Medicare Open Enrollment Begins October 15

What is the Medicare Open Enrollment Period?

The Medicare Open Enrollment Period is the time during which Medicare beneficiaries can make new choices and pick plans that work best for them. Each year, Medicare plan costs and coverage typically change. In addition, your health-care needs may have changed over the past year. The open enrollment period is your opportunity to switch Medicare health and prescription drug plans to better suit your needs.

When does the Medicare Open Enrollment Period start?

The annual Medicare Open Enrollment Period begins on October 15 and runs through December 7. Any changes made during open enrollment are effective as of January 1, 2020.

During the open enrollment period, you can:

• Join a Medicare prescription drug (Part D) plan
• Switch from one Part D plan to another Part D plan
• Drop your Part D coverage altogether
• Switch from Original Medicare to a Medicare Advantage plan
• Switch from a Medicare Advantage plan to Original Medicare
• Change from one Medicare Advantage plan to a different Medicare Advantage plan
• Change from a Medicare Advantage plan that offers prescription drug coverage to a Medicare Advantage plan that doesn't offer prescription drug coverage
• Switch from a Medicare Advantage plan that doesn't offer prescription drug coverage to a Medicare Advantage plan that does offer prescription drug coverage

What should you do?

Now is a good time to review your current Medicare plan. What worked for you last year may not work for you this year.

Have you been satisfied with the coverage and level of care you're receiving with your current plan? Are your premium costs or out-of-pocket expenses too high? Has your health changed?  Do you anticipate needing medical care or treatment, or new or pricier prescription drugs?

If your current plan doesn't meet your health-care needs or fit within your budget, you can switch to a plan that may work better for you.

If you find that you're still satisfied with your current Medicare plan and it's still being offered, you don't have to do anything. The coverage you have will continue.

What's new for 2020?

The end of the Medicare Part D donut hole. The Medicare Part D coverage gap or  "donut hole" will officially close in 2020. If you have a Medicare Part D prescription drug plan, you will now pay no more than 25% of the cost of both covered brand-name and generic prescription drugs after you've met your plan's deductible (if any), until you reach the out-of-pocket spending limit.

New Medicare Advantage features. Beginning in 2020, Medicare Advantage (Part C) plans will have the option of offering nontraditional services such as transportation to a doctor's office, home safety improvements, or nutritionist services. Of course, not all plans will offer these types of services.

Two Medigap  plans discontinued. If you're covered by Original Medicare (Part A and Part B), you may have purchased a private supplemental Medigap policy to cover some of the costs that Original Medicare doesn't cover. In most states, there are 10 standard types of Medigap policies, identified by letters A through D, F, G, and K through N. Starting in 2020, people who are newly eligible for Medicare will not be able to purchase Medigap Plans C and F (these plans cover the Part B deductible which is no longer allowed), but if you already have one of those plans you can keep it.

If you would like to review your current investment portfolio or discuss any medicare or health insurance questions, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

College Disrupted: Students Face High Costs and Pandemic Impact

Even in normal times, it can be challenging for families to cover college expenses without borrowing money and/or risking their own retirement security. For the 2019-2020 academic year, the cost of in-state tuition, fees, room, and board at a four-year public college averaged $21,950, and the total for a private college approached $50,000 ⁽¹⁾.

Sadly, the college world is not immune from the health fears and financial pain inflicted by the coronavirus pandemic. More students might choose schools that are less expensive and/or closer to home, take a year off, or forgo college altogether. The American Council on Education predicted a 15% decline in college enrollment nationwide for the next academic year ⁽²⁾.

With the financial futures of students and supportive parents at stake, it is more important than ever for families to make informed college decisions.

Reopening plans

As of August 5, 2020, about 29% of the nearly 3,000 institutions tracked by The Chronicle of Higher Education had announced plans for an online fall semester, 23.5% were planning to hold classes primarily or fully in person, 16% were proposing various hybrid models of in-person classes and remote learning, and the remainder were still undecided ⁽³⁾.

To reduce campus density and make room for social distancing in classrooms and residence halls, many colleges are inviting 40% to 60% of students back to campus (prioritizing freshman or seniors, certain majors, programs with clinical requirements, and students with unsafe home situations, for example) while expanding and improving remote teaching capabilities for students studying at home ⁽⁴⁾. Some colleges have backtracked on earlier plans to reopen due to a surge of the virus, and more could follow suit as events unfold ⁽⁵⁾.

