In our last post, we talked about what a recession actually is. This week, we will talk about what it means to us as investors.

As you know, we do not give individual investment advice on the Blog since each of you have different situations and different plans. But there are a few ideas which all of us can use.

1. Stick to the BIG plan but be ready to adjust the SMALL plan.

As we have talked with all of you over the last quarter, we have continued to emphasize the importance of sticking to the plan! But let’s be honest – that is really easy to say and really hard to do! For many of you that have been through significant stock market volatility (mostly downward!) before or have decades until retirement, you lost a little sleep and didn’t look at the spreadsheet with lots of red too closely. For others, this has been a time of significant concern and second guessing. This has been the first significant market downturn since I joined LFS and I too have had times of concern and second guessing – and I do this for a living! At the end of the day, if you are too worried about your investments to sleep, we need to make a change. We can and will do that with you.

Remember that we are for you – regardless of where you fall on the “worry” scale!

2. Diversification is more important than ever.

We often talk about this and as you look at your own results, you can see why we do. Those fixed income bond holdings have been steady, but not superb performers over the last few years – as planned. But all of us have been really glad we had them over the last several months. Large cap stocks and technology have recovered the fastest so far. Other asset classes and industries hopefully have more upside to come. Expect some portfolio re-balancing to come as asset classes perform very differently through this period.

3. There are opportunities for those with a strong stomach.

It’s really hard to invest when the market is terrible rather than when it’s improving but if you can bear to do it, there are plenty of choices. For those of you that are dollar cost averaging every month and/or re-investing your dividends, you are automatically getting some of the upside.

As you know, we recommend a strong cash or cash reserve position. For some of you, that’s to ensure that you have ample cash for living expenses without having to sell into a bad market. For others, it’s more like a little dry powder for some good potential market opportunities. These market opportunities might be stocks you have always wanted to own but deemed too expensive or funds in industries you think might be near the bottom of the economic cycle (maybe airlines or lodging) or asset classes like small cap equities. It’s a good time to have a “wish list” and maybe some limit orders!

We also have started talking to some of you about some interesting new funds which are designed to take advantage of the new world we all live in now. For example there is an ETF which holds stocks in Covid testing companies and potential therapeutics/vaccines. There is also a brand new ETF which holds stocks in companies which enable employees to work from home (think ZOOM and cloud computing). These are high risk funds but might be interesting to some of you. I wouldn’t invest my entire life savings in these but I might put a few dollars here. There has to be some positive news about this pandemic! If there are other industries you are interested in, challenge us to find some options for you!

The first of our two part blog will focus on what a recession actually is and then our follow up will talk about the implications.

Defining a recession, and then understanding if we are actually in one, should be easy, right? Uh, not so much….

When all of us took macroeconomics in school, the textbook definition of a recession was “ a two consecutive quarter decline in gross domestic product (GDP)” along with some other monthly economic signals, like rising unemployment. This definition was relatively straightforward and easy to measure. Either we have two consecutive quarters of GDP decline or we don’t. Even I could almost figure this out.

Now however, a recession must actually be “declared” by the National Bureau of Economic Research (NBER). The word “recession” is defined by NBER and Investopedia as a “significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income and employment, industrial production, and wholesale-retail sales.” At least now we understand why there is a question about whether or not we are in a recession AND why there is some debate week in and week out about it, even now.

Normally the NBER looks at certain monthly economic indicators to determine if we are in a recession rather than waiting for two quarters of GDP decline. The NBER officially declared a recession in February 2020. Historically, recessions have been caused by financial factors, economic factors and/or psychological factor or by structural shifts in industries – like oil price changes or new breakthrough technologies. There is little doubt among economists that we have had a severe economic downturn, caused by the COVID-19 epidemic. What experts are still debating is whether we are now in a short term period of economic recovery, a long term period of economic recovery growth or a plateau. Of course as we all know, by the time we get to Part 2 of this Blog, the economy could be in a completely different phase.

It’s been 10 years since our last declared recession. And although we all realize that recessions are a normal part of the business cycle, that doesn’t make it any easier. We were absolutely due for an economic downturn, but this one came on quickly and violently, and is greatly exacerbated by the real fear of the COVID-19 virus.

Next up: What are the implications of a recession to us as investors?

You may remember Part 1 of our CARES Act Blog which we posted on April 1. At that times, we labelled the post as Part 1 because we were confident there would be a change to the Act. Glad we were right about SOMETHING!

As a reminder, CARES stands for Coronavirus Aid, Relief and Economic Security Act. The bill itself is over 800 pages long and has economic provisions for individuals, small and large businesses, state and local governments, public health and education/other.

