Certain Uncertainty, Yet Signs of Hope

For many people, early September felt like a disruption to the normal tradition of sending kids off to school in new sneakers and backpacks. Instead, many charged up tablets for remote learning or adjusted to hybrid school schedules - complete with masks and Covid-19 screening protocols.

It is hard to believe we are six months into living with the coronavirus. It sometimes feels like a force field is keeping us from being free to “roam about the country,” to quote the Southwest Airlines television commercial (now absent from our TV screens). Yet, this Wednesday, September 23, marked six months since the S&P 500’s March 23 low for the year before it climbed nearly 45%, the best 6-month stretch since 2009.

September’s arrival also disrupted the summer’s stock market climb. The major stock indexes have now seen four consecutive weeks of losses. The pandemic’s economic toll, the prospects of an uneven U.S. economic recovery, and elevated levels of new infections in both Europe and the U.S. have shaken investor’s confidence. Meanwhile, nearly 170 coronavirus vaccines are in development worldwide and a dozen are starting or nearing the final stage of testing. Just this week, Johnson & Johnson’s vaccine returned positive Phase 1-2 trials and is moving into a Phase 3 with results expected by early 2021.

Adding to the uncertainty, the Presidential election (now 39 days away) intensified following last Friday’s passing of Supreme Court Justice Ruth Bader Ginsburg. Washington is now focused on filling Justice Ginburg’s seat, overshadowing negotiations for a second coronavirus relief package that Federal Reserve Chairman Jerome Powell believes is necessary to support the economy and labor market.

Today’s news headlines are dominated with stories on the candidates, their platforms and predictions on whether either candidate will move the economy and markets. Many are surprised to see a study by Vanguard detailing no statistical difference in a 60% stock/40% bond portfolio comparing election years to non-election years.

The bottom line: elections generate lots of headlines and it’s understandable to have concerns about election outcomes, but sticking to your financial plan is key.

Staying on the theme of financial planning, the Federal Reserve’s plan to hold benchmark interest rates near zero makes it a good time to review debt and look for savings opportunities.

Mortgage rates are likely to stay low. The average 30-year fixed mortgage is 2.87%, near its lowest level in about 50 years. This is likely to spur more home buying and continue the refinancing wave that began this spring. Some lenders are setting refinance rates higher than home purchase rates, but whether you’re staying put or buying it is a good time to review your options for lower payments and lifetime interest savings.
Student loans can be refinanced. A zero-rate environment means different things for federal and private loans. Those with federal loans can now defer payment until December 31. Refinancing can pull a federal loan borrower out of needed forbearance, but those with private education loans can now refinance and lower their payments quite a bit.

Finally, no one knows what next year’s tax changes will bring, but another planning strategy to consider is converting Individual Retirement Account funds to a Roth retirement account.

The money in a traditional IRA is taxed when taken out and moved to a Roth. Money grows tax free in a Roth and distributions after age 59 ½ are tax-free (provided the account has been open for at least five tax years). Under the 2019 SECURE Act, non-spouse IRA and Roth IRA beneficiaries have to deplete their inherited accounts within 10 years of the owner’s passing, but Roth IRA beneficiaries get the benefit of tax-fee withdrawals. (This can be advantageous if adult children are projected to be in prime earning years when inheriting Roth accounts from their parents.)

The Charter Oak team welcomes your thoughts and questions on these themes. It is our pleasure to serve you, especially in these challenging times, and we hope you enjoy the transition to fall weather in New England and beyond.