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Gotta Own FAANG For Your Portfolio to Hang?

The COVID-19 crisis has challenged and changed us all in different ways, including what we think of as essential. The conversation over what qualifies as an “essential” versus “non-essential” business has impacted many companies that produce and sell items and services considered essential for everyday use. What do you think of as essential (?) – we encourage you to reply to this email and let us know.

Traditionally defined, consumer staple stocks are broken down into five main industries: beverages, food, household goods, personal and hygiene products, and tobacco – services and items that individuals are either unwilling or unable to eliminate from their budgets even in times of financial trouble. Recently, a more contemporary definition of a consumer staple has emerged from our pandemic-altered lifestyles, and consequently, the definition of a consumer staple stock has arguably changed. Introducing, the FAANG stocks:

Facebook (social media). Amazon (e-commerce). Apple (smartphones and tech hardware). Netflix (video streaming). Google (online search and services). All five companies are known for their dominance in their respective industries and sizable customer bases. Combined, they have a market capitalization of more than $4 trillion! Additionally, as a group (below, in purple), the stocks have collectively outperformed the overall stock market (as measured by the S&P 500, below, in yellow) by a healthy margin so far in 2020: 

While many other companies have experienced major interruptions to business operations during the COVID-19 pandemic, revenue and earnings for the FAANG stocks have been excellent. Facebook doubled its first quarter profit from 2019; Amazon’s first quarter revenue in 2020 increased 26.4% from the same period a year ago; Apple increased its dividend by another 6% on April 30; Netflix now has 182.9 million subscribers, more than doubling its own projections for new paying customers in Q1 of 2020; and Google’s parent company, Alphabet, experienced year-over-year revenue growth of 13% (to $41.2 billion) in the first quarter of 2020. Clearly impressive numbers for these “essential” businesses.


Will companies like the FAANG stocks continue to dominate in the hazy and nebulous “new normal” we are all continuing to get used to, or will things revert and this outperformance be temporary? One thing is for certain – we should get used to life, as well as the financial markets, remaining unsettled and uncertain for the foreseeable future.

Pandemic Notes

  • Did you know that COVID-19 is an acronym for coronavirus disease of 2019? The name was selected by the WHO, the World Organization for Animal Health, and the Food and Agriculture Organization of the United Nations, working in cooperation. Their joint guidelines required that the name and its abbreviation be easy to pronounce, related to the disease, and not refer to a specific geographic location, a specific animal, or a specific group of people.
  • Good news heading into the weekend: While one additional coronavirus diagnosis is too many, the curve is flattening, as new COVID-19 cases in the United States have been stable for over two weeks now, according to Deutsche Bank, the World Health Organization, the CDC, and Worldometer:
  • More than 90 Sacramento restaurants are re-opening for dine-in service this weekend. To see the full list within the Sacramento Bee article, create a free account with the SacBee, or click HERE, and then cut and paste the URL into a web browser opened in “incognito mode” (a nifty little trick):


In addition to our dependence on the aforementioned technology behemoths and our desire to dine out again, a number of trending and notable events occurred over the past few weeks:

We are seeing early signs that these times of separation are beginning to pass, and opportunities to be back together in person with those we have been missing, are beginning to grow. And as always, whether in person or via a Zoom teleconference, we sincerely value our relationships and partnerships with each of you, as well as your trust and confidence in us here at Towerpoint Wealth. We encourage you to reach out to us at any time (916-405-9140, info@towerpointwealth.com) with any questions, concerns, or needs you may have – the world continues to be an extremely complicated place, and we are here for you.

– Nathan, Raquel, Steve, Joseph, Lori, and Jonathan

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Market Commentary: So much has changed

WHERE WE ARE

March 1st seems like ages ago: on that date, the United States reported a nationwide total of just 62 cases of COVID-19; a nursing-home resident in Kirkland, Washington died of the coronavirus, only the second known American to succumb to the disease; and New York Mets baseball pitcher Jacob deGrom looked razor sharp in throwing three innings of shutout baseball in a spring training game versus the Washington Nationals.

In what seems like several months compressed into the space of six weeks, financial asset prices, volatility levels, market liquidity, and investor sentiment have been repeatedly and forcefully buffeted by:

i. Sharp increases in the global and U.S. coronavirus infection growth rates and mounting death totals from the pandemic;

ii. Enormous strains on the physical and human elements of the healthcare system as adequate supplies have been sought of protective gear; rapid, accurate testing protocols; and medical equipment, and crash programs have been launched in attempts to find curative medicines and crucially, therapeutic and preventive vaccines;

iii. The application of massive, rapidly-fashioned monetary policy programs and fiscal relief packages;

iv. Government-mandated lockdowns, cancellations, quarantines, travel restrictions, and social distancing measures leading to extremely sudden and highly synchronized economic slowdowns, business closures, supply chain disruptions, and contractions in world trade activity;

v. Heretofore unencountered increases in new filings for unemployment insurance benefits and estimates of future job losses;

vi. An oil price war, ostensibly between Saudi Arabia and Russia, with deleterious effects on global oil and gas prices; and

vii. A veritable torrent of web-based and media-delivered coverage, press conferences, medicinal advice, conspiracy theories, tragic patient and healthcare provider contagion sagas, geopolitical prognostications, Twitter feeds, Instagram posts, disease progression modeling, and economic forecasts, some quite dire, even apocalyptic, and others, not nearly so saturnine and dyspeptic.

THE BEAR CASE

In our opinion, the more-negative, bearish case is based on several worrisome factors:

i. Consumer, corporate, and investor confidence deteriorates as the unfavorable news flow continues about infections and death rates (among persistently elevated concerns about the likelihood of a recurrence in the autumn of 2020 and beyond), even as some areas show signs of leveling off and/or decline;

ii. Financial assistance does not arrive with sufficient targeting, timeliness, nor magnitude to resuscitate or prevent the demise of a significant portion of small- and medium-sized businesses, which account for 44% of U.S. GDP and 47% of private sector employment;

iii. U.S. GDP and corporate profits exhibit very poor (currently, almost unforecastable) results in 2020, with an uncertain, feeble recovery outlook for 2021;

iv. Given high pre-crisis indebtedness, a greater-and-more-widespread than expected level of downgrades, defaults, bankruptcies occurs in the corporate sector, and perhaps also transpiring in the municipal realm;

v. Crude oil and natural gas prices remain under significant pressure for far longer than anticipated, exacting a significant financial and employment toll on highly leveraged entities in the energy industry; and

vi. Societal cohesion and confidence in the wisdom and efficacy of the authorities’ actions suffers some meaningful degree of permanent erosion, with harmful effects on identity, shared values, trust, cohesion, reciprocity, and productivity.

