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By Washington Trust / October 15, 2020

Can the IRS Lift the Spirits of Pandemic Parents? How about a “Kiddie Tax” Refund?

The so-called “Kiddie Tax” is a tax imposed on a child’s unearned income. Generally, a “child” means someone under 17 years old (or under 24 if certain criteria are met) and “unearned income” means income derived from sources not related to employment, including investments.

For many years, the Kiddie Tax was the greater of two calculations: the tax on the child's income as if the Kiddie Tax did not exist, and a far more complicated calculation using the parent’s marginal tax rates.

In 2018, Congress passed the Tax Cuts and Jobs Act (TCJA), which (among other things) attempted to simplify the Kiddie Tax. The TCJA taxed a child’s net unearned income at the same rates that applied to trusts and estates. This calculation was simpler, but the simplification came with a cost, since the tax rates for trusts and estates are quite unfavorable when compared to the tax rates for individuals. For example, for 2020, the trust tax bracket applies the rate (37%) once taxable income exceeds $12,950; for married filing jointly, that level is not hit until $622,050.

In 2020, Congress un-did their simplification, reverting to the pre-TCJA rules, as part of the SECURE Act. This means that, for 2020, a child’s income can be based on the parent’s marginal tax rates, rather than be subject to the higher tax rates for trusts and estates.

Most importantly, Congress made this fix retroactive to tax year 2018. As a result, anyone that paid “Kiddie Tax” at the trust tax rate may be able to obtain significant tax savings for the prior tax years.

We are examining the issue for clients who have their trusts with us here at Washington Trust Wealth Management. However, anyone subject to the Kiddie Tax should consult with their tax advisor to see if they may be able take advantage of this potential refund opportunity.


By Washington Trust / October 15, 2020

Economic Review Fall 2020

We will join the chorus and state the obvious. Unless you survived the flu epidemic of 1918, 2020 is a year unlike any experienced in our lifetime. The U.S. economy suffered its steepest downturn on record due to the COVID-19 pandemic when Q2 GDP plummeted at a 31.4% annualized rate, following a Q1 decline of 5%. Consumer spending plunged 33% during the second quarter.1 Except for government spending, other economic sectors shrank drastically as well.

The good news, such as it is, is that despite the speed and severity of the downturn, the economy bottomed in April and began to turn up in May with the partial reopening of the economy. The rebound has extended through the Summer and GDP is estimated to have bounced back in excess of 25% in the third quarter. Employment, which cratered in early Spring, has recovered well ahead of expectations with over half of the jobs lost now regained. The unemployment rate which peaked at 14.7% in April was expected to sit at 8.4% in December 2020. It has already declined to 7.9%.2

Before we get carried away, there were still well over 10 million fewer people working in September than in February. There are 6.5 million job openings in the U.S., an excellent number by the way, but more than 13 million people looking for work. Back in February, jobs openings exceeded job seekers by over a million.3 Some sectors, such as residential construction, are in the midst of a V-shaped recovery. Manufacturing and capital spending are also showing signs of life as technology prospers. Unfortunately, labor intensive industries including hospitality and travel continue to struggle.

The Federal Reserve revised its economic outlook in mid-September and upgraded its forecast for 2020 U.S. GDP to decline by 3.7% from a prior estimate of a sharper 5% contraction. The rapidity of the U.S. turnaround has been due in large part to massive government support. Between fiscal stimulus passed by Congress and lending facilities instituted by the Fed, an estimated $4 trillion was committed to revive the economy.

Many of these Federal Programs have now lapsed. Another round of stimulus, however, was thought to be forthcoming and deemed necessary by Federal Reserve Chief Powell to keep the recovery on track. With supplemental unemployment benefits curtailed and additional aid to states and municipalities now on hold, there is concern that the Fed may have been overly optimistic in changing its outlook. Furthermore, the recent surge in new Coronavirus cases is also an issue. Worries are mounting that long-term “scarring” of the economy will be inevitable due to the shuttering of so many small businesses.

