Wealth Noir (article posted on 3/24/2020)
3 Ways Millennials can Benefit from the Market Downturn
By Kamila McDonnough
The economy, financial markets and the state of the American healthcare system are faced with a great deal of uncertainty, fear and frustration at this time. As a Financial Advisor who has been in the industry for almost 20 years, I understand the concern from clients as their income, investments and,sometimes, health are at risk from the developing effects of coronavirus (COVID-19). I myself have avoided looking at my market portfolio. Instead, I find peace in thinking long-term, even during these challenging times with constant media coverage on the effects of coronavirus on equity markets and the economy.
Though the market is experiencing swift and extreme changes in response to the pandemic, simultaneously, legislative updates are happening daily to stimulate the economy. While most of us have never experienced a financial market under this set of circumstances, we do not need to panic. We may in fact find financial reward over time.
The State of the Market
As I write this article today, the markets are in deep bear market (the overall stock market declining) territory. I am monitoring the daily changes, but again, not my personal investment changes because I feel confident in my allocations for my long-term financial plan. Since I have 20+ years to go before retirement, maybe less if I can continue to save more each year, the market movements that have occurred the past few weeks will have minimal effect on me reaching my goals.
I don’t want to minimize the volatility though. The year-to-date performance of the Dow (-29.61%), Nasdaq (-20.31%) and S&P 500 (-25.42%) is concerning. This is a stark contrast to 2019 where we saw the Dow gain 23.76%, Nasdaq gain 35.2% and S&P 500 gain 28.9%. The effects of the pandemic are pervasive with multiple circuit breakers, halting trading, a sign of the significant instability we have experienced over the past couple of weeks.
What is not shared more prominently is the recent bond market performance. Bonds often move in the opposite direction of stocks and are used to mitigate stock market loses, so we would expect them to be up given the drops in equities. But, with the Federal Reserve cutting interest rates, in an unusual move on a Sunday, to 0-0.25%, bond markets have experienced volatility as the 10-year Treasury yield hits 1.01%. Currently, all the year-to-date gains for U.S. bonds are limited to Treasuries, with the exception of inflation indexed bonds. An asset class that typically performs conversely to the equity markets, the Barclays Aggregate Bond Index, is now generating negative year-to-date performance.
Yes, we are in a bear market, but we have been here before. There have been 10 bear markets in the past 52 years. As evidenced in the graphic below, we have experienced significant declines in U.S. equity markets over extended durations, with markets rebounding. Even with these significant declines, from 1952 to 2019, the S&P 500 average annual return was still 10.8% with dividends reinvested.
Duration in days
Market Impact and Opportunity for Millennials
The impact of COVID-19 on millennials has been varied. For those who recently began investing, it can be disheartening to see the precipitous drop in their portfolios. However, with 20-30 years until retirement, millennials have what many other generations do not have to recover from this downturn – time. Even in the immediate, there are some opportunities that millennials can pursue as they prepare for retirement. These include paying down debt or building wealth through real estate investments.
With equity markets now at 2017 levels, this can also be a unique buying opportunity for millennials that have key financial measures in place, like 3-6 months emergency savings, little or no debt and stability of income. The key is to maintain a long-term view to withstand the volatility that is projected to continue as the impacts of COVID-19 are felt throughout the economy.
Recent Changes That Can Positively Impact Millennials and Their Wealth
The U.S. government suspended interest rate accruals on Federal student loans until further notice
Millennials that have additional cash on hand, along with stability of income, can now ensure that all payments made will go directly to principal to more quickly pay off their student loan debt. With over 42 million Americans with outstanding federal loans, this is a unique opportunity to accelerate student loan paydown plans. As referenced throughout many articles on Wealth Noir, paying off debt allows you to free up funds to build assets through investing and saving more quickly.
The Federal Reserve recently reduced the Federal Funds rate to 0-0.25%
This should create a reduction in mortgage rates over time. The announcement has spurred refinance activity, so rates are still elevated now, but over time are expected to decline. Lower interest rates allow for lower debt service from lower interest rates and higher potential return for real estate investing. This can be a great opportunity for those looking to own their first home or expand their existing portfolio.
The IRS announced a delay in the tax filing deadline to July 15, 2020
If you anticipate making a tax payment when filing this year and owe less than $1 million in taxes, you now have until July 15, 2020, to make a payment with no interest or penalties. These additional funds can be helpful during this time, especially for those experiencing income instability.
For those who do not have the stability of income to take advantage of some of the opportunities shared, now is the time to reflect on your budget. Taking a look at your budget will allow you to remove discretionary spending. For example, if you follow the 50/30/20 rule, now is the time to revisit your budget and remove the 30 percent of spending on wants until this period of economic uncertainty passes.
Legislative Relief in Response to Coronavirus
Legislative action has been fast-paced with Congress and the Administration looking for ways to stimulate the economy and mitigate the effects of COVID-19. Thus far, the following legislation has been put into place.
On Wednesday, March 18, 2020, the Senate approved a House passed coronavirus emergency aid measure. Payments were approved for many workers with up to two weeks of paid sick leave for those being tested for coronavirus or who have been diagnosed. Also eligible are those who have been told by a doctor or government official to stay home because of exposure or symptoms. The payments would be capped at $511 a day, roughly what someone making $133,000 earns annually.
Workers with family members affected by the coronavirus and those whose children’s schools have closed would still receive up to two-thirds of their pay, with the benefit limited to $200 per day.
Small Business Owner Relief Lending
The Small Business Administration (SBA) is offering designated states low-interest federal disaster loans for working capital to small businesses suffering substantial economic injury as a result of COVID-19. These loans may be used to pay fixed debts, payroll, accounts payable and other bills because of the disaster’s impact. The interest rate is 3.75% for small businesses without credit available elsewhere. Businesses with credit available elsewhere are not eligible. The interest rate for non-profits is 2.75%. The loans will include long-term repayments for up to 30 years with terms determined on a case by case basis.
Planning for economic uncertainty is challenging but resources are plentiful and continued legislative support is being discussed and implemented. Navigating these waters can feel risky and thus, now more than ever, the guidance of a Trusted Advisor is critical for financial independence and success.
Kamila McDonnough is the President of GRID 202 Partners, a financial planning firm with locations in Washington D.C. and North Carolina. She has nearly two decades of financial planning and investment experience assisting high net worth individuals, endowments and foundations, and business owners with comprehensive wealth solutions and holistic planning. Kamila is on the Board of Directors for the CFP Board. The CFP Board of Directors is the policymaking and oversight body of Certified Financial Planner Board of Standards, Inc., for over 86,000 CFP® professionals in the U.S. Kamila obtained her B.A. and MBA from The Pennsylvania State University. She is a CERTIFIED FINANCIAL PLANNER™ and holds licenses for Life, Health and Long-Term Care Insurance.