THE BULL CASE

In our opinion, the more-positive, bullish case is based on several constructive factors:

i. Through antibodies testing, isolation, social separation, quarantines, warmer weather, medical treatments, and eventually, vaccines, COVID-19 is brought under control;

ii. Very little damage to the internet, communications, marketing relationships, and transportation infrastructure, combined with “postwar-like” unleashed pent-up demand augmented by newly-restored, improved supply chains are force-multiplied by U.S. Government stabilization programs aimed at individuals and businesses, by sizable infrastructure spending legislation, and by Federal Reserve actions (featuring continued low interest rates, financial support facilities, currency swap lines with foreign central banks, and Quantitative Easing (“money printing”), producing a surprisingly strong restorative effect on psychology and commerce;

iii. Corporate defaults end up being limited to weaker credits and kept at or below predicted rates;

iv. Oil and gas prices return to economically justifiable levels, as meaningful output reductions are agreed upon between the OPEC+ countries (including Russia) and U.S. producers; and

v. A newfound sense of survival gratitude, lifestyle and life-rethinking, national purpose, goal-setting, prioritization (to better prepare for future such challenges), some marginally-improved bipartisan cohesiveness, innovative technological, business, and educational energy, and affirmative direction takes the American nation to new high ground and a luminous era of advancement and restoration.

PORTFOLIO POSTIONING

As of now, quite a bit of bad news has already been reflected into asset prices, and our counsel for the past several months of caution and conservatism has for the most part proved a reasonably defensible and defensive strategy.

While it is quite possible that equity prices and interest rates will retest or even go below their recent lows, we give this scenario a slightly greater than even chance, as the negative fundamental news flow on the pandemic, the economy, and corporate profits seeps into and leads to further investment de-risking, we are inclined to put a modest portion of available cash reserves, if applicable, into high-quality assets (equities, perhaps some gold, and sterling-quality investment grade fixed income securities) of companies possessing fortress-like, cash-rich balance sheets, dividend strength, and defensible business models able to generate high returns on equity over a long time frame. Investors should also consider alternative investments in private credit, private real estate, and opportunistic strategies that are positioned to extract significant value during the current dislocation.

THE UNEMPLOYMENT OUTLOOK

Unemployment Rate 2020

From its March 2020 reading of 4.4%, the U.S. unemployment rate has been recently projected by Macrobond and Nordea to rise to 8.24% in April, 9.67% in May, and 12.7% in June, with CNBC, Bloomberg, and Refinitiv reporting that some sources are forecasting the U.S. unemployment rate could possibly top out around 30%. This is consistent with the more than 22 million jobless claims filings for the four weeks ending April 11th, which means that more than 14% of the 151 million-person U.S. labor force were out of work. In late March, St. Louis Federal Reserve Bank President James Bullard predicted the U.S. unemployment rate may hit 30% in the second quarter because of shutdowns to combat the coronavirus, with an unprecedented 50% drop in gross domestic product. Given the uncertainty of the times, forecasts can vary significantly as we can see. If such a jobless rate should occur, the Statista chart above shows that 30% or more unemployment would surpass the maximum unemployment percentage in each of the six worst unemployment years of the 1930s Great Depression. In our opinion, such severe readings are unlikely to come to pass, and if they did, it would be most likely for only a brief period of time because:

i. the economy should begin recovering as people return to work with more widespread testing leading to the plateauing of the coronavirus; and

ii. the lagged stimulative effects should kick in from the monetary and fiscal support implemented shortly after the severity of the pandemic began to be more broadly recognized.

At the present moment, we assign a less than 25% chance of this severe scenario unfolding, and if it did look likely to persist for any significant length of time, allocation positioning should be devoted to high quality assets.

PREDICATIONS OF ECONOMIC CONTRACTION

US Q2 GDP Growth Forecases COVID-19

The above economic forecasts (in the left panel) for 2Q2020 U.S. GDP exhibit a wide range of annualized rates of decline, from -30% by Morgan Stanley to -9% for NatWest Markets, with the median forecast at -12.5%, which is closer to our own thinking. The differences in the above forecasts primarily stem from varying assumptions as to: 

i. the efficacy and reach of the fiscal and monetary assistance programs;

ii. the severity and persistence of short-and intermediate-term impacts of the pandemic (and measures taken to counteract it) on business outlays, employment, consumer confidence, and personal spending and savings rates; and

ii. how fast and to what degree conditions return to the neighborhood of pre-crisis levels.

In the second panel, Oxford Economics projects a -11.5% annualized year-over-year rate of decline in U.S. GDP in 2Q20, followed by +3.2% annualized in 3Q20, and then +14.5% annualized in 4Q20. Should something similar to this forecast pattern unfold, equity prices and interest rates should rise, with outperformance by consumer, transportation, energy, industrial, materials, and financial stocks. Utility issues should lag, with pharmaceutical and other healthcare stocks once again likely to find themselves influenced by the tone and rhetoric of the national elections on Tuesday, November 3, 2020.

An Deeper Recession Then The GFC

It should be kept in mind that the 2020 pandemic recession follows eleven years of economic growth, the longest recorded economic expansion in U.S. history. The 2009-2020 recovery featured: 

i. materially increased corporate and government indebtedness and;

ii. more modest rates of GDP growth, the latter of which perhaps helped avoid some of the economic overheating and inflationary forces associated with more robust expansions.

Even as this recession is likely to be deeper than the recession experienced in the 2008-2009 Global Financial Crisis (as projected in the top left panel), the government-mandated nature of the lockdowns and cancellations underpins our current belief in a moderate recovery, which should become somewhat more vigorous with the passage of time, without persistently higher levels of precautionary savings post-crisis eating into personal consumption and thus miring the U.S. economy in ongoing economic stagnation. Our call to selectively add exposure to risk assets is predicated on the assumption of a modest-at-first 3Q20 U.S. recovery that gradually adds momentum in 4Q20 and into 2021.

In the right panel above, Oxford Economics is projecting a swift and sharp V-shaped rebound in the global economy, paced by the U.S. and particularly, by China. By contrast, owing to many countries’ generally less-aggressive policy measures taken to counteract the economic impact of the coronavirus, we have currently adopted more of a “wait and see” stance on the economic growth outlook (and thus the debt and equity securities) of developed economies (including Europe, Japan, Canada, Australia, and others) as well as the emerging economies (of Asia, Latin America, Africa, the Middle East, and elsewhere).       

THE PROFITS OUTLOOK

DPS Growth EPS The Profits Outlook

According to consensus forecast data compiled as of April 6, 2020 by Yardeni Research, Inc., the historical and estimated earnings per share and year-over-year growth rates for the Standard & Poor’s 500 companies are as follows : 

i. For 2017, $131.98, +11.8%; 

ii. For 2018, $161.93, +22.7%; 

iii. For 2019, $160.00, -1.1%; and 

iv. Estimated for 2020, $120.00, -26.4% (with quarterly year-over-year comparisons of 1Q20 -23.4%, 2Q20 -51.6%, 3Q20 -28.8%, and 4Q20 -4.8%); and 

v. Estimated for 2021, $150.00, +25.0% (it should be pointed out that these S&P 500 earnings per share, if achieved, would still be roughly 7% below the 2018 and 2019 results). 

