the lip. The point is we need to continue to keep playing the game. So long as we do that, the chances are more than likely that, as we quaff a beer on the 19th hole, we will have enjoyed a decent round despite that ugly triple-bogey we took on # 4.

So let’s hunker down in our homes for the time being. For me, when I’m not in the office, I’m binge-watching Ozark on Netflix. Pretty dark. Forget about looking at our portfolio statements for the next several months.

Remember . . . Deep breaths. And don’t look down!

Westover Capital Advisors - When Life Gives You Lemons . . .

When Life Gives You Lemons…

– by Matthew Beardwood, CFP®, Director of Wealth Management

“Life handed him a lemon,
As Life sometimes will do.
His friends looked on in pity,
Assuming he was through.
They came upon him later,
Reclining in the shade
In calm contentment, drinking
A glass of lemonade.”[1]

We’ve all heard that saying, and there is no better time than now to turn those lemons into lemonade. I think we would all agree that the stock market has soured recently, but there is a silver lining: the Roth IRA conversion just got less costly for IRA investors.

Corona Virus and the Great Conversion Opportunity

Some of you may remember an article I wrote touting the benefits of a Roth conversion (see the article I’m a Believer). I won’t go through all the benefits again, but here are the 3 biggies:

1. Roth IRA withdrawals provide you with tax-free income.
2. There are no Required Minimum Distributions.
3. Roth IRAs pass to your heirs with the same tax-free withdrawal rights you had.

When you convert your traditional IRA to a Roth IRA, the pretax traditional IRA funds used to convert will be included in your income in the year of the conversion.

That is a tax hit, for sure, but keep it in perspective. Consider this, the extra income you report and the corresponding income tax you must pay are only for the year of the conversion. The trade-off will be the years of tax-free benefits you and your family will enjoy in the years which follow. All your Roth IRA funds, including the earnings, will be tax-free when earned inside the Roth IRA as well as when you withdraw them. Not a bad deal!

Why do a Roth Conversion Now?

A Roth IRA conversion done when the market is down is a bargain. Remember, your tax bill is calculated on the value of the traditional IRA funds you used for the conversion. Convert now when IRA values are low and reap the benefits of tax-free earnings and withdrawals later, when the market bounces back.

In addition to taking advantage of downturns in volatile markets, there is another compelling reason to convert now. The Tax Reform Act of 2017 lowered tax rates for many, but these historically low rates will not be here forever. Under the Act, they sunset in 2026.

No one knows for sure what the future will bring. But with large deficits as far as the eye can see, and especially after the $2 trillion coronavirus rescue package, many advisors (including the principals of Westover Capital) believe future income taxes and rates will inevitably be higher. Much higher.

Not sure? Consider this: Even before that $2 trillion-dollar coronavirus congressional commitment, both Joe Biden and Bernie Sanders had proposed raising income tax rates if they are elected. Not after 2026, but next year. Further, if the Democrats also control the Congress after the election, then higher taxes for many are a certainty. And should Donald Trump be reelected, even he may have to raise taxes to deal with all the red ink spilled in this rescue bill.

Converting now is a way to lock in today’s low rates, and a sound way to avoid worries about the uncertainty of those potential, future tax increases.

Thinking conversion may be the right move? Ask yourself three questions. First, when will my IRA money be needed? If you need your IRA money immediately for living expenses, converting may not be for you. Second, what is your effective tax rate? If the income you report this year is lower than your regular income is, that may also favor conversion now. Third, do you have the money to pay the tax on the conversion? You need to pay the conversion tax from non-IRA funds.

Converting now is a way to lock in today’s low rates, and a sound way to avoid worries about the uncertainty of those potential, future tax increases.

Not sure about converting? The good news is that conversion is not an all-or-nothing decision. You can always hedge your bets and do a partial conversion.

Is Conversion Right for You?

Should everybody convert? No, of course not. Conversion is not one size fits all. Also, remember that conversions are now permanent. Are you the right candidate? Is now the time for your conversion? Grab a lemonade, and let’s talk.

Westover Capital Advisors - Boy Pouting - This Is No Fun

This Is No Fun

– by Murray Sawyer, JD, Founder and CEO

This is no fun for anyone. It’s so bad, I just might take up golf again. Making double and triple bogeys and three-putting every other hole would be less painful for me than watching the stock ticker’s crawl.

It’s no fun for thousands of our fellow Americans who have been temporarily or permanently laid off. It’s no fun for the airline industry, the cruise line industry, the travel industry, the restaurant industry, the multitude of small businesses across the country. . . The list goes on and on.

