06.05.20

Market Outlook: Navigating the global impact of the coronavirus

Plus: 10 ways to optimize your planning now

On April 30, 2020, TIAA presented a live webinar on the impact of the coronavirus (COVID-19) pandemic on the financial markets and global economy and steps you can take now to remain on track toward your goals. The one-hour event featured insights from Nuveen Chief Investment Strategist Brian Nick, CAIA®, TIAA Chief Planning Strategist Dan Keady, CFP®, and TIAA Wealth Management Director Jim Daniello, CFP®.
 
Below are key highlights from the webinar. To access the full, recorded webinar, click here .

Key market and economic themes

Coronavirus concerns dominate global markets

In his opening remarks, Nuveen Chief Investment Strategist Brian Nick, CAIA®, provided perspective on recent market volatility, noting that the markets reflect change more quickly than the economy or individual households are able to adjust their behaviors.
 
“What we are seeing is the market’s ability to react to news and take a forward-looking approach to the macroeconomic outlook,” Nick said.
 
“We learned that the first quarter was a negative quarter for GDP (gross domestic product) growth and is likely to be classified as a recession.”
 
Given the financial market’s performance in the month of April, however, there may be reason for optimism.
 
“The depth and duration of this downturn, including how long it lasts and how deep it may go, will be a function of COVID-19 and policymakers’ ability to contain it. We will only have a sense of how well that policy is working when the economy reopens. In all likelihood, there will be volatility, as well as periods where the news is good, such as signs that we are moving aggressively toward a vaccine.”

The recession is likely to be deep, but short in duration

“Compared to previous downturns, we are expecting a much deeper recession than normal, but a somewhat shorter one,” Nick said.
 
The dotted red line on the graph represents the expectation for a relatively short recession with a rapid return to the prior peak in economic activity, compared to the gray line, which represents the financial crisis of 2007-2009.
 
“The financial crisis, which began in 2007, was longer and shallower and took through the middle of 2011 for the economy to get back to normal. We think that process could come back twice as fast this time around,” Nick stated.

COVID-19 will take a toll on growth

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Stimulus efforts on the part of Congress, the Federal Reserve (Fed) and the White House will help the economy rebound.
 
“We’re seeing a strong response from central banks in the U.S. and Europe to help the economy get back on its feet, although uncertainty remains in regard to what future phases of U.S. fiscal stimulus will look like,” Nick said.
 
“While stimulus spending is not going to get the economy moving on its own, it should help cushion the blow of high unemployment as businesses re-open. One area where the Fed has had a lot of success is in helping to ensure the financial markets are functioning and the economy and markets remain liquid.”

Coronavirus concerns dominate global markets

After hitting an all-time high on February 19, the S&P 500 fell 34% by March 23, easily exceeding the 20% threshold that technically defines a bear market. It took a month for the index to soar 26.8% back into bull market territory.1 A bull market is generally viewed as a gain of 20+% from the most recent trough.
 
“While we’re not back to where we started, it is a much better position than we expected the equity market to be in,” Nick said.

The shortest bear market in history?

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Corporate bonds and munis yield to the pressure

Between January and March, the extra yield, or spread, provided by investment-grade corporate bonds over U.S. Treasuries jumped from just 93 basis points (0.93%) to 373 basis points (3.73%)—the widest spread since the 2008-09 financial crisis. The widening occurred as surging demand for safe-haven assets pushed Treasury yields down, while investors’ desire to offload assets deemed riskier, such as corporate bonds, drove yields on those bonds higher. (Price and yield move in opposite directions.) Spreads have narrowed again, due in large part to the Federal Reserve’s liquidity assistance programs aimed at the corporate bond market.
 
Even the historically staid municipal bond market hasn’t been immune to the volatility. Prior to the pandemic, daily swings of 10-15 basis points in key tax-free benchmarks would have raised eyebrows. Now, traders have become accustomed to shifts of up to 50 basis points in a single trading session.

Where do we go from here?

In a best-case scenario, we would see COVID-19 pass quickly and economic activity normalize by early summer. Global monetary and fiscal easing would reignite growth, and the United States would roll back all existing tariffs. However, Nick believes a more likely scenario is that the global economy exits recession in the third quarter and begins a gradual recovery, returning to its prior peak sometime in late 2021.
 
