Q2 2020 Market Commentary

The Markets

Stocks rebounded from a dismal March by posting their best monthly returns since 1987, as investors were encouraged by the expectation of additional government stimulus programs and hope that the economy would be reopening soon. The Paycheck Protection Program and Health Care Enhancement Act provided funding for additional small business loans, and offered financial support to hospitals, while increasing the availability of more virus testing. The Federal Reserve added trillions of dollars in funds to its lending programs. A few states began easing lockdown restrictions and reopening a range of businesses. While there were plenty of ups and downs in the market during the month, April closed with each of the benchmark indexes listed here climbing notably higher. The Nasdaq gained 15.45%, followed by the Russell 2000, the S&P 500, and the Dow.

In May, investors continued to rally to stocks as more states and foreign countries eased restrictions put in place in response to the COVID-19 pandemic. The economy continued to stagger, however. The unemployment rate reached its highest level since the Great Depression while claims for unemployment insurance pushed past 25 million. On the other hand, news of possible breakthroughs in the treatment of COVID-19 cases and the development of a vaccine for the virus provided optimism for investors. Once again, the Nasdaq led the way, advancing 6.75% by the close of May. The Russell 2000 gained 6.36%, followed by the S&P 500, and the Dow. 

June was a month of drastic highs and lows for stocks. The Dow climbed 6.8% in the first week of the month, then fell 5.5% in the second week. However, by the close of June, each of the indexes listed here posted gains with the tech holdings of the Nasdaq leading the way, up nearly 6.0% from its May closing value.

The second quarter of 2020 notched the best quarterly performance since 1998, with each of the benchmark indexes making sizeable gains over their historically poor first-quarter tallies. However, much of the second-quarter growth in the stock market and economy is more of a bounce back from a dismal March and April, when pandemic-related lockdowns and restrictions virtually shut down the economy. Nevertheless, stocks rose as investors focused on favorable economic data and the possibility of further government stimulus, despite rising virus cases and tepid trade relations with China. Of the benchmark indexes listed here, the Nasdaq again proved the strongest, soaring more than 30.0% for the quarter, followed by the small caps of the Russell 2000, which gained 25.0%. The large caps of the S&P 500 and the Dow closed the second quarter up nearly 20.0%.

Year to date, the Nasdaq remains the only index well ahead of its 2019 year-end closing value. While still in the red, the S&P 500 is within 5.0 percentage points of last year’s final mark, followed by the Dow and the Russell 2000.

 

Market/Index                 2019 Close      As of June 30    Monthly Change      Quarterly Change     YTD Change     
DJIA 28,538.44 25,812.88 1.69% 17.77%  -9.55% 
Nasdaq 8,972.60 10,058.77 5.99% 30.63%  12.11% 
S&P 500 3,230.78 3,100.29 1.84% 19.95%  -4.04% 
Russell 2000 1,668.47 1,441.37 3.4% 25.00%  -13.61% 
10-year Treasuries 1.91% 0.66% 2 bps 3 bps -125 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

 

The Stock Market Versus the Economy

It’s fair to say that many of our clients have been pleasantly surprised (or even shocked!) as they’ve checked their account balances over the past month and a half. It’s also fair to say we’ve been pleased with the discipline and stick-to-it-iveness of our clients. For example, for our clients who rode out the volatility with a roughly 60% equity, 40% fixed income portfolio – they are likely modestly positive in their retirement accounts (just under 1%) and modestly negative in their taxable accounts (just about 1% under). While this certainly isn’t cause for celebration, it’s a testament to both our focus on risk management and our clients’ trust in our process. Nonetheless, why has the market recovered so quickly? When we look around – we see restaurants closed, retailers with less foot traffic, and hotels sitting vacant. Yet the market is barely negative for the year, so who can blame anyone for being confused? Obviously, there’s still a substantial amount of uncertainty and volatility ahead, but hopefully, we can lend some color to why the market is where it’s at. 

First and foremost, there’s been an unprecedented government response from both Congress and the Federal Reserve. When you total up the alphabet soup of programs that have been created, it comes to roughly $2.5 trillion (and we wouldn’t be surprised if there was more on the way). And importantly, the market is a forward discounting mechanism, what’s that mean? That means it’s trying to predict public companies’ future earnings 3 to 5 years out, it isn’t trying to reflect the economic picture we see today. Simply put, the stock market is not the economy. The economy certainly matters to the markets, but it’s important to differentiate between the two. As you’ll see below; hotels, tourism, and transportation (sectors certainly affected by COVID-19) account for roughly 20% of our gross domestic product (GDP) and employment. However, they only account for 7% of the S&P 500’s operating earnings. To put this in perspective, the five largest companies in the S&P 500 are Microsoft, Apple, Amazon, Facebook, and Google. They just aren’t companies that are terribly affected by COVID. 