A new landscape

Students who live on campus or attend classes in person are likely to find strict rules and restrictions regarding safety practices (physical distancing, face coverings, virus testing) and changes in many facets of campus life, including living situations, food options, class settings, social gatherings, and popular extracurricular programs such as arts and athletics.

Acknowledging that students are not getting the college experience they wanted and are now more price sensitive, many schools are freezing tuition, and others are offering discounts, increasing scholarships, or allowing students to defer payments ⁽⁶⁾. In anticipation of $23 billion in revenue losses, colleges nationwide have also had to lay off employees, reduce salaries, eliminate programs, and make other budget cuts ^(7-8).

In mid-March, Moody's Investors Service downgraded the outlook for higher education from stable to negative, citing reduced enrollment. Institutions with large endowments and/or strong cash flows are better positioned to withstand the crisis, but lost tuition poses a bigger threat to smaller colleges ⁽⁹⁾.

Shopping for schools

High school students who are involved in the planning and application process might be lucky to enter college after the worst of the health crisis is over. Still, more economic hardship means that cost could play a greater role in school selection.

Many students don't pay published tuition prices, and financial aid packages differ from school to school. After identifying schools that might be a fit, families can use net price calculators to compare how generous different colleges might be, based on the household's financial situation and the student's academic profile.

Before choosing a school, students should understand how much they might have to borrow and what the monthly payment would be after college. It's also important to take a hard look at earning potential when choosing an academic program. Those who plan to enter lower-paying fields may fare better if they keep costs down and borrowing to a minimum.

Seeking financial aid

To receive grants and/or loans, students must complete the Department of Education's Free Application for Federal Student Aid (FAFSA) and apply for aid according to the college's instructions as early as possible. Higher-earning families should also fill out the FAFSA because they may qualify for more need-based aid than they might expect, and some schools may require a completed FAFSA for merit-based scholarships.

College students with parents who have lost a job or earned less income than normal this year due to COVID-19 may want to appeal for a revised aid package, if not for fall then for spring. The financial aid administrator may be able to reduce the loan component of a student's aid package and/or increase the scholarship, grant, or work-study component.

Will college pay off?

The average college graduate earns $78,000 per year, compared with about $45,000 for the average worker with a high school diploma. The wages of workers without a college degree tend to fall more during recessions, and they are more likely to be unemployed, as seen during the pandemic ⁽¹⁰⁾.

A 2019 Federal Reserve analysis of the cost (four years of tuition and lost wages) and the benefits (higher lifetime earnings) concluded that a college degree is a sound investment for most people; the average rate of return for a bachelor's degree is about 14% ⁽¹¹⁾.

When Fed economists adjusted this analysis to account for the 2020 pandemic, the return on a college degree rose to 17% (under the assumption that many workers with a high school diploma would be unemployed for a year). For a student who takes a gap year, the estimated return dropped to 13%. The $90,000 cost of a delay includes one year's worth of post-graduation earnings and slower growth in wages over a lifetime ⁽¹²⁾.

Remote learning may not be a perfect substitute for in-person interactions and relationships, especially for students enrolled at expensive institutions. Still, motivated students can grow intellectually and work toward a degree that could be valuable in terms of future earnings and social mobility.

Many colleges may be able to utilize their investments in technology and online curriculums long after the pandemic passes, providing future undergraduates with more opportunities to earn an affordable college degree remotely.

If you would like to review your current investment portfolio or discuss any college planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

⁽¹⁾ College Board, 2019
⁽²⁾⁽⁷⁾ American Council on Education, 2020
⁽³⁾ The Chronicle of Higher Education, August 5, 2020
⁽⁴⁾⁽⁹⁾ The New York Times, July 7, 2020, and May 12, 2020
⁽⁵⁾ NPR.com, July 22, 2020
⁽⁶⁾⁽⁸⁾ Inside Higher Ed, April 27, 2020, and June 29, 2020
^(10)(11)(12) Federal Reserve Bank of New York, 2019-2020

IRS Clarifies COVID-19 Relief Measures for Retirement Savers

The Coronavirus Aid, Relief, and Economic Security (CARES) Act passed in March 2020 ushered in several measures designed to help IRA and retirement plan account holders cope with financial fallout from the virus. The rules were welcome relief to many people, but left questions about the details unanswered. In late June, the IRS released Notices 2020-50 and 2020-51, which shed light on these outstanding issues.