In each of the two panels above, it can be seen that Goldman Sachs expects a deeper year-over-year earnings decline than does Yardeni Research for the full year 2020 (-32.5%) and in 2Q20 (-123%), with a higher-than-consensus year-over-year recovery in 4Q20 (+27%) and for 2021 (+55%). 

Recognizing that forecasting earnings is particularly difficult in the current uncertain environment for interest rates, domestic and international economic growth, currency levels, energy prices, wage rates and hours worked, our view currently stands closer to the consensus view, with S&P 500 earnings per share likely to decline more than 25% this year and then rebound by a similar 25% in 2021. This supports our call for continued emphasis on defensive sectors and highest-quality assets, with a disciplined, measured, dollar-cost-averaging approach to adding risk through each phase of the public health and economic crunch. 

The second panel above also shows that total S&P 500 dividends are estimated as likely to fall by 25% in 2020, followed by a minuscule +3% expected dividend growth in 2021. This underscores our longtime emphasis on companies with high returns on equity, adequate current and future after-tax earnings, sufficient liquidity and cash levels, and manageable leverage that can maintain or even increase their dividend payouts through capital discipline, balance sheet strength, and financial prudence. 

BEAR MARKET EPISODES

Bear Markets and Recoveries

The suddenness and severity of the recent equity market selloff stimulates questions as to: how long the U.S. equity bear market might continue; whether or not the maximum decline has been experienced; and how long it will take for the S&P 500 index to again reach its February 19, 2020 record closing high of 3,386.15. 

With full awareness that “although history never repeats itself, it sometimes rhymes,” the upper left panel may provide some perspective. For the 10 S&P 500 bear market episodes (excluding the current one) experienced from the mid-1950s to the present, the chart shows: 

i. The duration of the bear market episodes ranged from a low of three months in 1990 to a high of 31 months in the 2000-2002 interval, with an average (mean) duration of 14.2 months, or just over a year; 

ii. The severity of the bear market declines ranged from a low of -20% in 1990 to a high of -56% during the 2007- 2009 years, with an average (mean) decline of -34.2%; and 

iii. The length of the recovery to the previous highs ranged from 4 months in 1990 to 69 months during the tumultuous decade of the 1970s, with an average (mean) recovery taking 25.4 months, slightly over two years. 

The severity and length of this decline, as well as the path and length of the stock market recovery, depend on numerous factors, including:

i. How successful the authorities in the United States (and not to be minimized, internationally) can bring the spread of the pandemic under control and develop preventative and therapeutic vaccines and other medicines; 

ii. How quickly the lockdown orders and other containment measures can be lifted, allowing academic, business, travel, entertainment, and other activities to resume; 

iii. How profoundly the psychological impact of this crisis affects corporate and consumer behavior, savings rates, and investment; and 

iv. The initial stages of enduring longer-term consequences for commerce, societal norms, supply chain structures, global trade patterns, energy markets, political dynamics, and geopolitical relationships. 

Notwithstanding the drawn-out experiences of the 2000-2002 dotcom bust bear market and the 2007-2009 mortgage finance bear market, delineated above in the upper right panel, our current assessment, given how swiftly the S&P 500 index “took its bitter medicine early,” is for U.S. equity prices this time to experience a briefer-than-average bear market time span (under a year in length), an average S&P 500 bear market total decline (meaning a good part of the damage has already been done), with a below-average length of time needed to reach the February 2020 highs (perhaps comfortably before the rescheduled Tokyo Olympic Games, July 23-August 8, 2021). 

THE OIL OUTLOOK

Over the weekend of April 11–12, 2020, OPEC and allied oil producers, led by Saudi Arabia and Russia, agreed to cut production by 9.7 million barrels per day (roughly one-tenth of global supply) during May and June, with Saudi Arabia and Russia together sharing 5.0 Million barrels per day of the cuts, and other OPEC+ producers agreeing to remove an additional 4.7 million barrels per day. With G20 support in the form of oil purchases for storage and declining production in North America, this could mean as much as 15 million barrels per day of supply will potentially be removed from the market. Combined with existing sanctions on Iran and Venezuela and outages in other countries such as Libya, the measures could help withhold as much as 20 million barrels a day of supplies from the market, OPEC stated in a draft press release. 

The top panel shows NYMEX Oil Futures over the past 20 years, now in the high teens for West Texas Intermediate Crude. Covering a much longer time frame, the bottom panel illustrates the cyclicality of oil prices ever since the early 1970s, when the U.S. dollar was de-linked from gold and allowed to float freely subject to market forces. Given current projections of oil’s pandemic-stage global demand swiftly declining by as much as 30 million barrels per day or more, without further supply reductions, it will be virtually impossible to achieve oil prices anywhere near the $40-$50 per barrel range, which represent breakeven levels for many U.S., Canadian, and other producers, much less for national petroleum companies which need these or higher prices to help balance their governments’ annual spending budgets (The Wall Street Journal reports that Russia needs an oil price of $40 a barrel to balance its budget and the Saudis around $80). Several forecasters have even predicted single-digit prices as pipes, tank farms, oil at sea, and floating storage facilities reach capacity. Facing limited places to stockpile oil, crude has recently changed hands for as little as (and even below) $7.00 a barrel in Midland, Texas, and $5.00 a barrel in Alberta’s oil sands. 

Such dramatic dislocations have numerous adverse and damaging implications, a few among them: 

i. Even as stronger energy firms consider whether to acquire the assets of their weakened and/or bankrupt competitors, they face decisions whether to implement the drastic and potentially costly actions of shutting loss-making wells, risking downhole groundwater and corrosion damage to the associated reservoirs (Rystad Energy, a Norwegian independent energy research consultancy, has predicted that U.S. production could fall by close to 4 million barrels per day by the end of 2021, compared with a record high daily output above 13 million barrels in late February); 

ii. Already in 2020, U.S. producers have responded to the collapse in demand (and a price war led by low-cost producing nations to gain market share) through 30-50% cutbacks in capital spending; oil service companies face equally or more severe business reductions as, according to Baker Hughes, the number of rigs drilling in the United States has fallen to 600 in mid-April from 800 in early March; 

iii. With traditional buyers of high- yield debt having become more discriminating, many heavily indebted shale energy companies are now struggling to make interest payments on the debt they carry and are finding it challenging to raise new financing. According to Moody’s, North American oil exploration and production companies have $86 billion in debt maturing between 2020 and 2024, and pipeline companies have an additional $123 billion in debt coming due over the same period; in 10 of the last 11 years, energy companies have been the single largest junk bond issuers, and since 2016, when oil prices began to decline, more than 208 North American producers have filed for bankruptcy involving $121.7 billion in aggregate debt; 

iv. In efforts aimed at protecting their dividends amidst flat to down oil production and depressed prices, the larger, well capitalized oil companies have increased borrowing, cut capital expenditures, suspended stock repurchase programs, and implemented workforce reductions; and 

v. Slumping oil prices and production levels have put meaningful downward pressure on tax revenues, government budgets, employment levels, and the economies of several oil-producing states including Texas, Oklahoma, North Dakota, and Alaska, especially in rural areas heavily dependent on oil. 