This is no fun for anyone.

And this is certainly no fun for a President who looks like he would rather be pouring road asphalt in August than holding another daily press conference about the “Chinese” virus. In case you hadn’t heard, Mr. President, the entire stock market gains during your Trump years have been officially wiped out as of March 18, 2020.

And we know it’s no fun for any of you, our dear friends, colleagues, and clients.

The Interplay Between Mr. Market and Miss Economy

Just remember, Mr. Market and Miss Economy are siblings, but they’re not identical twins. I didn’t actually type that out: Just remember Mr. Market and Miss Economy are siblings but they’re not identical twins is a permanent smart key on my computer.

Mr. Market is the older child. He leads his younger sister, Miss Economy, both up and down. His trend has historically been two steps forward to one step back. At some point, the market will bottom — perhaps today, perhaps in a week, perhaps in a month, perhaps in three months — and then Mr. Market will turn up.

That turn will be swift and with little to no forewarning. And it will be many months thereafter before our economy has healed itself. It will take the economy much longer to rebuild from the seismic shocks not only from COVID-19 but also from the ongoing hammer and tong oil fight between Saudi Arabia and Russia. (Oil is selling at prices today that we haven’t seen since 2002).

Do you remember the all-time highs reached in all three markets in mid-February? Why does that seem like a century ago? Since February 24th the average daily movement in the market has been 4.9%. Up or down.

Mr. Market and Miss Economy are siblings, but they’re not identical twins.

We are being proactive, and continue to be, as we navigate our ship through this historic meltdown.

In the hopes that this report will give you some comfort, I will briefly, but only briefly, tell you of three steps we have been taking to protect our clients and their best interests.

Navigating the Ship Through a Historic Market Meltdown

Step #1: Equity exposure in all our models has been systematically reduced. This is not only a function of what’s been going on in the markets, but also is a function of our decision to sell specific equities at strategic times when we get these up-day bounces. We are leveraging our firm’s extensive experience and skill in technical and trading analysis to make these decisions.

Step #2: We’ve purchased an ETF that seeks daily investment results corresponding to two times the inverse of the daily performance of the S&P 500 index. Briefly stated, it goes up when the market goes down and vice versa. It’s a small position. We believe this will serve as an effective hedge against future fluctuations.

Step #3: We are concerned about the potential for money market funds to “break the buck” because, with investor nervousness at an all-time high, there could be a run on them and thus a liquidity crunch. Accordingly, we are in the process of moving cash out of money market accounts and into FDIC-insured cash accounts. The tradeoff, of course, is they pay no interest, but they do assist in the preservation of capital.

Our view is that these steps take us to the best port in this storm. Storm? Hell, with apologies to Billy Joel, we’ve got a force twelve blowing on the Beaufort Scale.

The Narrow Tightrope Between Conflicting Views

I leave you with this conundrum. Bill Ackman, a well-regarded hedge fund manager, announced today that we are facing Market Meltdown Armageddon. At the same time, Bill Miller, a legendary stock picker for more than 40 years, opined that this is the “best time in his lifetime” to be an equity buyer. We’re walking that narrow tightrope between these two views, but in times like these, it’s always with an eye toward trying to protect our clients’ capital first.

Keep the faith.

Westover Capital Advisors - Basketball

Be Happy You’re Not Roy Williams

– by Murray Sawyer, JD, Founder and CEO

It’s no secret that two of the principals of Westover Capital are huge fans of Roy Williams, the head coach of the UNC Men’s basketball team. Two hundred colleges play NCAA division one basketball. Six of them, including the Tar Heels, have an active Hall of Fame coach.

Williams has been a head coach at the University of Kansas and at the University of North Carolina for 31 years. He is the fifth winningest coach in NCAA history. His winning percentage is .778. That’s higher than the three active coaches ahead of him on the all-time wins list — Coach K, Jim Boeheim of Syracuse and Jim Calhoun of Connecticut (now St. Joseph of CT).

He is the only coach to have taken two different universities to four Final Fours. He took Kansas to 14 consecutive NCAA tournaments. At his alma mater, North Carolina, he has won 3 national championships since 2005. No other coach has won that many national championships over that same time period — not Coach K, not Bill Self, not John Calipari, not Jay Wright. No one.

Until this year he had never had a losing season.