Required minimum distributions (RMDs)

One CARES Act measure suspends 2020 RMDs from defined contribution plans and IRAs. Account holders who prefer to forgo RMDs from their accounts, or to withdraw a lower amount than required, may do so. The waiver also applies to account holders who turned 70½ in 2019 and who would have had to take their first RMD by April 1, 2020, as well as beneficiaries of inherited retirement accounts.

One of the questions left unanswered by the legislation was: "What if an account holder took an RMD in 2020 before passage of the CARES Act and missed the 60-day window to roll the money back into a qualified account?"

In April, IRS Notice 2020-23 extended the 60-day rollover rule for those who took a distribution on or after February 1, 2020, allowing participants to roll their money back into an eligible retirement account by July 15, 2020. This seemingly left account owners who had taken RMDs in January without recourse. However, IRS Notice 2020-51 rectified the situation by stating that all 2020 RMDs — even those received as early as January 1 — may be rolled back into a qualified account by August 31, 2020. Moreover, such a rollover would not be subject to the one-rollover-per-year rule.

This ability to undo a 2020 RMD also applies to beneficiaries who would otherwise be ineligible to conduct a rollover. (However, in their case, the money must be rolled back into the original account.)

This provision does not apply to defined benefit (pension) plans.

Coronavirus withdrawals and loans

Another measure in the CARES Act allows qualified IRA and retirement plan account holders affected by the virus to withdraw up to $100,000 of their vested balance without having to pay the 10% early-withdrawal penalty (25% for certain SIMPLE IRAs). They may choose to spread the income from these "coronavirus-related distributions," or CRDs, ratably over a period of three years to help manage the associated income tax liability. They may also recontribute any portion of the distribution that would otherwise be eligible for a tax-free rollover to an eligible retirement plan over a three-year period, and the amounts repaid would be treated as a trustee-to-trustee transfer, avoiding tax consequences.¹

In addition, the CARES Act included a provision stating that between March 27 and September 22, 2020, qualified coronavirus-affected retirement plan participants may also be able to borrow up to 100% of their vested account balance or $100,000, whichever is less. In addition, any qualified participant with an outstanding loan who has payments due between March 27, 2020, and December 31, 2020, may be able to delay those payments by one year.

IRS Notice 2020-50

To be eligible for coronavirus-related provisions in the CARES Act, "qualified individuals" were originally defined as IRA owners and retirement plan participants who were diagnosed with the virus, those whose spouses or dependents were diagnosed with the illness, and account holders who experienced certain adverse financial consequences as a result of the pandemic. IRS Notice 2020-50 expanded that definition to also include an account holder, spouse, or household member who has experienced pandemic-related financial setbacks as a result of:

• A quarantine, furlough, layoff, or reduced work hours
• An inability to work due to lack of childcare
• Owning a business forced to close or reduce hours
• Reduced pay or self-employment income
• A rescinded job offer or delayed start date for a job

These expanded eligibility provisions enhance the opportunities for account holders to take a CRD.

The Notice clarifies that qualified individuals can take multiple distributions totaling no more than $100,000 regardless of actual need. In other words, the total amount withdrawn does not need to match the amount of the adverse financial consequence. (Retirement investors should consider the pros and cons carefully before withdrawing money.)

It also states that individuals will report a coronavirus-related distribution (or distributions) on their federal income tax returns and on Form 8915-E, Qualified 2020 Disaster Retirement Plan Distributions and Repayments. Individuals can also use this form to report any recontributed amounts. As noted above, individuals can choose to either spread the income ratably over three years or report it all in year one; however, once a decision is indicated on the initial tax filing, it cannot be changed. Note that if multiple CRDs occur in 2020, they must all be treated consistently — either ratably over three years or reported all at once.