Over the intermediate-term into 2021, it is possible to foresee a structural shift towards higher oil prices as economies recover, demand begins to normalize, and new investment in oil supply becomes required. For patient, contrary-minded investors, we continue to strictly emphasize quality in purchasing the equity and debt issues of companies in the energy space, focusing on enterprises with: 

i. diversification in upstream, midstream, and downstream operations; 

ii. discipline in capital allocation; and 

iii. dividend protection. 

THE FEDERAL RESERVE AND DEFICIT FINANCING

FRED Modern Monetary Skyrocket Deficits

Beginning by cutting interest rates effectively to zero and announcing a $700 billion round of quantitative easing (“money printing”) on Sunday, March 15 in a surprise press briefing, the Federal Reserve embarked on a large-scale program employing a broadening array of policy actions, emergency powers, and lending programs in order to stabilize the U.S. economy under pressure from the COVID-19 pandemic. Among other additional steps taken in succeeding weeks, these measures include: 

i. Loosening banks’ balance sheet reporting requirements, total loss absorbing capacity metrics, required capital levels, non-critical oversight reviews, reporting schedules, counterparty risk assessment methodologies, U.S. Treasury securities-for-repurchase agreement exchange protocols, and corporate ownership control provisions; 

ii. Encouraging more active use of the Fed’s “discount window” (which banks can use as an emergency funding source); 

iii. Coordinating international actions with an expanded roster of foreign central banks to improve access to U.S. dollar liquidity swap arrangements; and iv. Creating funding facilities and/or giving regulatory relief to support taxable and tax exempt commercial paper, collateralized loans to large broker-dealers, money market mutual funds, high-quality municipal debt and variable rate demand loans, commercial and other mortgage-backed securities, corporate credit, corporate bonds, loans to small- and medium-sized businesses, business development companies, certain high yield securities, and some high-yield exchange traded funds. 

As a result of these actions, and the various Quantitative Easing programs instituted by the Federal Reserve during and in the wake of the 2008-2009 financial crisis, the left panel shows how the Federal Reserve’s total balance sheet has swollen, from $1.0 trillion in early 2008 to $6.0 trillion as of mid-April 2020. Numerous projections, taking into account the Fed’s money printing to purchase Treasury securities to help fund the enormous U.S. government deficits (estimated by the Federal Reserve Bank of St. Louis to reach 13% of GDP in 2020, as shown in the right panel above), posit that the Fed’s total balance sheet could reach at least $9 trillion. Such large and heretofore unencountered monetization of Treasury deficits naturally raises questions about: (i) America’s credit rating; and (ii) the long-term inflationary impact (with potentially upward pressure on interest rates) associated with massive money printing. While we share such concerns over the long term, we agree with Fitch Ratings, which on March 26, in affirming the U.S.’s AAA credit rating, stated that “recent dislocations and illiquidity in the market for U.S. Treasuries reflect changes in the structure of the market and exceptional conditions, and do not signal heightened perceptions of U.S. credit risk on the part of investors.” We are also of the opinion that, given the exceptionally large short-term contractionary and deflationary forces acting on the economy, the risks of rising interest rates are modest for now. As a consequence, income-oriented investors may purchase (or continue to hold) high-quality investment grade and municipal securities, as well as high yield issues at the uppermost end of the credit spectrum. 

THE GOLD OUTLOOK

Global Gold Demand in 2019

The precious yellow metal, gold (not subject to oxidation or corrosion, with 79 protons in its nucleus, and an atomic weight of 196.96) was termed “a barbarous relic” by the eminent British economist John Maynard Keynes (1883-1946). Gold has many fervent fans and equally passionate skeptics. 

Paraphrasing from The Art of Asset Allocation, Second Edition, selected bullish and bearish views of gold are set forth below. 

Bullish Views of Gold: 

i. For centuries, the intrinsic value of gold has been widely accepted due to its rarity, beauty, durability, indestructibility, malleability, ductility, portability, divisibility, and anonymity; 

ii. Unlike many managed-paper currency systems’ “fiat money,” gold has a slowly changing and relatively inelastic supply, one reason why many central banks own and/or purchase gold (as shown in the right panel above, 15% of gold demand in 2019 came from central bank purchases), is to enhance perceptions that their country’s currency is at least partially anchored in a “real” asset. Gold is considered to be the only monetary asset that is not the liability of another party (as the renowned financier John Pierpont Morgan (1837-1913) is reputed to have stated, “gold is money; everything else is credit”); 

iii. During many previous periods of excessive inflation, environmental catastrophe, financial markets turmoil, deflationary shock, monetary system failure, geopolitical instability, military action, or a breakdown in societal order and confidence, gold has been viewed as a form of insurance protection and refuge; 

iv. Over sufficiently long periods of time, gold has tended to retain its purchasing power compared to the cost of fundamental human needs such as food, shelter, and clothing; and v. Gold has generally (though not always) exhibited negative or very low correlations of returns with almost all other asset classes, thus appealing to some investors as a form of hedging against unfavorable movements in financial asset prices. 

BEARISH VIEWS OF GOLD:

  i. Physical gold has no yield, trades in relatively low volume and at times in illiquid markets, is cumbersome to transport in large quantities, may incur costs of assay, custody, taxation, segregation, and insurance, and may be difficult to access in unsettled conditions; 

ii. Partially owing to its reputation as a controversial, anti-establishment asset, gold may be subject to governmental confiscation through the sealing of safety deposit boxes and other measures, the declaration of gold payment classes as unenforceable, and governments’ arbitrary fixing of gold prices; 

iii. For substantial intervals during eras of financial and geopolitical stability, gold prices may move essentially within a mean-reverting band, influenced by the level of real interest rates; the demand for jewelry, industrial uses and identified bar hoarding; and sources of supply, including new discoveries, production, forward sales and hedging by gold mining companies, gold scrap recycling, and central bank selling and gold lending activity; 

iv. Although gold as an asset may be considered a conservative investment, some segments of the global physical and derivatives-based gold markets have at times been considered to lack sufficient regulation and have been thought to include speculative and momentum-based traders, promoters, conspiracy theorists, and dogmatic participants whose views may lack objectivity; and 

v. Due to their effectively embedded option component linked to potential movements in gold prices, gold mining shares have substantially leveraged exposure to changes in the gold price, tend at times to be expensively valued, and may sometimes be difficult to assess using conventional methods. 

As shown in the left panel, gold prices have been rising in recent years, driven by: limited levels of investment competition from declining, ultralow, and in a meaningful number of cases, negative interest rates; some degree of investor distrust in substantial money printing by many of the world’s major central banks; and “haven demand” by investors seeking protection from perceived systemic fragility and geopolitical instability. 