Back in April, we talked about the following changes to required minimum distributions (RMDs) from IRAs for 2020:

RMDs (Required Minimum Distributions) have been suspended for 2020:

• This suspension includes inherited IRAs
• There will be no penalty assessed if the distribution is eliminated in 2020
• Obviously the majority of retirees need this money for living expenses and will need to take the 2020 distribution anyway

If you have already taken your 2020 RMD, but don’t need the cash for living expenses in 2020:

• You have 60 days to return the dollars to a retirement account without paying the taxes
• We are not yet sure how Ameritrade will want to handle this transaction so let us know if you are interested in pursuing
• You can also convert this distribution to a Roth IRA and pay the taxes as you had planned. Again, call us if you are interested in doing this.

The newest change is that the 60-day limit for return of funds to an IRA has now been eliminated, which means that any distributions taken in 2020 can now be returned to your IRA, even if you actually took the distribution in January. You will get the taxes refunded to you in April 2021. Alternatively, you can put the dollars in your Roth IRA.

As always, let us know if you have questions or want to pursue. As expected, there is paperwork.

Happy Father’s Day to all of you dads out there, including ours!

This is a photo from February trip to Morocco. As expected, Mom was smart enough not to participate in this particular activity.

We have decided to run a contest for the best caption for this photo – knowing many of you will add a caption whether we request it or not. Send back your caption ideas and we will share the winning entry!

Happy Father’s Day to all of you!

Hi everyone. This is Bradley again with the rest of my BLOG post on oil. As promised, I want to share what has happened to oil prices in 2020 and even more importantly, why we all care about that!

Although Russia is not officially part of OPEC, it has generally cooperated in their supply agreements. Since 2017, OPEC and Russia have consistently tried to cut their production to maintain high oil prices. However, this deal came to a head in early March 2020. In the midst of probable decreases in oil demand due to economic slowdown related to COVID-19, OPEC demanded that Russia cut its oil production further. Russia refused, and in response Saudi Arabia (the world’s largest producer of oil) flooded the world market with oil. Thus, oil prices in the world collapsed (Brent crude dropped from $45/barrel to $30/barrel overnight and is now trading at $26/barrel.) Oil prices actually went negative briefly in late April as oil storage tanks were used up due to a lack of customer demand.

Now, what does this mean for us? Most obviously, it will cause a decrease in gasoline prices at the pump. US oil producers may be hurt significantly since many of them are not profitable with oil at current prices. Possibly prices of other products will decline as a result, but that will be difficult to determine with so many other factors involved.

Now for some input from LFS: What does this all mean to us? As consumers, it is clear that gas prices are lower; now if we only had somewhere to go. As investors, the collapse in oil has contributed in no small way to the market volatility we are experiencing. Are there investment opportunities here? Maybe – at least for the non-squeamish among us. And as global citizens, it’s clearly just another example of how interconnected we are.

This is Bradley again, reporting in from “Safe-at-home” in Southern California…(I needed a break from thesis writing). This week, I’m going to stay far away from COVID-19 news (because we definitely get enough of that) and talk about the global oil markets, and some recent “interesting” events.

We are all at least passingly familiar with oil. Oil is a mixture of chemicals (specifically hydrocarbons) that are derived from decay of organic remains of ancient organisms. In the past several centuries, humans have figured out how to separate oil into different useful parts (a process called refining) including fuels (gasoline, diesel, methane), feedstocks for the chemical industry (ingredients for plastics, perfumes, and pharmaceuticals), and building materials (asphalt and tar). As a result, oil production, trade, and refining has become an essential part of the global market.

Because of petroleum’s important uses, a global trade in petroleum has developed. We’re probably all familiar with seeing pundits talking about the price of a “barrel” of oil. A barrel of oil is 42 gallons and is the primary trading unit in oil markets. There are many different kinds of oil that are traded in the global marketplace, but probably the two most common are Brent and WTI (West Texas Intermediate). Generally speaking, the differences between types of oil aren’t important financially (specifically they have different densities and quantities of sulfur) because they all produce fuels and other compounds after refining (that’s what we chemical engineers do). They generally move together in global markets, with Brent having a higher price than WTI.

Now, let’s finally talk about oil in the financial markets. Broadly speaking, oil prices move the same way as the economy. This is because when the economy is good, people buy more stuff (which often requires petroleum products to make and transport) and travel more (using more fuel), which increases the demand for petroleum products and thus the price. When the economy enters a recession, all things being equal, oil prices will decrease due to a decrease in aggregate demand.

However, the oil market is not a free market (at all), due to the presence of OPEC (organization of petroleum exporting countries) in the market. OPEC is a cartel made up of countries (and their state-owned petroleum companies) that produce much of the world’s oil, with the goal of maintaining high oil prices to maximize revenue. Important members of OPEC include Saudi Arabia, Venezuela, Nigeria, Iraq, and Iran. Historically, OPEC has had a great deal of control over global oil prices. However, recently due to technological advancements, the US (and to a lesser degree Canada) have diminished OPEC’s power due to development of shale oil resources. These resources significantly increased the supply of oil, resulting in lower prices and significant strife in OPEC which is no longer able to maintain their high prices.

Next up: What has happened to oil prices in 2020 and why it matters to us