“We think corporate profits are destined to fall at least 20%. That is basically priced in. We also think consumer price inflation and interest rates will remain low,” Nick said.
 
“Compared to many types of bonds, the U.S. stock market is actually still quite cheap. If you are not fully invested in the equity side, or you're holding onto cash until the market looks better, now may be a good time to invest in equities.”
 
Nick believes certain opportunities exist, especially for those thinking about moving out of cash or high-rated bonds and into stocks that he believes “will pay dividends for investors literally and figuratively over the next 5 to 10 years.”

10 ways you can optimize your planning now

According to TIAA Wealth Management Director Jim Daniello, CFP®, one of the most important things people need to understand—especially during periods of uncertainty—is that there are deliberate steps you can take to remain on course. That begins with a well-constructed plan that reflects the goals that are most important to you.
 
“While individual situations vary, sticking with your plan is often the best course of action during times of uncertainty,” Daniello said.
 
“But that doesn’t mean you should not review, and, if needed, adjust your plan and your goals regularly. That’s what the planning process is designed to help you achieve.”
 
TIAA Chief Planning Strategist Dan Keady, CFP®, agrees. “A big part of the planning process involves identifying and prioritizing your goals and looking at multiple scenarios and trade-offs in the event your goals, circumstances or outside influences change, like we’re seeing today,” Keady said.
 
Daniello and Keady share the following steps for remaining on course during periods of change or increased market volatility.

1. Create a buffer

Begin with your emergency fund. Regardless of the market environment, it’s generally prudent to set aside six months of essential living expenses in liquid assets, such as a bank savings account.
 
“If you’re not sure how much you may need to set aside, or if your needs have changed, you can work with your advisor to complete a budget worksheet to prioritize your essential and nonessential expenses,” Keady said.
 
If you’re currently retired, your emergency fund can be a valuable tool for helping you to avoid taking income from long-term assets that are declining in value, thus cementing losses.
 
“Also, try to keep your debt on the conservative side,” Keady said. “Remember, paying high interest rates on credit card debt can hinder your ability to accomplish your goals within your desired time frame.”

2. Continue regularly scheduled investments

While not intuitive, market downturns can often be good for long-term investors saving for retirement. That’s because the ongoing payroll contributions you make to your workplace plan are buying shares in mutual funds more cheaply. As the markets recover over time, those shares grow in value. So, essentially, the same money buys more shares at a lower cost per share in a down market than is possible when share prices are rising.
 
“That’s a strategy we call dollar-cost averaging,” Keady said. “Over time, the market’s fluctuations help to average out the price you pay for the shares you own.”
 
Historically, equities, or stock market investments, have provided the most robust returns over time. Through dollar-cost averaging, you’re able to take advantage of these increases, buying shares at lower prices when the market is in decline.
 
“It’s also important to remember that as you near retirement, you’re still a long-term investor,” Daniello added.
 
“You don’t need all of the money you’ve accumulated the day you retire. That money still needs to be invested to generate the growth you will need to support your plan over the course of your retirement.”

3. Diversify your investments

While not a guarantee, generally, a mix of different investments and asset classes that may include stocks and bonds has historically offered growth and a degree of stability over the long term. It’s difficult to guess which asset class will do well in any given year. To manage risk, your portfolio assets should be spread out among a variety of investments, so that an upswing in one investment may help to offset downward movement in another as market conditions change.

4. Consider rebalancing

As the chart shows, over time, market swings can throw your asset allocation out of balance, and potentially your risk targets and investment goals, as well. When this happens, you can rebalance by moving money from investments that take up a greater portion of your portfolio than desired into those that could use a boost—to get back to the initial (or target) asset allocation.

Rebalance at least annually

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5. Don’t time the markets

While market volatility can be unnerving, trying to time the markets to get out before a drop, and back in before the markets go back up is hard, if not impossible to do with certainty.
 
“You have to be right two times through every market cycle, over many decades in the case of retirement planning,” Keady said.
 