Financial markets, however, continue to look past the pandemic and remained buoyant in the third quarter. COVID-19 treatments continue to improve, and several vaccines are already in Phase 3 testing, although widespread distribution of a successful vaccine is unlikely before the spring of 2021. U.S. stocks as measured by the S&P 500 Index turned positive in the third quarter and have posted a gain of 5.6% as of 09/30/20, an astonishing achievement after the first quarter’s 20% shellacking. However, smaller capitalization shares remain mired in the red at quarter-end as were international stocks. Fixed income markets have also generated solid results (the Bloomberg Barclays US Aggregate has advanced 6.8% as of 09/30/20) due to the dramatic fall in interest rates.4

Given the pandemic-induced 25% collapse in 2020 earnings, U.S. stocks now seem expensive. Even anticipating a solid 34% for 2021 earnings recovery to $164 per share, stocks still appear fully valued, trading at 21.4x Washington Trust’s estimate.5 In our view, the Federal Reserve deserves much of the credit for the stock market’s surge to record levels.

Not only did the Fed lower the overnight interest rate to the zero lower bound and resumed quantitative easing back in March, it has provided guidance suggesting the rate will remain anchored there potentially into 2023 or beyond. Furthermore, the Fed which has a dual mandate of ensuring price stability and full employment, has put inflation fighting on the back burner and declared the priority of restoring lost jobs. To that end, the Fed has altered its approach in assessing inflationary conditions and will use inflation “averaging” rather than a single point in time to determine policy. Using this method, the Fed will allow the economy to run “hot” before taking action to bring down the inflation rate.

If stocks appear rich, Fed policy has sent bond prices soaring. As of September 30th, a 10-year Treasury note and a 30-year Treasury bond yielded just 0.68% and 1.46%, respectively. However, expansionary Fed policy has revived both inflation and inflationary expectations. A 10-year market derived inflation forecast stood at 1.64% per year.6 This implies that bond yields adjusted for inflation are negative across the yield curve. Government bonds are viewed as a safe investment but if this inflation forecast pans out, an investor purchasing a bond today will suffer an economic loss over the life of the investment.

Another consideration for investors is, of course, the pending Presidential election. The Trump Administration is generally viewed as pro-business and investor friendly. The stock market has performed well under its watch. Biden and the Democrats are proposing tax hikes and re-regulation, but the market continues to rise even as they solidify their lead in the polls. While sector leadership may be affected by the Presidential Election’s outcome, our conclusion is to focus on the fundamentals of the economy and earnings and, without fail, on the Fed in trying to assess the direction of the broad market.

At this juncture, we continue to favor equities over bonds given the meager returns available in the fixed income market. However, some caution is warranted and paring back equity exposure to maintain alignment with portfolio objectives is the sensible course. Pre-election rallies can, of course, result in post-election pullbacks. We also anticipate a potential shift in leadership, but time will tell. In the fixed income market, we believe a modest further steepening of the yield curve may provide a better entry point, and some exposure to credit risk is necessary to generate a positive real return.

The views expressed here are those of Washington Trust Wealth Management and are subject to change based on market and other conditions. Investment recommendations and opinions expressed in these reports may change without prior notice. All material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. Investing entails risk, including the possible loss of principal. Stock markets and investments in individual stocks are volatile and can decline significantly in response to issuer, market, economic, political, regulatory, geopolitical, and other conditions.

Investments in foreign markets through issuers or currencies can involve greater risk and volatility than U.S. investments because of adverse market, economic, political, regulatory, geopolitical, or other conditions. Emerging markets can have less market structure, depth, and regulatory oversight and greater political, social, and economic instability than developed markets. Fixed Income investments, including floating rate bonds, involve risks such as interest rate risk, credit risk and market risk, including the possible loss of principal. Interest rate risk is the risk that interest rates will rise, causing bond prices to fall. Past performance does not guarantee future results. The S&P 500 Index is an unmanaged index and is widely regarded as the standard for measuring large-cap U.S. stock-market performance. In addition, the S&P 500 Index cannot be invested in directly and does not reflect any fees, expenses or sales charges. Further, such index includes 400 industrial firms, 40 financial stocks, 40 utilities and 20 transportation stocks. The information we provide does not constitute investment or tax advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell any security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. Please consult with your Portfolio Manager, Financial Counselor, attorney or tax professional regarding your specific investment, legal or tax situation.