Taxpayers who recontribute amounts after paying taxes on reported CRD income will have to file amended returns and Form 8915-E to recoup the payments. Taxpayers who elect to report income over three years and then recontribute amounts that exceed the amount required to be reported in any given year may "carry forward" the excess contributions — i.e., they may report the additional amounts on the next year's tax return.

The Notice also clarifies that amounts can be recontributed at any point during the three-year period beginning the day after the day of a CRD. Amounts recontributed will not apply to the one-rollover-per-year rule.

Regarding plan loans, participants who delay their payments as permitted by the CARES Act should understand that once the delay period ends, their loan payments will be recalculated to include interest that accrued over the time frame and reamortized over a period up to one year longer than the original term of the loan.

Retirement plans are not required to adopt the loan and withdrawal provisions, so check with your plan administrator to see which options might apply to you. However, qualified individuals whose plans do not specifically adopt the CARES Act provisions may choose to categorize certain other types of distributions — including distributions that in any other year would be considered RMDs — as CRDs on their tax returns, provided the total amount does not exceed $100,000.

For more information, review IRS Notices 2020-50 and 2020-51, or talk to us.

¹Qualified beneficiaries may also treat a distribution as a CRD; however, nonspousal beneficiaries are not permitted to recontribute funds, as they would not otherwise be eligible for a rollover.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

2020: Not Your Average Election Year

If you decided to take a long nap on New Year's Eve and just woke up today, looked at your account statements, you might have yawned at how unchanged and boring the market must have been. You'd probably think, "on average, the market has been unchanged."

But that's the problem of averages when it comes to the stock market -- they can wall-paper over a lot of painful experiences, like the tech bubble of 1999-2000, and the housing bubble of 2006-2007.

Considering the health catastrophe created by COVID-19, the strong rebound in stocks since the late-March low is astounding, especially given the deep economic damage. But given that the stock market is a forward-looking discount mechanism, it suggests that the collective wisdom of investors is more optimistic than the evidence that we hear and read about every day.

Stock markets continue to express little concern about the many uncertainties in this environment. Stock market valuations have met or exceeded their pre-crisis levels by most measures and continue to expand despite the major ongoing risks. Existing home sales in June of 4.7 million exceeded a record level on the back of falling interest rates, even as the number of unemployment claims ticked up last week for the first time in four months.

Federal Reserve support, rock bottom interest rates, the re-opening trade, and stronger economic data have helped. I also believe investors are looking past this year’s hit to corporate profits and are expecting an upturn in 2021.

The jump in daily COVID cases has created some renewed volatility, and it bears watching, but it has yet to knock the bulls off course. New all-time highs in the stock market in the weeks ahead would not surprise me one bit (the NASDAQ index has already done it). Even more surprising, it's entirely possible that we've embarked on a new bull market.

While we are cautiously optimistic and giving this market the benefit of the doubt, we are maintaining our defensive allocation, primarily due to the persistent level of exuberance in the markets and resulting current overvaluation, as well as the uncertainty around possible rollbacks in re-openings.

Ultimately, the path of the virus will play the biggest role in how the economic outlook unfolds. Some folks are itching to get back to normal, while others remain on guard against the disease and are taking a more cautious approach. It may take time for some businesses to fully recover. Some never will.

Last month I opined, “I don’t expect a return to a pre-Covid jobless rate anytime soon. But investors are betting that an economic bottom is in sight.”

Try to look past continued volatility. With elections coming up this year, I expect more wacky market moves to go along with the typical wacky political moves we always see in a presidential election year. Regardless, based on recent economic reports, I think we hit bottom in April.

Those worried about a return to the March lows currently don't have much evidence in terms of stock market action to support their worries. With so much money on the sidelines, it seems that every little dip is getting bought by those left behind in the panic.

If you liken the February-March stock market crash to an earthquake, then sure, you may feel some tremors and aftershocks for months, but the likelihood of another earthquake within a short period of time is highly improbable.

What to Do

None of us expected an economic upheaval spawned by a health crisis as the year began. But it pays to discuss some of the lessons and takeaways from the COVID-19 crisis.  And as I discuss them, you’ll probably recognize some of the themes (yes I do repeat myself frequently, like a nagging parent). Let’s not forget that the fundamentals—the core financial precepts—are always the building blocks of any credible financial plan.