Our view continues to be that gold and/or gold mining shares deserve consideration and a legitimate place in investment portfolios, with the specific percentage allocation determined by the investor’s motivations, fears, amounts to invest, objectives, and personal circumstances. The objective of gold ownership is not to achieve income generation, medical breakthroughs, technological advancement, or powerful brand positioning, which, after all, represent the primary function of investment in financial assets. Gold’s chief advantage in portfolios may be psychological as much as financial, stemming from its store of value characteristics and perceptions that it is the “currency of last resort.”

IMPORTANT DISCLAIMERS AND DISCLOSURES

Disclosures: Towerpoint Wealth is a Registered Investment Advisor. This platform is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Towerpoint Wealth and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Towerpoint Wealth unless a client service agreement is in place. No portion of any content within this commentary is to be interpreted as a testimonial or endorsement of Towerpoint Wealth investment advisory services and it is not known whether any clients referenced herein approve of Towerpoint Wealth or its services; nor should it be assumed that any references to our clients are representative of all our clients’ experiences. 

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If You Give, We Will Match – It’s Time to Step Up

Needless to say, the coronavirus crisis is profoundly reshaping life here in America. We are sending you this edition of Trending Today with a deep sense of concern and responsibility, understanding the challenges and complications that this unprecedented health epidemic has created for virtually all of us. While we are 100% confident the situation we are all part of is a temporary one, it also remains very serious and open-ended.

If you are an essential worker, or on the front lines of this battle helping our daily lives to be as normal and as safe as they can be, we offer a huge dose of appreciation and a sincere thank you.

If you are sheltering-in-place by yourself or with family, we hope you are coping, making due, and working to make lemonade out of these temporary lemons. At Towerpoint Wealth, we fully understand that being physically separated from family we love and friends we cherish is both trying and difficult. We share those same feelings here at the firm, as the TPW family misses each other as well. While our daily Zoom video conferences have been productive and useful, it is near impossible to replicate the satisfaction and enjoyment we all get, and sincere connection we all feel, from spending physical time with each other at our downtown headquarters.

Understanding these unique circumstances we are all now a part of, we have drawn inspiration in many ways and from many sources. And regardless of your faith, we felt Pope Francis’ words, delivered just yesterday to an eerily empty St. Peter’s Square at the Vatican, ring perfectly true:

We have realized that we are on the same boat, all of us fragile and disoriented, but at the same time important and needed, all of us called to row together, each of us in need of comforting the other… We have realized that we cannot go on thinking of ourselves, but only together we can do this.

Fortunately, tough times do not last, but tough people do. And in that spirit, Towerpoint Wealth is committed to directly helping those in need during this pandemic, and we are pleased to offer a 100% match, up to a total of $50,000, of any COVID-19-related charitable donation made by you!

While we all have access to Google, here is a head start:

  • Click HERE to begin a Charity Navigator search of highly rated charities that have created funds to support communities throughout the world affected by the outbreak.
  • On a more local level, click HERE to head to Donate4Sacramento, the Capital Region’s primary COVID-19 regional response fund, with a mission of providing relief support in five primary ways: Support for Families, Support for Small Businesses, Support for Our Unhoused Neighbors, Nonprofit Support, and General Support.
  • Click HERE for the Salvation Army’s COVID-19 initiative. 

Regardless of where or how much you decide to give, please simply email us your donation receipt at info@towerpointwealth.com, and we will promptly email you our matching donation receipt within 48 hours.

Lastly, and as always, we sincerely value our relationships and partnerships with each of you, as well as your trust and confidence in us here at Towerpoint Wealth. We encourage you to reach out to us (info@towerpointwealth.com) with any questions, concerns, or needs you may have. The world continues to be an extremely complicated place, and we are here for you.


Nathan, Raquel, Steve, Joseph, Lori, and Jonathan

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Can You Keep Your Poise and Tune Out the Noise?

The drumbeat of unnecessary, repetitive, and extraneous information and news (read: noise) will always be a constant part of our lives. The challenge is to define and identify what information is truly meaningful, and what is false or useless, and then how to deposit it into our personal knowledge bank. Finally, and we believe most importantly, is the pursuit and application of wisdom, or the ability to think and act using our knowledge, insight, understanding, and common sense, growing slowly with experience over time.

Instead of being distracted, worried, and reactionary, one of our central goals at Towerpoint Wealth is to help our clients be more confident and purposefulinvestors, which ultimately leads you to gain greater economic peace-of-mind. However, as we are all now acutely aware, the global public health and economic uncertainty surrounding the coronavirus/COVID-19 disease makes the attainment of this economic peace-of-mind a much more difficult endeavor.

Reducing and even flat-out ignoring noise is a difficult thing to do, as it oftentimes is a battle against deeply-entrenched habits. Our smartphones, our friends, and the media are regularly our greatest economic enemies, and at Towerpoint Wealth, we believe that a large part of our legal fiduciary obligation to each of our clients is to help you properly tune out. The discipline needed to filter is one of the primary determinants along the path to successfully building and protecting longer-term wealth. And as we continually nurture our client relationships at TPW, we not only set the expectation that we will be explicitly objective about the importance (or lack thereof) of newsworthy external events and the glut of immediately-available information (even if they may not like what they hear from us), but also act as an “information filter,” taking our knowledge and experience and having it translate into the wisdom our clients desire.

Please do not mistake our commentary about noise as being at all insensitive or tone-deaf to the seriousness of the coronavirus situation. More than 100,000 worldwide infections, and at at least 3,383 confirmed deaths do to COVID-19 are sobering figures, and we recognize there are many unanswered questions about what may lie ahead. Additionally, we certainly do not advocate clients walk around with their head in the sand, as it is important to have an awareness and understanding of what is happening. We simply want to help you avoid and ignore the shorter-term distractions that none of us have any control over. Put differently:

Excellent illustration courtesy of Napkin Finance

As mentioned in the Special Report we issued on February 26 (Coronavirus and the Stock Market Pullback), we firmly believe the US consumer is on solid footing, and will continue to be one of the key drivers of US economic growth in 2020, and that any drop in corporate earnings and economic activity due to the COVID-19 disease will be more than made up for over the remainder of the year. Additionally, we encourage you to click on our March 2020 Monthly Market Commentary found below for our updated outlook and details.

In summary, we think you will enjoy (and ask you to think about) Barry Ritholz’s tongue-in-cheek list below:

What’s Happening at Towerpoint Wealth?

Our esteemed Client Service Specialist, Raquel Jackson, stopped by the office last weekend to do some over-and-above work, and enlisted the help of her three daughters, Zaida (18), Zenia (14), and Daijah (3), while doing so!

Our President, Joseph Eschleman, and Director of Operations, Lori Heppner, enjoyed a delicious lunch together at Tiger on the K Street Mall (now known as “The Kay”).