1 U.S. Bureau of Economic Analysis
2 U.S. Bureau of Labor Statistics 2 U.S. Bureau of Labor Statistics
4 Bloomberg
5 Washington Trust Wealth Management
6 Bloomberg


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By Kimberly I. McCarthy, Esq. / August 13, 2020

The biggest legislative change to retirement plans in more than a decade happened just before 12/31/19. The SECURE Act, among other things, eliminated the “stretch”, a core of estate plans for decades.

The first quarter of 2020 saw a global pandemic with a major unanticipated impact on the market. The IRS reacted with a waiver or relaxing of many 2020 requirements for IRAs and 401(k)s.

So what should people be doing in 2020, and beyond 2020, to incorporate their IRAs and 401(k) plan assets into their retirement and estate planning? In this webinar, Kimberly I. McCarthy, Esq., Senior Vice President and Chief Tax and Benefits Officer, Wealth Management Client Services, discusses an overview of key changes (and what stayed the same) under the new legislation and guidance, including contributions, RMDs, and elimination of the “stretch”. There is also a discussion of the key issues, concerns, and fixes to be considered for retirement and trust planning under the new rules.


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By Washington Trust / July 20, 2020

The U.S. is suffering its worst economic downturn since the Great Depression with GDP estimated to have plunged at an annualized pace in excess of 30% in the most recent quarter after a 5% drop in Q1.1 The velocity of the decline is as stunning as its magnitude. This recession was, of course, self-imposed as much of the economy was shutdown beginning in March to halt the spread of COVID-19.

With the partial reopening of the economy in May, data indicate that the economy did, in fact trough in April with a material increase in the employment numbers in May and June. That being said, the June unemployment rate stood at 11.1%, which was down significantly from the April peak of 14.7%, but still higher than during the depths of the Great Recession of 2008-2009. Weekly jobless claims have also steadily declined but remain very elevated with permanent job losses climbing, which is evidence of a significant churn in the labor market. All told, approximately 14 million fewer people are working in the U.S. than in February.2

The recent surge in COVID-19 cases is, of course, of concern. Some of the most important data including monthly employment and consumer confidence are based on mid-month surveys. Consumer confidence also rebounded smartly in June. Business sentiment indicators including the ISM manufacturing and service sector surveys also exceeded expectations. Could this reverse?

The consensus view is for growth to snap back at a 20% rate in the summer quarter.3 The disturbing increase in COVID-19 cases across the South and West, and the resulting mitigation efforts suggests that the recovery will be bumpier than initially thought. However, such measures are unlikely to be as drastic as what transpired in the spring and the increase in economic activity should still be quite substantial. Growth should moderate in the following quarter and continue into 2021 but a complete recovery in output to peak levels and a return to full employment is unlikely to occur before 2022 or beyond. While the descent from steady growth into a severe recession was virtually instantaneous. It is clear the road ahead to recovery will be long and arduous given the massive disruption from the virus and the challenges it poses to our way of life, and the way of doing business. While the reopening thus far indicates huge pent up demand from consumers to get back to restaurants and to travel, some changes are likely to become more or less permanent. The trend towards a digital economy has obviously accelerated. Major elements of our health care system will need to be reassessed. Many consumers have experienced a shock unlike anything felt previously.