1. Money at the end of your month

Saving for an emergency cannot be underestimated. Six to nine months of spending needs is optimal. But there is an added benefit—financial peace of mind.

It’s reflected in the proverb “The borrower is servant to the lender.” It’s not that I would counsel against a mortgage for a home or a reasonable loan for a car. But accumulation of wants (not needs) with (credit card) debt doesn’t bring contentment.

Instead, it brings stress. I have seen it over and over. You want money at the end of your month, not month at the end of your money.

A financial cushion eliminates one of life’s worries.

2. Wants vs. needs

Many of us have learned to do without certain things during quarantine. Whether we wanted to or not, we were forced to cut back on certain items.

Ask yourself this question, “As businesses reopen, are there things I can do without? Can I continue to cut back and still maintain my lifestyle?”

Many of our entertainment options have been curtailed. As we emerge from our homes and businesses re-open, are there items that can be trimmed from the budget?

It’s not a cold turkey approach, i.e. no more eating out, sporting events, travel or theater. But can we reduce expenditures on some items without sacrificing our overall lifestyle?

3. Diversification and tolerance for risk

We’ve just witnessed an unusual amount of stock market volatility. Calling it a roller coaster does not fully capture the experience (and most amusement parks are still shuttered!)

The major indexes have erased much of their losses. Yet, how did you fare emotionally when stocks took a beating? Now is the time to reevaluate your tolerance for risk. We’d be happy to assist and make any adjustments as they relate to your longer-term financial goals.

4. Expecting the unexpected

From its March 2009 low to the February 2020 high, the bull market ran for over 10 years (measured by the S&P 500 Index). We know bear markets are inevitable, but I recognize that the onset of a steep decline may be unnerving.

Nonetheless, a well-diversified portfolio of stocks has historically had an upside bias. That upside bias is incorporated into the recommendations we make, even as our recommendations are tailored to your individual circumstances and goals.

Further, a mix of fixed income and contra-funds helped cushion the decline. While we monitor events and the markets over a shorter-term period, let’s be careful not to take our eyes off your longer-term goals.

Be proactive, not reactive

The ideas above are a broad overview and individual circumstances may vary.

Taking inventory is critical. It’s half the battle. Be proactive, not reactive. You may find you are in a much better position than you realized. As always, we are here to help.

I hope you’ve found this review to be helpful and educational.

I understand the uncertainty facing all of us. We are grappling with an economic and a health care crisis. It’s something none of us have ever faced. We have addressed various issues with you, but I have an open-door policy. If you have questions or concerns, let’s have a conversation. That’s what I’m here for.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

What's Going on in the Markets June 7, 2020

 Over the past week, the stocks of American Airlines, United Airlines and Delta Airlines were up 77%, 51% and 35% respectively. In addition, the stocks of Norwegian Cruises, Carnival Cruises and Royal Caribbean Cruises were up 43%, 37%, and 34% respectively.

But none was more bizarre than the stock of Hertz Car Rental, which was up a whopping 157% on the week. Now it's not unusual for a cheap stock trading for $1.00 a share to double or triple in a week. But it is unusual when the company has already declared bankruptcy, meaning that stockholders will likely receive nothing in the reorganization.

In what I can only describe as a bit of overexuberance in a world where many don't plan to get on an airplane in the next 12 months, and others who say they'll never step foot on a cruise ship in their lifetimes again, can I say that the recent rally is getting a little "bubblelicious"?

That's all to say that I cannot remember a time when I’ve seen such a widespread disparity between what is happening in the economy and what is happening in the stock market.

Let’s take a few moments to briefly outline the situation using hard data.

• The unemployment rate soared to a post-depression high of 14.7% in April, while the survey of businesses by the U.S. Bureau of Labor Statistics revealed a loss of 20.5 million jobs in April, the worst monthly reading since records began in 1939.
• In a single month, nearly all of the jobs created after the financial crisis disappeared, at least temporarily.
• Then on Friday we got the May Jobs report and we were surprised that the economy had created 2.5 million jobs and the unemployment rate had actually declined to 13.3%. While 13.3% unemployment is a "depression-like" number, it was far better than numbers projected by economists: a loss of 7.5 million jobs and a 20% unemployment rate. To paraphrase Yogi Berra: "forecasting is hard, especially when it's about the future".
• April’s 11.2% drop in industrial production, a metric the Federal Reserve has tracked since 1919 – is the biggest monthly decline on record. Furthermore, consumer spending in April fell 13.6%, the biggest decline ever recorded (U.S. BEA, data back to 1959).
• The Institute for Supply Management's (ISM) Manufacturing Index and the ISM Services Index both showed a slight improvement in May; however, both segments remain deep in contraction territory.
• Record layoffs continue, with the number of first-time claims for unemployment insurance topping 40 million over a 10-week period ending May 23. Put another way, nearly one in four working Americans have experienced a job loss.