Roy Williams’ Successful 30-Year Run as a Metaphor for Stock Market Performance

This year the Tar Heels finished with a 14-19 record. They were dead last in the ACC. On Wednesday, March 11th, they ended their season with an embarrassing, near thirty-point blowout loss, 81-53, in the ACC Tournament.

The Tar Heels performance was a metaphor for the stock market nosedive on March 12th. The Dow Jones Industrial Average lost 10% as did the S&P 500 and Nasdaq indices. It was the worst single day for the markets since 1987. Saying that brings up an obvious but important point that bears repeating: There has not been a day that bad for equity investors in more than 30 years. Likewise, there has not been a year as bad for Roy Williams in the last 30 years.

Two Black Swan Events That Hurt the Market

So, what has happened to our portfolios? Two Black Swan events converged at the same time to create uncertainty and volatility in an unprecedented fashion. Markets loathe uncertainty.

Event One: the coronavirus or COVID-19. There is no known coronavirus vaccine at this stage, and testing is not yet readily available to the general public. Event Two: the Saudi Arabia-Russia knife fight over oil. I assume we all intuitively understand the challenge of Event One.

Two Black Swan events converged at the same time to create uncertainty and volatility in an unprecedented fashion. Markets loathe uncertainty.

Lest we underestimate the significance of Event Two, let me put it in this context for you — oil prices have dropped to near historic lows. As a rough rule of thumb, oil which is sold for $50 per barrel is said to be the global “break-even” price point, the point where producers and consumers can live in peaceful coexistence. Today, the Saudis are flooding Europe with oil prices at $25 per barrel. They and the Russians say they can hold prices in the thirty-dollar range for years to come.

We suffered both events and at the same time.

Those two matters have had and will continue to have a significant and real impact on an economy that was humming along, before their coalescence. Unemployment was at historic lows — 3.5%. Job gains for the month were 273,000, well above the projected 175,000.

The Impact of an Economic Shutdown

Nevertheless, Broadway has canceled shows for a month; the NBA has postponed its season; other sporting events have suspended or canceled their games, including the NCAA Men’s basketball tournament. Travel has been severely disrupted. States of emergency have been declared from the East Coast (Delaware) to the West (California). The list goes on and on. As I write, I read that the President plans a national emergency declaration.

Economic losses have already started to pile up and compound as fast as Tar Heel basketball losses. At one point, starting in early February, UNC lost seven games in a row, marking another “record” for Coach Williams. With the President’s anticipated declaration, things will get worse in the markets short term before they start to repair.

What’s an investor to do? The answer is quite simple: determine what your time horizon is for the money you need. If it’s one year or less, then hold cash. If it’s two years or more, then stay the course. Be diversified with respect to the equities you hold and be balanced by holding stocks, bonds, cash, and gold. This is precisely the face of all Westover client portfolios.

Yesterday was a microcosm of the Tar Heels’ most recent basketball season. But they both are aberrations. Ask yourself this question: where will the S&P Index be a year from now, on March 13, 2021?

How Will the Markets Heal?

These two things need to be addressed for the markets to heal:

1. Manage and control the COVID-19 pandemic;

2. Have oil prices stabilize at rates the world needs for growth;

I’m willing to predict that sometime within the next year both issues will be solved. There are historic, economic and political reasons for that belief.

From a historical perspective, the S&P has been up 30 of the most recent 40 years. Put another way, if you threw a dart at a board you would hit a green number rather than a red number three out of every four times.

From an economic perspective, we have a strong economy. It will need to recover from the coronavirus and oil shock smackdowns, but it will. Our system of free markets, capitalism, liberty, and democracy is the best system known to mankind.

From a political perspective, neither party wants to do anything to hurt this country. Stumble as they may, both parties will use their best efforts to assist and propel our country forward, both from an economic perspective and to assure the safety of our citizens from a health perspective. Let’s all take a deep breath. Let’s give them some space and time, as they use legislative and administrative tools to address these matters.

You know during our annual reviews Chip, Matt and I always say, “It’s a good time to buy when good companies put their stock price on sale.” This week, and especially yesterday, was a Bargain Basement sale event. Depending on your sector allocation you may have benefitted from Chip’s purchases of UPS, Costco, Walmart, Gilead or CVS.

To return to our Tar Heel theme.

Next year the Tar Heels bring in four McDonald’s high school All- Americans. That’s more than Duke, Kentucky or Kansas. These players will play with Garrison Brooks, who will be a senior and who was voted the most improved player in the ACC this year. Roy Williams did not lose his touch overnight. As the saying goes, he’s not a Hall of Fame coach for no reason. Likewise, markets don’t go up for no reason. If you are an investor and your time horizon is longer than two years, stay the course.