Simply put, those hotels, tourism, and transportation aren’t a large portion of the public markets. Does that mean the market is priced appropriately? That’s always up for debate, but hopefully, this helps you understand why the market is at where it’s at. 

Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Factset, S&P 500, J.P. Morgan Asset Management. Consumer spending (2019 annual): membership clubs, sports, amusement parks, campgrounds, movies, theaters, museums, libraries, casino gambling, purchased meals and beverages, packaged tours, air and water transportation, hotels and motels, and select retail goods and services. Employment (January 2020): air and water transportation, transit and ground passenger transportation, support activities for air and water transportation, arts, entertainment, recreation, accommodation, food services and drinking places, and retail ex-food and beverage stores. Earnings (2019 operating): hotels restaurants and leisure; airlines; select entertainment and travel booking companies; multiline and specialty retail; and textiles apparel and luxury goods. Data are as of June 22, 2020.

 

 

Despite what we hope is some good news for your account balances, we know this an extraordinarily stressful time for many of our clients. As always, we hope our work for you allows you to focus on what really matters to you – your friends and family. We hope everyone had a wonderful and safe 4th of July. It’s our sincere wish that we can return to normalcy sooner rather than later.

Heartland TrustQ2 2020 Market Commentary
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Strengthening Connections

There are many great quotes out there that are relevant right now, but it’s a lyric from Bob Dylan’s song, Brownsville Girl (a B-side track from the 80’s) that is in my mind: “Strange how people who suffer together have stronger connections than people who are most content.”

Yes, the times they are a-changin’ in many different ways, and it is easy to feel alone or isolated as we all do our part to slow the spread of COVID-19. But remember . . . our families, businesses, communities, states, and countries are all in this together. We have all been forced to look at things from a different angle. Ultimately, it is making us stronger and pushing us forward so that we can be more resilient in the future. 

Brian Halverson - PresidentStrengthening Connections
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CARES Act Recap

Adapted from Broadridge Investor Communication Solutions

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020. This $2 trillion emergency relief package represents a bipartisan effort to assist both individuals and businesses in the ongoing coronavirus pandemic and accompanying economic crisis. The CARES Act provisions for retirement plan relief for individuals under federal tax law are discussed here.

For those seeking access to their retirement funds, these include special provisions for coronavirus-related distributions and loans. For those seeking to preserve their retirement funds, certain required minimum distributions from retirement funds have been suspended.

Coronavirus-related distributions

A 10% penalty tax generally applies to distributions from an employer retirement plan or individual retirement account (IRA) before age 59½ unless an exception applies. Due to the coronavirus pandemic, the penalty tax will not apply to up to $100,000 of coronavirus-related distributions to an individual during 2020. Additionally, income resulting from a coronavirus-related distribution is spread over a three-year period for tax purposes unless an individual elects otherwise. Coronavirus-related distributions can also be paid back to an eligible retirement plan within three years of the day after the distribution was received.

Heartland TrustCARES Act Recap
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A Retirement Income Roadmap for Women

While everybody needs to plan for retirement, women often face special challenges when planning for this time of life. 

For one, their careers are more likely to be interrupted to care for children or elderly parents. Even if women stay in the workforce fulltime, they tend to earn less than men, on average. As a result, their retirement plan balances are often lower. 

In addition to earning less, women generally live longer than men. This means having to stretch potentially limited retirement savings and benefits over many years.

Don’t dismay. Here are a few tips to help yourself or the women in your life manage these challenging financial realities. 

Participate In Retirement Planning. 

You may be balancing so many responsibilities that you haven’t given retirement planning much thought. Or maybe you’d rather let your spouse take on these duties. That’s understandable, but it’s critical for women to take an active role in planning for retirement. Married or not, make sure you are well-informed and are able to make financial decisions that benefit you. 

Shara Fischer, Relationship ManagerA Retirement Income Roadmap for Women
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How Often Should I Review Retirement

Adapted from Broadridge Investor Communication Solutions

 

It’s generally a good idea to review your employer-sponsored retirement savings plan at least once each year and when major life changes occur. If you haven’t given your plan a thorough review within the last 12 months, now may be a good time to do so.

Have you experienced any life changes?

Since your last retirement plan review, have you experienced any major life changes?