In addition to filtering information, washing hands, and appreciating the good people we have around us, a number of trending and notable events occurred over the past few weeks:

Lastly and as always, we sincerely value our relationships and partnerships with each of you, as well as your trust and confidence in us here at Towerpoint Wealth, and encourage you to reach out to us (info@towerpointwealth.com) with any questions, concerns, or needs you may have. The world continues to be an extremely complicated place. We are here for you, and look forward to connecting with, helping, and being a direct, fully independent, and objective expert financial resource for you.

– Nathan, Raquel, James, Joseph, Lori, Steve, and Jonathan

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Reflections on the COVID-19 and the Correction

MARCH 2020 MARKET COMMENTARY

Some Reflections and Possible Outcomes with the  S&P 500 Down Seven Sessions in a Row

As this year‘s second month drew to a close on Friday, February 28, the S&P 500 index finished in correction territory at 2,954.22, down 12.8% over the seven consecutive loss-days from its February 19 record high of 3,386.15. All 11 of the S&P 500 industry sectors were showing year-to-date losses, and fully 95% of the S&P 500 companies were down 10% or more from their highs. Flows of capital were instead allocated into perceived safe–haven assets, driving U.S. Treasury two-year yields to 0.878% and 10-year U.S. Treasury yields to a new record low of 1.127%. Even as Federal Reserve Chair Jerome Powell inspired a Friday intraday rally when he indicated that the Fed is prepared to lower interest rates to protect the economy from the spreading economic slowdown, the Chicago Board Options Exchange VIX volatility index spiked to 40.11, its highest close since August 2015, which witnessed three devaluations of the Chinese yuan and a 43% two-month decline in the Shanghai Stock Exchange index. Gold finished at $1,564.10 per troy ounce (+2.9% year to date) and West Texas Intermediate crude oil closed at $44.76 per barrel (-23.1% year to date).

Although the rate of new COVID-19 infections in China has slowed, it should be apparent that a series of rather draconian restrictions (including quarantines, isolation, travel bans, lockdowns, contact tracings, and other strict measures) has been necessary to attempt this within the world’s second largest economy and most populous nation. Such measures have led to harmful consequences for Chinese — and thereby global, due to a much more intertwined worldwide economy than 10-15 years ago — manufacturing, logistics, and just-in-time inventory management (on the supply side) and travel, leisure, bricks-and-mortar commerce, and other forms of economic activity (on the demand-side).

In our opinion, the continuing flight-to-safety decline in bond and money market yields and the further selloff in equity prices is being driven by increasing concerns over the spread of the coronavirus within and between other countries in Asia, the Middle East, and Europe, coupled with emerging realizations that (i) an effective vaccine will take a longer time than generally anticipated to test, develop, and administer; and (ii) it is only a matter of time until the United States experiences outbreaks followed by deleterious effects on individual, corporate, and governmental behavior — producing hitherto unanticipated downward revisions to GDP growth and profit forecasts. For example, on February 27, Goldman Sachs predicted that earnings for S&P 500 companies would show zero growth this year, after earlier predicting that they would increase 5.5%. As of now, our call is for low to mid single-digit S&P 500 earnings growth in 2020, based upon some likely further policy stimulus and more of a V-shaped economic contraction and recovery.

It is important to keep in mind that our cautious and conservative stance (before this market correction in the S&P 500 and other equity indices commenced) has been based upon four main factors, among others: 

  1. lofty price-earnings and price-to-sales valuation levels, many of which were in the 95 to 99th percentile relative to historical experience; 
  2. heavy concentration of market leadership in a limited number of companies (with the top five stocks representing a record 19.0% of the S&P 500 aggregate market capitalization, even higher than the 18.5% previous all-time high, reached at the peak of the 1999 dotcom exuberance);
  3. the more than a decade-long age of the equities price advance and U.S. economic expansion; and 
  4. a significant degree of complacency and nonchalance as evidenced in persistently bullish investor survey readings and low volatility metrics.

For now, we envision three possible scenarios going forward:  

(Base Case, 50-60% probability in our opinion): The following factors: warmer weather; various preventive epidemiological and public health measures; some degree of measured monetary stimulus; and the experienced realization that — even with a possibly high infection rate and quite unpleasant side effects, the coronavirus mortality rate is quite low; leads to a short and meaningful decline in the economy in 2Q20, followed by a similarly rapid recovery, back to or slightly below earlier forecasted levels of economic growth. Cash levels can be slowly and judiciously deployed into diversified portfolios, continuing our emphasis on attractively-valued companies with solid earnings prospects and dividend protection.

(Optimistic Case, 20-25% probability in our opinion): The above scenario occurs but with large scale stimulus measures launched across a broad front to counteract increased worries over the potential negative economic and financial impacts of the spread of the coronavirus globally and in the United States potentially including:

  1. massive monetary, fiscal, and deregulatory stimulus by the Chinese Authorities; 
  2. immense monetary stimulus by the Federal Reserve in the form of swift and larger-than-expected reductions in policy interest rates and a potential resumption of large-scale Quantitative Easing; and 
  3. extensive fiscal stimulus in the form of across-the-board corporate and individual tax cuts and additional federal government spending

These actions are followed by sudden and sharp equity price recoveries, in which we would emphasize technology, consumer discretionary, industrial, materials, and energy companies.

(Unfavorable Case, 15-20% probability in our opinion): High levels of indebtedness, and lingering economic and psychological aftereffects of the coronavirus crisis, lead to a broad decline in hours worked, employment, wage growth, consumer confidence, and personal consumption, bringing on a recession in the second half of 2020, which is exacerbated by late and/or ineffectual policy responses and fears (unfounded, in our view) that it is a replay of the global financial crisis of 2008-2009. In such a scenario, emphasis should be placed on money market instruments, high-quality fixed income securities, and defensive equity industry sectors such as utilities and high-quality companies paying well-protected dividends.

Overall, we stand by our call over the past several months. We have been counseling and continue to counsel diligence, caution, and conservatism — with shorter duration, higher-grade exposure in the fixed income realm, emphasizing high-quality companies whose business results may have been affected by the coronavirus crisis, but whose intrinsic business models remain fundamentally sound, in defensive sectors with reasonable earnings multiples and well-covered dividend support.

 As we did last month, we feature a select group of charts and associated commentary below.

Investment Lessons from a Master

On Saturday, February 22, 2020, Warren Edward Buffett released his annual letter to the shareholders of Berkshire Hathaway, and for the 55 years from 1965 through 2019, the compound annual growth rate in per-share market value of Berkshire was 20.3%, versus 10.0% for the Standard & Poor’s 500 with dividends included and reinvested. This means that an investment of $1,000.00 in the common shares of Berkshire Hathaway on January 1, 1965 was worth $25,978,226.78 on December 31, 2019, compared to $189,059.14 had that same $1,000.00 instead been invested in the S&P 500 with dividends included and reinvested — demonstrating: (i) the immense power of significant differences in compounding rates; and (ii) the massive effects of compounding over long time periods.