In this environment, one would expect investors to exercise great caution. In reality, risk aversion lasted for a little more than a month, if that. While the U.S. was in the deepest recession of a lifetime during the June quarter, financial market returns were nothing short of spectacular. The S&P 500 Index, with a gain of 21%, turned in its best quarterly performance in more than two decades while bonds posted solid gains with the riskiest sectors outperforming their benchmarks.3

The positive response of the markets is not without precedent. Financial markets are forward looking, discounting mechanisms. The stock market will typically decline as the economy peaks and monetary conditions tighten while bull markets often begin in recession as monetary and fiscal stimulus is applied. What was unprecedented was the massive scale and scope of the Federal Reserve and the Federal Government’s response to the economic shock from the Coronavirus pandemic. The Wall Street adage of “Never fight the Fed (Federal Reserve)” was never better illustrated.

During March, the Fed cut the Federal Funds (overnight) interest rate to near zero and resumed quantitative easing via the purchase of long-term bonds. In addition, it announced a broad array of facilities to shore up nearly every segment of the credit market including municipal bonds, corporate debt, and even junk bonds. The programs were expanded and refined during the recent quarter and include direct lending in addition to secondary market purchases. Congress enacted a $2.5 trillion support package which included a small business lending program, cash payments to low- and middle-income taxpayers, supplemental unemployment benefits, in addition to aid to state and local governments and loans to severely impacted industries.

These programs have been essential in keeping many consumers and businesses afloat and will need to be extended if the U.S. is able to return to sustainable growth in a relatively short time frame. The Fed, for its part, has indicated that its commitment to provide stimulus is open ended. In his June press conference, Fed Chairman Powell emphasized that the Central Bank’s priority is to restore lost jobs. Additionally, the Fed insists that it will continue to strive to boost inflation to its 2% target. It will be at least two years, or more likely, even longer before the Fed scales back its support for the economy. Congress and the Administration still need to agree on additional aid. The small business lending program was extended until early August and is likely to be renewed through year-end. However, the supplemental unemployment benefits will expire at the end of July and their extension has been more controversial. Additional support for state and local government is also needed to avoid layoffs of government workers. All told, an additional $1 - $2 trillion will need to be appropriated to prevent further economic damage.

Our assumption is that additional fiscal support for the economy will be approved. Another important factor is containment of the disease and recent trends have not been favorable. Investors are looking past this recent spike and we are optimistic that progress on treatment will continue as well as on the development of an effective vaccine to be widely available in 2021. Of course, there are no guarantees.

While we are reasonably confident that a return to sustainable growth will occur by 2021, the strength of the rally has made the market outlook more challenging. Stocks are not cheap. Investors are clearly looking past a 2020 earnings disaster with a probable decline for the S&P 500 Index of at least 25% to $122 per share. Should 2021 earnings recover to our single point estimate of $155 per share, the S&P 500 Index is trading at a lofty P/E ratio of 20x next year’s earnings compared to a historical average of 16x.5

Washington Trust’s valuation work for stocks currently employs a price/earnings multiple range of 15x to 19x. The high-end of our “normal” valuation range has now been exceeded in a period of great uncertainty. Are stocks overvalued or is it different this time? The Federal Reserve has investors’ backs as never before by clearly signaling that they will hold interest rates near zero through 2022. Fed policy is also suppressing longer-term rates across the yield curve and will keep markets awash in liquidity. The Central Bank is effectively encouraging investors to move out on the risk spectrum. While monetary policy risk appears off the table, other risks still abound. Our banking system is well capitalized compared to past crises, but questions remain. While central banks can ensure liquidity, they cannot ensure solvency and a distressing number of bankruptcies are in the news. Additional fiscal support from the Federal Government is still needed near term. Medical progress against COVID-19 is required but not assured. Finally, the litany of geopolitical risks moved to the back burner due to COVID-19, but has only intensified.

Three months ago, coming off a 20% loss in the first quarter, we recommended investors take a long-term view regarding asset allocation and to maintain equity exposure. We had no expectation of a 21% rally in the subsequent quarter. The same advice still holds. At this time, however, investors may want to be sure they have sufficient liquidity looking ahead and, perhaps, trim equities if they are at the high-end or have exceeded targets.