“This is not very realistic.” For example, if you sold at the bottom of the Great Recession and waited a year to get back in, you greatly underperformed compared to staying fully invested. Every downturn will be different, but the point is that market timing may create a risk to reaching your goals.

6. Make sure you’re on track

If you plan to retire soon, be sure to update your plan with your advisor. If it turns out that you are not on track, consider if you can:
  • Work a year or two longer, which can often improve the Confidence Zone number in your plan.
  • Often, even slightly lowering spending can push up your number.
  • Reprioritize your goals or consider trade-offs. Maybe buying that cabin at the lake can wait a few years, or maybe you take it off your list altogether.
  • Consider increasing your sources of lifetime income. Begin by examining your Social Security claiming strategy, and whether lifetime annuity income is helpful, using the Retirement Income Review.
For those who are already retired, Keady says to work with your advisor to update your plan yearly and consider drawing from assets that have not declined in value, like an emergency fund, to delay the need to draw from assets that have declined in value. You may also want to consider reducing spending to help stay or get into the Confidence Zone in your plan.

7. Manage your tax exposure

Taxes are an important consideration for those in retirement, so you want to make sure your income strategy is highly tax efficient. For many retirees, this may be a good time to think about tax-loss harvesting or possibly a Roth conversion. Plus, waiving your required minimum distributions (RMDs) this year under the provision in the CARES Act should be considered.
 
“Remember, taxes are an expense, and lowering taxes reduces the amount you need to draw from your accounts to pay those taxes,” Keady said.

8. Evaluate your guaranteed income sources

Daniello reminds retirees that evaluating how much of your income is derived from guaranteed sources, such as Social Security, pensions and fixed annuities, is another important consideration. When your essential needs—food, housing, healthcare and transportation—are met through your guaranteed sources of income, it’s easier to avoid taking distributions from long-term assets during periods of declining investment values. As a result, that can help you avoid locking in long-term losses.

“If you’re uncertain about how much guaranteed income you may need in retirement, your advisor can help you evaluate your current asset allocation, as well as product allocations for lifetime income,” Daniello said.

Retirement income sources

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9. Make sure assets are located in the right accounts

The ability to identify all of your potential sources of income and ways you may be able to avoid locking in losses on long-term investment holdings can be critical, especially when dealing with periods of ongoing turbulence in the markets. Keady recommends scheduling time with your TIAA wealth advisor to complete an asset location worksheet.
 
“Your advisor uses this worksheet to review the location of each account you own to help ensure you have the right kind of asset in the right account, you're using smart strategies to help reduce the impact of taxes and market volatility, and each asset has a clear purpose in your overall financial plan,” Keady said.
 
When the review is complete, you should have a clearer idea of whether your assets are in a suitable location, if your strategy is as tax smart as it could be, and if there are additional steps that need to be taken now in regard to portfolio diversification or rebalancing. It can also help you determine whether you have adequate sources of guaranteed income in retirement, and ways to avoid cementing losses in your long-term investment accounts.
 
“For example, if you’re retired and drawing income from your investment portfolio, we can see if it makes sense instead to draw current income from your emergency savings or other cash resources to minimize your investment losses,” he added. “If you’re nearing retirement, it can help determine if you’re still on course, or if it makes sense to extend your retirement timeline and continue working for another year or two to allow the markets time to recover.”

10. Meet with your advisor

Remember, if you have a TIAA retirement plan, you have access to advice from an advisor at no additional cost. Whether you need a few questions answered or advice on a specific issue, TIAA brings more than 100 years of experience helping investors and retirement plan participants navigate change at all stages of life.
 
To learn more, contact your TIAA advisor to schedule time to talk about your needs.

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1https://www.tiaa.org/public/offer/insights/tiaa-market-commentary/us-equities-cant-sustain-aprils-momentum
 
This material is for informational or educational purposes only and does not constitute fiduciary investment advice under ERISA, a securities recommendation under all securities laws, or an insurance product recommendation under state insurance laws or regulations. This material does not take into account any specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on the investor’s own objectives and circumstances.
 
Advisory services are provided by Advice & Planning Services, a division of TIAA-CREF Individual & Institutional Services, LLC, a registered investment adviser.
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