If there is any good news, it is that the number of first-time filings has been declining, and the number of individuals who re-certify on a regular basis in order to continue receiving jobless benefits is about half the number of first-time filings.

This would suggest that the economic injury disaster loans and payroll protection program loans are kicking in, and re-openings are encouraging businesses to recall furloughed workers.

Let’s Back Up Again for a Moment

• In April, in just a three-week period, the number of first-time claims for jobless benefits totaled an astounding 17 million. For perspective, during the 18-month-long 2007-2009 recession…first-time claims totaled 9.6 million.
• Yet the Dow Jones Industrial Average added 2,107 points over the three Thursdays when the massive number of new claims were released.
• Since then (April 9), the Dow has added 3,600 points, or 15.0%. It is up 49% since its near-term March 23 bottom.
• The broader-based S&P 500 Index eclipsed 3,000 by the end of May and has rebounded nearly 46% from its March 23 low to near 3,200.
• Meanwhile the tech-heavy NASDAQ Composite has added 48%, is back above 9,800, and has already surpassed its all-time high.

Simply put, economic activity is falling with depression-like speed, but the major averages are in the midst of an historic rally.

Here’s one more piece of performance data:

• During the financial crisis, the S&P 500 Index lost nearly 57% from its October 2007 peak to the bottom in March 2009. This year, in about one month, the S&P 500 Index shed 34% before hitting a near-term bottom on March 23.

The adage “stocks climb a wall of worry” has never been more appropriate amid economic devastation and an outlook that remains incredibly murky.

A Closer Look at the Wall Street/Main Street Disconnect

A combination of factors has fueled the rally since late March.

The response by the Federal Reserve has far outpaced its 2008 response, which has lent a tremendous amount of support to stocks. The same can be said of government fiscal stimulus.

Investors are also keeping close tabs on state re-openings, which will re-employ furloughed workers, help stabilize the economy, and set the stage for a possible economic rebound later in the summer. Talk of possible vaccines has also helped.

You see, investors don’t simply look at today’s data, which in many cases is backward-looking. Instead, they are forward-looking as they attempt to price in economic activity, the level of interest rates, corporate profits, and more over the next 6-12 months.

An Approaching Dawn

If we look at what is called “high-frequency economic data” (daily or weekly reports), we are starting to see signs of stability.

Daily gasoline usage has rebounded (Energy Information Administration), daily travel through TSA checkpoints is up, hotel occupancy is off the bottom, and the same can be said of weekly box office receipts (Box Office Mojo).

In addition, the weekly U.S. MBA’s Purchase Index (home loan applications) registered its fifth-best reading over the last year (as of May 22), suggesting that low-interest rates and some confidence that the U.S. economy is set to recover are lending support to housing.

Of course, these are highly unconventional measures of economic activity and are industry-specific. Outside of the Purchase Index, each remains well below previous highs, but the turnaround suggests we may be seeing some light at the end of a very dark tunnel.

Collective Wisdom

Any given level of a major stock market index represents the collective wisdom of tens of millions of stock market investors. It is not simply an opinion, but an opinion with money behind it. That’s an opinion worth listening to.

When stocks were in a free fall in March, investors were anticipating a devastating blow to the economy. Tragically, the data did not disappoint.

But has the rally been too much, too quickly?

Even in the best of times, economic forecasting can be difficult (refer to earlier Yogi Berra quote). Today, the outlook is clouded with a much greater degree of uncertainty.

1. Will the virus lay down over the summer?
2. How will re-openings proceed?
3. How quickly can a readily available vaccine and treatment be developed?
4. What might happen to COVID-19 next fall and winter?
5. How quickly will consumers venture back in public and resume prior spending patterns?