The views expressed here are those of Washington Trust Wealth Management and are subject to change based on market and other conditions. Investment recommendations and opinions expressed in these reports may change without prior notice. All material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. Investing entails risk, including the possible loss of principal. Stock markets and investments in individual stocks are volatile and can decline significantly in response to issuer, market, economic, political, regulatory, geopolitical, and other conditions.
Investments in foreign markets through issuers or currencies can involve greater risk and volatility than U.S. investments because of adverse market, economic, political, regulatory, geopolitical, or other conditions. Emerging markets can have less market structure, depth, and regulatory oversight and greater political, social, and economic instability than developed markets. Fixed Income investments, including floating rate bonds, involve risks such as interest rate risk, credit risk and market risk, including the possible loss of principal. Interest rate risk is the risk that interest rates will rise, causing bond prices to fall. Past performance does not guarantee future results. The S&P 500 Index is an unmanaged index and is widely regarded as the standard for measuring large-cap U.S. stock-market performance. In addition, the S&P 500 Index cannot be invested in directly and does not reflect any fees, expenses or sales charges. Further, such index includes 400 industrial firms, 40 financial stocks, 40 utilities and 20 transportation stocks. The information we provide does not constitute investment or tax advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell any security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. Please consult with your Portfolio Manager, Financial Counselor, attorney or tax professional regarding your specific investment, legal or tax situation.

Sources:
1 Bloomberg, Bureau of Economic Analysis
2 Bureau of Labor Statistics
3 Bloomberg
4 Washington Trust Wealth Management


By Kimberly I. McCarthy, Esq. / June 24, 2020

There have been a lot of changes regarding Required Minimum Distributions (“RMDs”) in the past 6 months! For anyone that wants to hit the pause button on this chaotic state of affairs and get an RMD “do over”, June 23rd was a good day.

On Tuesday, June 23, 2020, the IRS released formal guidance expanding relief for participants in 401(k)/403(b) plans, IRAs, and their beneficiaries. Specifically, the new guidance extends existing relief backwards (to distributions taken as far back as 1/1/20); extends existing relief forward (by moving the deadline to “reverse” or “undo” an RMD from 7/15/20 to 8/31/20); and by providing a new category of relief (allowing inheritance beneficiaries to re-contribute their RMDs).

The landscape for 2020 RMDs – combining the SECURE Act, the CARES Act, and all of the IRS guidance to date - is explained in the following FAQs.

Q: Who has to take an RMD from their 401(k)/403(b)/IRA during 2020?
A: No one; RMDs are waived for 2020.

Q: Does that include first year RMDs?
A: Yes, first year RMDs (e.g. 2019 RMDs) for those who turned 70.5 during 2019 are waived for 2020. In addition, IRA owners who were younger than 70.5 on 12/31/19 are subject to the new SECURE Act rules: Their first year RMDs don’t start until age 72.

Q: Does that include RMDs for inheritance beneficiaries?
A: Yes, all RMDs are waived for 2020, so beneficiaries who inherited IRAs or 401(k)/403(b) plan accounts are also exempt from RMDs for 2020.

Q: If I choose not to take an RMD this year, do I have to take 2 RMDs next year?
A: No. RMDs are waived for 2020, not delayed. For inheritance beneficiaries, if the new 10-year payout rules apply, the beneficiary will still receive the full 10 years starting next year: 2020 will not count against them.

Q: What if I took some or all of my 2020 RMD already? Can I “undo” the distribution and put the money back?
A: Yes! There is relief for any 2020 RMD distribution made on or after 1/1/20 that is corrected by 8/31/20.

Anyone can put their RMD back into the IRA/401(k)/403(b) from which it was taken, as long as it is done by 08/31/20. Note: this includes inheritance beneficiaries, even though rollovers and contributions to inherited IRAs are generally prohibited.

In addition, plan participants/IRA owners (but not inheritance beneficiaries) can “roll over” RMDs they have taken during 2020 into any tax-deferred account IF the rollover rules apply AND the roll over is completed by 08/31/20.

Q: Is the CARES Act relief all-or-nothing, or can I take/return some (but not all) of my RMD?
A: It is not an all-or nothing proposition. You can elect to take none, some, or all of your 2020 RMD, and you can elect to return none/some/ or all of your 2020 RMD.