It’s a good time to buy when good companies put their stock price on sale.

Although I have never seen Roy’s portfolio, I think it’s safe to say he is invested in the market, both personally as well as with his 401K account. He’s suffered a double whammy then. He has endured the ignominy of having his first losing basketball season and has seen his portfolio take a free-fall as well.

I’m just happy we’re not him.

Keep the faith.

Westover Capital Advisors - Boxers

Everyone Has a Plan . . .

– by Chip Sawyer, CFA, Chief Investment Officer

When Dad left for Hawaii on January 18, the S&P 500 Index stood at 3,329. While Dad was enjoying the Hawaiian sun over the next month, the index added another 2% setting a new all-time high on February 19. Dad returned on Sunday and the market has lost 12% in the four trading days since his return. So, we’ve booked him a one-way return ticket to Hawaii and told him he can’t come back until the market makes another all-time high. Problem solved.

In our annual meetings, we like to remind our clients of the market’s tendency to test investors’ resolve in the form of market drawdowns. This reminder is especially important after the market has as successful a year as we had in 2019. Years like last year and 2017 (when the market increased every month of the year) tend to lull investors into a false sense of calm. We forget that over the past 40 years, the average intra-year decline in the S&P was 13.8%. However, over that same time horizon, investors who did not panic and sell during one of these drawdowns made 11.8% annually and 8,574% cumulatively.

In our annual meetings, we like to remind our clients of the market’s tendency to test investors’ resolve in the form of market drawdowns.

The Importance of Keeping Emotions in Check During Corrections

Of course, it’s much easier to keep your cool when you’re talking about volatility in the abstract. It’s much more of a challenge to keep your emotions in check when we are in the middle of one of these corrections as we are now. As the great American philosopher, Mike Tyson, once said, “everyone has a plan ‘till they get punched in the mouth.”

At Westover, our plan is to intelligently manage portfolios to each of our client’s specific equity target. That means when stocks are doing well, we are selling to bring them back in line with the target. And conversely, when stocks are doing poorly, we are buying using proceeds from the bond and cash side of the portfolio.

The Economic Impact of the Coronavirus

There is always a reason for market corrections. And the coronavirus that has spooked the market this year is a legitimate concern. There will certainly be an economic impact from the global response to this health crisis. Japan has closed schools; China has closed cities. Airlines have restricted travel and waived cancellation and change fees. Because we are in the middle of the crisis, there are too many unknowns to analyze this on a fundamental basis. What we do know is the markets have already priced in many of the risks. And we also know that markets always bottom before the last of the bad news is reported.

While the current coronavirus has been more widespread than some previous health crises, it’s still helpful to see how the market performed after these prior scares.

S&P 500 Index Performance

Epidemic Month End 6-Month 12-Month
SARS Apr 2003 +14.6% +20.8%
Avian Flu Jun 2006 +11.7% +18.4%
Swine Flu Apr 2009 +18.7% +36.0%
Cholera Nov 2010 +14.0% +5.6%
MERS May 2013 +10.7% +18.0%
Ebola Mar 2014 +5.3% +10.4%
Zika Jan 2016 +12.0% +17.5%

(Source: Dow Jones)

Over the next few months, we will learn about new cases of this virus. We will see a public response to these new facts, and companies will update the markets with how their business is being challenged. Apple and Microsoft have both recently made announcements estimating its effects. But remember that the market has already priced in a 12% correction to account for this virus. There could very well be additional volatility as the market digests relevant news. But a year from now, we’re confident that the globe will have contained the virus, and the market will have resumed its pre-virus trend.

Corrections Provide Opportunities

These corrections are no fun. But remember that they do provide opportunities to buy stocks at lower prices which will pay off in the long term. We like to call these bouts of volatility the price an equity investor must pay to realize the long-term gains that help us reach our financial goals.

And keeping that long-term perspective is never more important than after you’ve been punched in the mouth. Just ask Mike Tyson.

Westover Capital - The SECURE Act of 2019

The SECURE Act May Not Be So Secure

– by Murray Sawyer, JD, President and CEO and Matthew Beardwood, CFP®, Director of Wealth Management

The most significant retirement legislation in a decade was passed this week in Congress and will likely be signed into law immediately by President Trump, as part of a broader government spending bill.