These are difficult questions to answer.

I don't expect a return to a pre-COVID jobless rate anytime soon. But investors are betting that an economic bottom is in sight or has already occurred.

I understand the uncertainty facing all of us and I don't underestimate the enormous amount of work that has to be done or the difficulties we'll encounter in getting back to "normal". We are grappling with an economic and a health care crisis, not to mention recent civil unrest. It’s a combination none of us have ever faced.

A New Bull Market or the Most Epic of all Bear Market Rallies?

For our clients' portfolios, I know that I will spend years analyzing the last few months and scrutinizing our moves. I'm pleased that we entered 2020 with a defensive stance that served us well. I'm also pleased that we followed our rules in further reducing portfolio risk and increasing hedges as we saw fit as the decline kicked into high gear. I'm very pleased that we held firm with our core holdings, never wavering from our belief that our core assets would ultimately be just fine, dividends would continue to accrue and that the foundation of our portfolios remained intact.

As we moved through the crash methodically with a steady hand and calm head,  I'm also pleased that not a single client panicked, and those that stuck with their investment plans and did not decide to tinker with their portfolio risk "on the fly" fared the best among our clients. Those that paid attention to the media (who regularly try their best to scare us witless), and who insisted on reducing their risk near the bottom and not follow their own investment plan still fared OK but cost their portfolios dearly. 

So I guess I'll say it again: Neither they, you, or I know what's going to happen next, no matter how smart we are. All we can do is watch the price action, put probabilities in our favor, and pay heed to risk. Ultimately, we're in the risk management business, not the prediction business.

What I'm not as pleased about is that we didn't more aggressively buy the panic that ensued in the market. Of course, this is easy to say in hindsight. It was my plan to do so, but the bounce proceeded too quickly and the shallow pullbacks did not allow for the necessary low-risk entries that I was planning for. While we bought some investments lightly on the way down and also on the way up, with the benefit of hindsight, we could have more aggressively reduced hedges and ramped up buying. 

I'm also not pleased that I underestimated the power of the Federal Reserve and found myself being overly moderate. Of course, the next few months could prove my current sentiment to be completely wrong and the gains quickly reverse. As it stands, it is my plan to increase our overall investment levels based on the "quality" of the next pullback.

Towards that end, if this is truly a new bull market, and the recession turns out to be one of the shortest ones on record, then the next pullback should be of the 5%-10% variety, and will give us a low-risk way to increase stock market exposure further.  If instead, this has been the "mother" of all bear market rallies, then our continued defensive stance will serve us quite well. Only time will tell.

Short-term, the market is a bit overheated, so a pullback could ensue any day now. For those who are phasing back into the market, or who need to rebalance their portfolio, it may be advantageous to wait for the pullback.

As we move forward from here, I'll be the first to admit that I still have no idea how this all plays out into the remainder of 2020. From the coronavirus, we have now moved to national demonstrations and riots which are affecting cities all across America. In just a few months we'll be heading directly into a presidential election. If that's not a recipe for elevated volatility for the rest of the year, I don't know what is.

On the investment horizon, I can tell you that this bust/ boom cycle we've just witnessed has solidified, more than ever, just how important it is to have a portfolio diversification not only in different asset types, but also across time-frames (i.e., short term, medium-term and long-term investments). It has solidified the idea that a client's risk tolerance is much more important than age-based risk tolerance, and that I plan to spend more time in client meetings making sure that clients truly understand and accept their overall risk. As a firm, we'll continue looking to do more of the things that have worked for us and less of the things that didn't.

Bottom Line

Fueled by record amounts of stimulus in both monetary and fiscal policy, stocks have continued to move higher in spite of the ongoing economic damage. This disconnect between the economy and the stock market has confounded many analysts due to the fact that there is typically a tight link between the two. And while it’s key to understand the additional dynamics which affect the stock market, this divergence (between the economy and stock market) represents a high degree of risk which continues to warrant a defensive portfolio stance.

As always, I’m honored and humbled that you're devoting time to read what I'm writing and/or given me the opportunity to serve as your financial planner/advisor. If you have any questions or would like to discuss any financial matters, please feel free to give me a call.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.