Q: What if I made a qualified charitable distribution (a “QCD”). Can I undo that?
A: Generally, no. A QCD is a charitable donation, and charitable gifts are irrevocable and cannot be unilaterally unwound.

Q: If I took my entire 2020 RMD, does the CARES Act relief provide for additional IRA withdrawals tax-free?
A: No. There is some additional retirement plan relief – like a waiver of the 10% early withdrawal penalty for coronavirus distributions and expanded plan loan provisions – but not additional tax-free IRA distributions.

If you have any questions, please contact Washington Trust Wealth Management at 800-582-1076 or by email at info@washtrustwealth.com.

This overview provides general information based on currently available data and takes into account the IRS’ guidance to date. All material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. This FAQ does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. Please consult with a financial advisor, attorney or tax professional regarding your specific investment, legal or tax situation as this is not intended as legal or tax advice.


By Matthew S. Blank, CFA® / April 20, 2020

Economic forecasts for 2020 have been upended as public health concerns prompted the shutdown of large parts of the U.S. economy in order to prevent rapid transmission of COVID-19. 2019 had concluded on a very healthy note as GDP grew at a 2.1% pace in the final quarter and 2.3% for the year.1 A continuation of moderate growth seemed probable in 2020. If you recall, January and February economic data were solid, characterized by strong employment and a robust housing sector.

By late March, however, it was apparent the stay-at-home orders instituted throughout most of the country had triggered a deep recession. In just the last two weeks of the month, nearly 10 million workers had filed for unemployment insurance and even deeper job losses are likely on the way, underscoring the deterioration of a once vibrant labor market.2 The official unemployment rate which had been hovering around 50-year-lows had jumped from 0.9% in March to 4.4%.3 Estimates now call for unemployment to potentially peak anywhere from the mid-teens to 30% by late spring.4

GDP growth will plummet as well. It is now presumed that Q1 GDP has dropped from low to mid-single digits, and that second quarter GDP is likely to contract 15% or more5. Across the world, governments are deliberately creating a recession to deal with the coronavirus. These dire U.S. numbers are mirrored globally, although East Asia is showing some resilience, which is a hopeful sign. This region, having been the first to experience the coronavirus, is likely to be the first to emerge from the pandemic. The situation in poorer emerging markets, however, is especially worrisome.

The hope, of course, is that while damage to the economy will be severe, it will be temporary. Governments and central banks around the globe have responded with massive programs to prevent the economy from going into freefall and appear to have succeeded. In the U.S., Congress approved a $2 trillion spending package, while the Federal Reserve cut the Fed Funds rate by 1.5% and resumed large scale asset purchases to support markets. It is estimated the total support for the economy could exceed $4 trillion.

COVID-19 will eventually run its course and many are questioning the shape and extent of the recovery. We expect a strong rebound towards the second half of this year, but it would be naïve to think that an all-clear will sound and things will snap back to prior levels in an instantaneous fashion. COVID-19 caseloads in a number of states may not peak until late May, while many businesses will never recover lost sales. A sharp recovery would seem unlikely before mid-summer. Medical concerns including availability of widespread testing and adequate supplies of equipment will also need to be resolved.

Unfortunately, it now appears the U.S. economy will likely experience negative growth for the full year, most probably in the low single digits. While the labor market should begin to heal quickly, a return to a 3.5% unemployment rate is likely to be years rather than months away. Capital spending which was already limping along prior to the COVID-19 outbreak will likely be even slower to recover. However, despite the current pain, our forecast is for a return to sustainable growth in 2021.6

U.S. financial markets largely ignored the pandemic over the first six or seven weeks of the year. Despite the carnage experienced in China, the S&P 500 Index hit a record high on February 19th. The burgeoning number of COVID-19 cases in Europe, however, quickly made clear that the relatively few cases in the U.S. would compound exponentially. The only means to slow the spread of the disease and prevent the healthcare system from being overwhelmed would be extreme “social distancing” which would entail significant economic disruption. Markets went into a tailspin.