Page ten of the 2019 Berkshire Hathaway annual report also lists the 15 common stock investments of Berkshire that at yearend had the largest market value, shown above. It can be seen that over the 55-year lifetime of Berkshire Hathaway under Buffet’s stewardship, the total equity investment portfolio had as of yearend 2019 generated a pretax capital gain of $137.687 billion, of which just five stocks — American Express ($17.6B), Apple ($38.4B), Bank of America ($20.8B), Coca-Cola (also $20.8B), and Wells Fargo ($11.6B) accounted for $109.186 billion. This indicates that 79.3% of the total capital gain in Berkshire Hathaway’s equity investment portfolio over five-and-one-half decades came from five investment ideas, underscoring two of the important precepts espoused in “A Lesson on Elementary Worldly Wisdom,“ Warren Buffett’s partner Charlie Munger’s famous 1994 speech given at the University of Southern California Business School: “Stay within your circle of competence — figure out where you’ve got an edge, some of which you may have been born with, and some of which are slowly developed through disciplined effort.” And “Bet seldom and bet significantly, when markets offer you compelling opportunities.” Recognizing the wisdom of these two principles, for the majority of mainstream investors, we  also emphasize investing in high-quality assets for the long-term rather than attempting to trade in-and-out on a short-term basis. 

Energy Stocks Near Multi-Decade Lows

U.S. energy stocks have recently plummet to their lowest price relative to the Standard & Poor’s 500 in almost 80 years. This underperformance has taken place against the backdrop of: 

  1. elevated coronavirus-related concerns over the 2020 trajectory of global growth (thereby putting downward pressure on demand for energy products); 
  2. an oversupplied worldwide energy market, meaningfully augmented by the significant increases over the past 10 years of U.S. oil and gas output driven by hydraulic fracturing (a well stimulation technique, also known as  “fracking,” in which oil- and gas-bearing rock is fractured by a pressurized liquid); and  
  3. rising antipathy toward hydrocarbon-producing companies and/or divestments of some or all categories of fossil fuel assets by a number of institutional investors, including endowments, foundations, pension funds, and certain large sovereign wealth funds.

Noting the tendency for cyclical rebounds to gradually unfold following such extreme readings in energy stocks’ versus the S&P 500’s relative price performance, we think that value-oriented, somewhat contrarian-minded, mean reversion-aware investors may consider carefully building some exposure to this sector in a disciplined manner, focusing on companies with: 

  1. capital discipline; 
  2. meaningful plans to encompass renewable energy; and 
  3. dividend maintenance strength.

Volatility Spikes

The “VIX” represents  the ticker symbol and the popular name for the Chicago Board Options Exchange’s CBOE Volatility Index, a popular measure of the stock market’s (and financial markets’ more broadly) expectations of volatility as calculated based on S&P 500 index options. The VIX is computed and disseminated on a real-time basis by the CBOE, and is sometimes referred to as the “fear index” or “fear gauge.” Traders on the floor of various options and futures exchanges  have for several years employed a shorthand expression regarding the VIX volatility measure: “When the VIX is low, it’s time to go slow, and when the VIX is high, it’s time to buy.” In other words, a low VIX reading usually indicates a fair degree of investor quiescence, complacency, and nonchalance, and sharply elevated readings generally reflect widespread concern —  sometimes, even panicked selling — associated with equity market washouts that may signal a cyclical bottoming in asset  prices. Mindful of the continuing degree of uncertainty relating to the impact of the coronavirus on the global economy, our recommendation is that investors should remain aware of the VIX level as a general barometer (rather than a precise thermometer) of financial market sentiment, viewing a series of too-low readings with ongoing skepticism and by contrast, considering significantly high readings as potential signposts for adding funds to the equity markets. 

Equity Valuations Still Above Average

The fundamental drivers of all asset prices — including stocks; bonds; real estate; agricultural, industrial, and other commodities; precious metals; and even such asset categories as jewelry, art, and collectibles — are driven by various combinations of: 

  1. fundamental forces (such as earnings, economic trends, and dividend, interest, and rental payments); 
  2. valuation measures (relating prices to revenues, earnings, book values, and other measures); and 
  3. psychological, sentiment, and technical factors (such as surveys of bullish and bearish views, initial public offering and merger and acquisition volume, aggregate trading activity, charts of price trends, new highs compared to new lows in prices, advance-decline lines, and moving-average computations).

While fundamental factors tend to be the preeminent forces on asset prices during extended upward or downward moves, and psychological, sentiment, and technical factors tend to exert a dominant influence at major turning points (with extreme euphoria and optimism characterizing market tops, and extreme despondency and despair characterizing market bottoms), valuation metrics are used as a reality check and to provide useful and much needed historical perspective on asset pricing. Prior to the recent coronavirus-driven changes in equity, fixed income, precious metals, energy, and currency prices, it can be seen from the above table that many valuation measures of the Standard & Poor’s 500 composite index as  of yearend 2019 were registering in the 88th to 99th percentile of their historical valuation readings. Such elevated  valuation measures — including U.S. Market Cap/GDP; Enterprise Value/Sales; Enterprise Value/EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization); Price/Book Value; Cyclically Adjusted P/E; and Forward P/E — have been an important influence on our multi-month message of caution and conservative portfolio positioning. Even though the S&P Earnings Yield (the inverse of the Price/Earnings ratio) minus the 10 year U.S. Treasury yield was only at the 28th percentile (due to ultra-low interest rates), in our view, the recent pullback in most of these valuations still leaves them at well-above-average historical levels and underscores our continued counsel of vigilant, careful, and cautious investment strategy and asset allocation.

Equity Performance in Presidential Election Years

Widespread wisdom concerning U.S. equity market performance in the four years of a presidential term — promulgated among other market prognosticators, by Yale Hirsch in The Stock Trader’s Almanac, with his “Presidential Election Cycle Theory“  — usually holds that: 

  1. the best year is year three; followed by 
  2. year four, as various forms of economic stimulus may be applied in advance of the election itself; 
  3. year one, characterized by the good feelings after a national election; and lastly, 
  4. year two, when the effects are felt of whatever economic and policy “housecleaning” has been effectuated. 

For the 23 presidential election cycles since 1928, the upper panel shows the mean (which is the conventional arithmetic average) and the median (defined as the midpoint) of the S&P 500 average returns in each year of a presidential term. We caution that these outcomes reflect average performance, and a given presidential cycle can deviate, sometimes meaningfully, from the results generated over the past 92 years. This can be seen in the lower panel, which shows the Standard & Poor’s 500 performance for the 42nd, 43rd, 44th, and 45th U.S. presidencies. For example, in year four of President Bush’s second term, the S&P 500 substantially lagged the performance of the other three years, and in both of President Obama’s terms, the first two years produced the best performance. As calendar year 2020 progresses toward Election Day on Tuesday, November 3, we advise to be aware of the psychological and sentiment impact that is likely to be felt on quite a number of industry groups during the upcoming presidential campaign. With corporate taxation, industry dominance, and market power likely subjects of discussion and debate, sectors expected to be in the spotlight include, among others oil, gas, coal, and hydraulic fracturing; pharmaceuticals, biotechnology, and medical devices; and social media and other technology-enabled companies. Investors would be wise to give careful consideration to the intermediate- and longer-term implications of this year’s elections for specific holdings in these and other industries.