For example, did you get married or divorced, buy or sell a house, have a baby, or send a child to college? Perhaps you or your spouse changed jobs, received a promotion, or left the workforce entirely. Has someone in your family experienced a change in health? Or maybe you inherited a sum of money that has had a material impact on your net worth. Any of these situations can affect both your current and future financial situation and should be considered as you review your retirement savings needs.

In addition, your annual review is a good time to examine the beneficiary designations on your plan account to make sure they reflect your current wishes. This is particularly true if your marital situation has changed. With most employer-sponsored plans, your spouse is automatically your plan beneficiary unless he or she waives that right in writing.

Say, for example, you remarried and you would like your children to remain as primary beneficiaries on your retirement plan. In that case, your spouse would need to waive his or her right to the assets in writing.

Heartland TrustHow Often Should I Review Retirement
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HTC Team News and Honors

HTC Team News 

  • Missy Zarak has been promoted to the position of Trust Officer. Congratulations, Missy!
  • Heather Jung joined Heartland Trust Company as a Retirement Services Administrative Associate. She brings over 13 years of experience assisting plan sponsors, financial advisors, and third party administrators with retirement plans.
  • Shara Fischer, Relationship Manager, obtained her Chartered Retirement Planning Counselor (CRPC) designation. Professionals with this designation concentrate on retirement planning by focusing on client-centered, problem-solving. Congratulations, Shara! 
  • The HTC team has opened numerous “satellite offices” since March. These offices include our employees’ kitchens, home offices, living rooms, and spare bedrooms. Here’s a glimpse of how we are working from home to reduce the spread of COVID-19.
Heartland TrustHTC Team News and Honors
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Meet Gary Hanson

Meet Gary Hanson

Gary Hanson is the senior vice president and a director at Heartland Trust Company. He has been an integral part of the growth and success of Heartland Trust over the years. While now enjoying a certain amount of “flex-time,” he continues to be in the office almost every day.

What do you do at Heartland Trust?

Along with ongoing business development responsibilities, I managed the Retirement Services Division at Heartland until 2014. My current responsibilities at HTC include account administration, client relationships, leading the corporate finance team, and serving on the executive committee.      

Tell us about yourself.

I am originally from Crookston, Minnesota, and, except for a two-year break, I have been in the Fargo area since graduating from Moorhead State University in 1972 with an accounting degree. My wife, Ruth, and I live in West Fargo, and our daughter, Rachel Clarke, and family live in north Fargo, while our son, Ben, and family live in south Fargo.     

Heartland TrustMeet Gary Hanson
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Celebrating 30 Years: Part 2

Heartland Trust Company turns 30 this year, and we’ve accumulated a bit of history as we enter our fourth decade. Each quarterly newsletter this year will have a feature on one of our old locations.

Shortly after Heartland Trust opened its doors for business at the same location as Busy Bubbles Car Wash & Laundromat, it was clear the growing company needed more office space.

Heartland TrustCelebrating 30 Years: Part 2
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Is Being Vulnerable a Weakness

By Brian Halverson, President

Emotional Intelligence (EQ) is a hot topic in today’s business world, and rightfully so. It is your ability to express and control your own emotions and also your ability to understand and interpret other people’s emotions. Why is this so important, you may ask? Just watch an episode of The Bachelor or Bachelorette. Many of our own problems we bring onto ourselves.

As humans, it is impossible to get every decision just right or have the proper reaction to everything. It’s hard work balancing a sick kid, getting everyone out the door in the morning and on time, dealing with a flat tire, meeting deadlines, dealing with health issues, etc. This is where having the ability to be vulnerable is so important. If you are aware you made a poor decision or said something out of line in a meeting, recognize that and have the courage to admit it. It’s far better for your team at work or your family if you address it, put it behind you, and move on. If you don’t, it will linger on and not only affect your performance but those around you.

 

At the end of the day, we all want to be happy and that starts with ourselves. In my mind, being vulnerable is not about winning or losing, it’s about showing strong character.

Brian Halverson - PresidentIs Being Vulnerable a Weakness
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The Importance of Annual 401(k) Census Information

Businesses that sponsor 401(k) plans are required to run annual compliance tests to ensure that their plan meets the regulatory requirements to maintain their qualified status. In order to run these tests, your Third Party Administrator (TPA) will request certain information from you such as a complete census file. This file includes important information on each employee who received a paycheck from you during the year, regardless of whether or not they are eligible to participate in the plan. Your census information should be compiled and forwarded to your TPA within a month following your plan year-end to ensure that the proper tests are run and any necessary corrections to testing failures are completed timely.   

Monica Millette - VP, Manager -- Retirement Services.The Importance of Annual 401(k) Census Information
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