Not only did the S&P 500 Index lose more than 30% from its February peak to its March 23rd low, credit markets also plummeted and were on the verge of seizing. The yield differential between high-yield bonds and Treasuries, which had fallen to a cycle low of 3.15% on January 13th, spiked to 11% by March 23rd.7 All the while, prices of Treasury securities were screaming higher in a flight to quality and as the Federal Reserve swiftly lowered the Fed Funds rate towards the zero lower bound. At one point, even the yield on the 30-year Treasury bond plunged below 1% for the first time ever, while the yield on the benchmark 10-year Treasury has fallen below 1% and remained there.

While the velocity of the market decline was remarkable, markets just as quickly recouped much of their losses. Describing the scope and scale of the Government response, particularly that of the Federal Reserve “as unprecedented” is an understatement. Federal Reserve officials have long boasted of having an arsenal of tools to address extreme economic and market turmoil. In addition to slashing interest rates, the Federal Reserve initiated massive asset purchases in nearly every corner of the debt market, including municipal securities, and, for the first time ever, junk bonds. Lending facilities were also established to provide liquidity to a range of borrowers. With the Federal Reserve serving as a backstop, market participants regained the fortitude to return to the fray.

As of April 10th, the S&P 500 year-to-date loss had been reduced to 13.1%, although declines were significantly larger for smaller capitalization shares. Taking a longer-term perspective, the benchmark has only shed 3.1% from a year ago.8 Investors may well be wondering if we just experienced the shortest bear market in history. However, fundamentals are dismal. When the year began, Washington Trust forecast a mid-single digit gain in 2020 S&P 500 earnings to $173 per share. We have now slashed our estimate to $122.50, which results in a rather lofty forward P/E ratio of nearly 23x.9

Investors are clearly looking beyond 2020. A strong earnings recovery in 2021 is probable, but a return to peak levels of 2018/2019 would seem too much of a stretch. The damage done to the economy is real and changes to consumer behavior could be longer lasting than some expect. COVID-19 may not be completely be vanquished until a vaccine is successfully introduced which some experts indicate is likely to take at least another year. As interest rates are likely to remain near current depressed levels for the foreseeable future, higher equity valuation is not unreasonable but, in our view, P/E’s above 19x or 20x are unlikely to be sustained over time.

While Treasury yields are likely to stay “lower for longer”, investors may be able to locate fixed income investment opportunities given the substantial widening of credit spreads. As the credit picture has grown cloudier, new challenges have emerged, but diligent investors may now be able to reap some rewards. For example, a two-year Treasury is yielding just 0.2%, but a AAA tax-exempt municipal security of similar maturity could yield 1.75% or better. With this type of yield differential, the muni bond could be a sensible choice for any account regardless of tax status. Corporate spreads have also widened materially. We would focus on higher-quality investments given economic uncertainty.

The current economic environment is unlike anything experienced in our lifetime. There is no definitive roadmap for the progression of the disease or financial markets. While there were no visible financial bubbles preceding this crisis, we now recognize the fragility of our consumer economy, filled with great abundance, when so many live paycheck to paycheck. The closest analog is the 1918 influenza pandemic which took the lives of 675,000 Americans (over 1/2% of the population) and 50 million people worldwide and tended to afflict those in their working prime. Interestingly, the stock market steadily rose over its course.

Nobel Laureate Robert Shiller has speculated on three explanations. The bigger story at the time was, of course, the end of World War I. Further, there was confidence in the banking system in large part due to the creation of the Federal Reserve five years earlier. Lastly, the general public was far less involved in the stock market, and prices of financial assets were of less consequence to society. Shiller concludes with a truism, “Predicting the stock market at a time like this is hard. To do so well, we would have to predict the direct effects on the economy of the COVID-19 pandemic, as well as all the real and psychological effects of the pandemic of financial anxiety.”10 To that we would only add that the U.S. emerged from the pandemic of 1918 to a decade of great prosperity. While the current situation is disheartening and history does not necessarily repeat, investors should continue to think long-term and construct portfolios accordingly.