Tax Proposals of Presidential Candidates

Regardless of one’s political persuasion and tax bracket, we think it is quite important from an investment standpoint to pay close attention to the likely post-election contours of the top marginal tax rates on labor and investment income. Investor psychology, consumer behavior, and corporate profitability are influenced to a significant degree by the trend and level in federal (as well as state and local) taxes on labor income. In addition, taxes on capital (investment income) affect investment, a major determinative factor influencing productivity growth, and thus, wage growth.

Quite apart from the media and debate attention given to several Democratic presidential candidates’ proposed single-payer health care and wealth taxes, the table to the left sets forth the current federal top marginal tax rates on labor and investment income under current law and also shows the size of the much-less-publicized tax increases on labor and investment income proposed by three of the Democratic presidential candidates. The top marginal federal tax rate on labor is currently 40.2%, (including the 2.9% Medicare tax) with the proposed top marginal tax rate proposed by the three (Buttigieg suspended campaign 3/1/20) cited presidential candidates ranging from 51.8% to 69.2%. The table also shows that the top marginal tax rate on investment income is 23.8%, with the proposed top marginal tax rate proposed by the three cited presidential candidates ranging from 43.4% to 58.2%. Our counsel is to pay particular attention to these and other candidates’ tax proposals, focusing on their impact on corporate, consumer, and investor behavior.

For additional perspective on the evolution and complexity of the U.S. federal tax code, we share the following thoughts:

Approaching the annual April 15 due date for tax filing, we also offer the following reflections relating to the history of federal income taxation and the size of the federal tax code. The United States tax system has evolved through the nation’s history, from an initial revenue-generation reliance on tariffs, with new income taxes and other levies generally introduced during times of war to raise additional revenue, then being allowed to expire once the war was over. In the years after 1900, popular and legislative support began to build for a continual income tax, and in February 1913 the Sixteenth Amendment was ratified to the Constitution, granting Congress the power to collect taxes on personal income. 

According to Thomson Reuters-Refinitiv and Wolters Kluwer CCH (the latter of which has analyzed the federal tax code since 1913), in the first 26 years of the federal income tax, the code only grew from 400 to 504 pages, and even during President Franklin Delano Roosevelt’s New Deal, the tax code came in comfortably under 1,000 pages. Changes implemented during World War II increased the total code (including appendices) to 8,200 pages; by 1984, it had swollen to 26,300 pages, and as of early 2018, several Congressional and media commentators have pointed out that the federal tax code exceeds 80,000 pages. The length of the actual current actual tax code itself runs in the neighborhood of 3,000 pages, with over 75,000 additional pages devoted to the inclusion of: all past tax statutes; Internal Revenue Service regulations and revenue rulings; and annotated case law covering court proceedings surrounding the tax code.

Warm Regards,
Joseph F. Eschleman, CIMA®
President
Towerpoint Wealth, LLC

Disclosures: Towerpoint Wealth is a Registered Investment Advisor. This platform is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Towerpoint Wealth and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Towerpoint Wealth unless a client service agreement is in place. No portion of any content within this commentary is to be interpreted as a testimonial or endorsement of Towerpoint Wealth investment advisory services and it is not known whether any clients referenced herein approve of Towerpoint Wealth or its services; nor should it be assumed that any references to our clients are representative of all our clients’ experiences.

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Special Coronavirus Alert – Stock Market Pullback

What happened? A little more than a week ago, on February 19, the S&P 500 closed at a record high of 3,386.16. Yesterday, it closed at 3,128.21, suffering a brutal -7.6%decline in only four days, and turning negative for all of 2020. Since last Wednesday’s high, $2.138 trillion of stock market value has been erased. And we all know the reason why – fears about the current COVID-19 (novel coronavirus) outbreak.

Clearly the spreading virus has sent shockwaves through the global financial markets, as declines of this magnitude are by no means ordinary, especially after the stock market just hit an all-time high. Understandably, all anyone can seem to think about right now are the potential negatives of the coronavirus emerging in the U.S. and in other major economies; however, we are confident that eventually the bad news will give way, positives will emerge, and today’s worst placed fears will not come to fruition. Considerations:

  1. There will ultimately be a vaccine, as there is already a drug that will combat COVID-19 moving toward first phase clinical trials. And as a testament to advances in drug technology, it took only three months in 2020 for this to happen, versus 20 months for SARS back in 2002-2003
  2. According to Worldometer, there have been 30,597 coronavirus cases with an outcome (2,699 deaths and 27,898 recoveries). The total active cases now stand at 49,923, a drop of 15% from the peak on February 17.

While one death is too many, let’s put these numbers into perspective: According to the World Health Organization, just in the US alone for the ’19-’20 Flu season, there have been 15,000,000 flu illnesses, 140,000 hospitalizations, and 8,200 deaths. Imagine if everyone with an internet connection followed the spread of the annual flu, case-by-case, hour-by-hour…

We are by no means cockeyed optimists here at Towerpoint Wealth, and we fully understand that equity markets react unpredictably to the unknown. However, we also recognize that historically, Wall Street’s reaction to epidemics and fast-moving diseases is often short-lived, and we feel that today’s current coronavirus fears will be no different. At Towerpoint Wealth, we believe it is not “if” but “when” the markets recover; and that is likely to be when investors believe the impulse of new coronavirus cases has peaked.

Additionally, we firmly believe the US consumer is on solid footing and will continue to be one of the key drivers of US economic growth in 2020. Some have suggested that the 1918 Spanish Flu, which killed hundreds of thousands in the US, could happen again. And despite the severity of the 1918 event, the relatively small amount of research done on the economic effects of that pandemic indicate that they were short term. We all recognize that the US rebounded from the Spanish Flu when all was said and done, and 2020 is certainly not 1918. Technology and medicine are light years ahead of where they were a century ago, and news today is now instantaneous. We suspect that any drop in corporate earnings and economic activity will be short-lived, and more than made up for over the remainder of the year to come.

Put differently, it is not time to hit the panic button. Stay invested, systematically rebalance your portfolio, remain disciplined and faithful to your plan and investment philosophy.

If after reading this you continue to have concerns, and/or do not currently have a thoughtful financial and investment plan or strategy in place, please message us (info@towerpointwealth.com) to talk further. The world continues to be an extremely complicated place. We are here for you, and look forward to connecting with, helping, and being a direct, fully independent, and objective expert financial resource for you.

– Nathan, Raquel, James, Joseph, Lori, Steve, and Jonathan