We first reported on The Setting Every Community Up for Retirement Enhancement Act of 2019 (known as the SECURE Act) back in May of this year when it quickly passed in the House of Representatives. While the name implies that this new legislation will help Americans with their retirement, not all the changes are for the good. 

The government estimates that over the next decade it will extract $15.7 billion from the pockets of IRA inheritors with the passage of this act. We’re reminded of that line in the song “Lyin’ Eyes”, a Grammy-winning ballad sung by the Eagles in 1975: “Every form of refuge has its price.”

The Main Takeaways of the SECURE Act

The legislation contains several modifications to the current law designed to help small business employees, home care workers, long-term part-time workers, and benefit annuity-issuing insurance companies, but as advisors, the main takeaways for us are the following:

  • Investors will be able to contribute to traditional IRAs for as long as they want after age 70 ½, instead of being stopped at that age under the previous law;
  • Retirees won’t have to take required minimum distributions until age 72 (changed from 70 ½); and
  • The so-called “Stretch” IRA will be eliminated for most IRA inheritors.

Of these 3, the most significant by far is the elimination of the Stretch IRA.

Implications for the Stretch IRA

The Stretch IRA has become a staple estate planning. It was a technique that allowed IRA beneficiaries to take distributions over the course of their actuarial lifetimes. Think small payout, small taxes and stretching the IRA over an extended period with tax-advantaged investment gains all the while. 

Under the new law, IRA beneficiaries will be required to deplete their inherited IRAs within 10 years. In plain words, IRA distributions will be subject to higher taxes and sooner, as distributions are made in larger amounts over a shorter period to the beneficiaries.

For example, a 23-year-old who inherited a Roth IRA under the old rules could take required payouts over 60 years while those assets kept growing; now they will need to be exhausted within 10 years. Ed Slott, a CPA and nationally recognized IRA specialist, has estimated that this hypothetical 23- year-old with a $1 million Roth IRA could receive a total of $23 million over that 60-year span. But with the 10- year rule in place, the heir would receive about $16 million, or 30% less over the same 60-year period. (This assumes a 6% annual rate of return, a 25% average tax rate, and no withdrawals from the Roth under the new law until the end of the 10th year. Amounts are unadjusted for inflation). Unless your name is Bill Gates, we’ll bet you probably could find good use for an extra $10 million over your lifetime.

Under the new law, IRA beneficiaries will be required to deplete their inherited IRAs within 10 years. In plain words, IRA distributions will be subject to higher taxes and sooner, as distributions are made in larger amounts over a shorter period to the beneficiaries.

There are some exceptions to the 10-year rule, namely surviving spouses and certain beneficiaries (minor children and people with disabilities).

Strategies for IRA Owners to Consider

These legislative changes require IRA owners to revisit their plans. The good news is there are sound planning strategies and workarounds to consider.

  1. Roth Conversions: A conversion is a great way to ease future tax burdens. Although the account owner would have to pay the taxes now, the beneficiary withdrawals would be tax-free under current tax law. With tax rates expected to increase in the future, retirees could presumably pay less in taxes now than their beneficiaries would pay had the funds stayed in a traditional IRA. Nevertheless, even Roth IRA beneficiaries would be subject to the 10-year payout rule.
  2. Charitable Donations: Consider using IRA assets to make charitable donations during life as well as at death, instead of other available assets. Qualified Charitable Distributions (QCD) allow retirees to make donations directly from their IRA to a qualified charity. The amount given to charity is excluded from taxable income. Because IRA distributions are taxed as ordinary income, this is a very tax-efficient way to support those causes that are important to you. Charitable distributions from an IRA at death receive a charitable deduction equal to the amount of the gift, thereby reducing the size of the decedent’s estate.
  3. Bequest Non-IRA Assets: Instead of passing on the IRA to their heirs, IRA owners could spend down those assets and bequeath assets from their taxable (investment) accounts instead. Assets in taxable accounts, such as stocks, receive a step-up in basis at death. Because the beneficiaries are free to sell inherited stocks whenever they wish, they can better time their sales to minimize taxes. These assets are also subject to more favorable capital gains taxes as opposed to IRA assets, which are subject to ordinary income tax rates.

Every individual’s circumstances are different, so these recommendations may not apply to all, but if you have IRA assets, now is the time to review your beneficiary designations within the context of your estate plan. We would welcome the opportunity to review your circumstance and provide you with our best possible advice.

Adieu, Stretch IRA, adieu.

Best wishes for a Happy Holiday Season!