For more information, contact your client services team or email us at info@washtrustwealth.com.

The views expressed here are those of Washington Trust Wealth Management and are subject to change based on market and other conditions. Investment recommendations and opinions expressed in these reports may change without prior notice. All material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. Investing entails risk, including the possible loss of principal. Stock markets and investments in individual stocks are volatile and can decline significantly in response to issuer, market, economic, political, regulatory, geopolitical, and other conditions.
Investments in foreign markets through issuers or currencies can involve greater risk and volatility than U.S. investments because of adverse market, economic, political, regulatory, geopolitical, or other conditions. Emerging markets can have less market structure, depth, and regulatory oversight and greater political, social, and economic instability than developed markets. Fixed Income investments, including floating rate bonds, involve risks such as interest rate risk, credit risk and market risk, including the possible loss of principal. Interest rate risk is the risk that interest rates will rise, causing bond prices to fall. Past performance does not guarantee future results. The S&P 500 Index is an unmanaged index and is widely regarded as the standard for measuring large-cap U.S. stock-market performance. In addition, the S&P 500 Index cannot be invested in directly and does not reflect any fees, expenses or sales charges. Further, such index includes 400 industrial firms, 40 financial stocks, 40 utilities and 20 transportation stocks. The information we provide does not constitute investment or tax advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell any security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. Please consult with your Portfolio Manager, financial counselor, attorney or tax professional regarding your specific investment, legal or tax situation.

Sources:
1 Bureau of Economic Analysis
2 Bureau of Labor Statistics
3 Bureau of Labor Statistics
4 Bloomberg
5 Bloomberg
6 Washington Trust Wealth Management
7 Bloomberg
8 Bloomberg
9 Washington Trust Wealth Management
10 Robert J, Shiller, “The Two Pandemics”, Project Syndicate


By Kimberly I. McCarthy, Esq. / April 20, 2020

As you undoubtedly have heard, in light of COVID-19, Congress passed legislation at the end of March which (among other things) waived all RMDs for 2020. This waiver applies to traditional IRAs, Roth IRAs, inherited IRAs, and 401(k) plans.

You may not know that many people who took RMDs prior to the law’s enactment can “undo” their RMD and put those funds back into their retirement plan, if they wish. The IRS issued guidance last week expanding both the group eligible to take advantage of that opportunity and the timeframe to get it done. Now most individuals who took an RMD on or after 2/1/2020 can “undo” that RMD via a rollover.

As with all tax rules, there are exceptions: inherited IRA beneficiaries aren’t eligible, qualified charitable distributions generally can’t be “undone”, and some owners who took distributions in January still might qualify.

To learn more, or get assistance with “undoing” an RMD, contact your account team – we are here for you!


By Washington Trust / March 20, 2020
 

We understand that current market conditions have made many investors nervous. However, we encourage investors to stay focused on their long-term investment goals, as we anticipate that the financial markets will recover, as they have from virus outbreaks in the past. We recommend that you ensure your near-term cash needs are met and resist the temptation to make any major asset allocation changes as a result of current events.


By Washington Trust / March 16, 2020
 

By Washington Trust / March 9, 2020
 

As concerns regarding the spread of COVID-19 (coronavirus) mount and the financial markets react, the Washington Trust team is here to answer your questions and address your concerns. No one really knows the potential human and economic impact of COVID-19. The U.S. and global economies will surely suffer some negative impact in the near term; however, past experience suggests any damage to the economy and financial markets will be transitory.


The opinions expressed in this blog are those of the author and may not reflect those of Washington Trust Wealth Management. The information in this report has been obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed. Any opinions expressed herein are subject to change at any time without notice. Any person relying upon this information shall be solely responsible for the consequences of such reliance. Performance is historical and does not guarantee future results.

Such information does not constitute legal or professional advice as all situations are unique and are based on individual facts and circumstances.

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