The Asset Allocation Team updates long-term capital market assumptions twice a year, most recently at the end of June. Did the pandemic change your long-term outlook?

Bahuguna: The reason we make long-term market assumptions is so that we don’t have to recalibrate our strategic positions for every unforeseen event — otherwise we would be adjusting frequently. We do make shorter term tactical asset-allocation decisions, but we arrive at those separately. Our capital-market forecasts look five years ahead and attempt to incorporate several scenarios, both positive and negative.

When we made our forecast for asset class returns at the beginning of the year, we were anticipating a recession in the ensuing five-year period. We just weren’t expecting it this year. Because of the coronavirus, the recession occurred in the first quarter of this year and brought forward its effects on asset classes earlier than anticipated.

Many states entered the COVID-19 recession with healthy balance sheets, sustainable debt burdens and ample liquidity. State tax revenues were projected to collapse in March/April, a narrative amplified in the media. The actual results are proving more nuanced as the delayed IRS tax filing date created phantom losses due to timing of tax revenues. CARES Act stimulus programs also provided indirect budget relief.  States will be contending with budget headwinds for the next two to three years. But there is no impending “fiscal cliff,” even if a fourth fiscal stimulus program proves to be underwhelming. The long-term challenge underscores the need for an active approach to bond selection based on exhaustive fundamental research.

 

The equity market continues to prove that it’s extremely resilient. Markets continue to trade on a foregone conclusion that the world will recover from this year’s challenges. Monetary and fiscal policy has been supportive, momentum is high and volatility is low. The main factor keeping us from a full overweight is the relatively expensive valuation of the market. A neutral or defensive stance may be necessary in November if volatility spikes on or around the U.S. presidential election.

 

Credit markets and equities have been trading in tandem, benefiting directly from generous fiscal support policies. Spreads have tightened since March, but fixed-income pricing dislocations have still not completely recovered. We believe this asset class provides attractive defensive opportunities, as well as a way to take advantage of continued recovery.

 

While truly non-directional strategies represent excellent opportunities...

Many investors don’t realize that 529 plan assets can be used to pay for much more than books and tuition. In fact, distributions can be used to cover a long list of qualified education expenses at eligible institutions.

The recently passed Setting Every Community Up for Retirement Enhancement (SECURE) Act expanded qualified expenses to include registered apprenticeship programs and repayment of college debt. And since account owners have full control over 529 plan assets, they can even be the beneficiary of their own account — a huge benefit to anyone looking to go back to school themselves right now to advance their skills for the new work environment.

The Asset Allocation Team updates long-term capital market assumptions twice a year, most recently at the end of June. Did the pandemic change your long-term outlook?

 

Bahuguna: The reason we make long-term market assumptions is so that we don’t have to recalibrate our strategic positions for every unforeseen event — otherwise we would be adjusting frequently. We do make shorter term tactical asset-allocation decisions, but we arrive at those separately. Our capital-market forecasts look five years ahead and attempt to incorporate several scenarios, both positive and negative.

Three experts explain the tax structure, advantages and estate planning benefits of 529 savings plans. They also define qualified higher education expenses, offer creative examples, and share unique ways to use 529 plans from a financial planning standpoint.

Many investors don’t realize that 529 plan assets can be used to pay for much more than books and tuition. In fact, distributions can be used to cover a long list of qualified education expenses at eligible institutions.

The recently passed Setting Every Community Up for Retirement Enhancement (SECURE) Act expanded qualified expenses to include registered apprenticeship programs and repayment of college debt. And since account owners have full control over 529 plan assets, they can even be the beneficiary of their own account — a huge benefit to anyone looking to go back to school themselves right now to advance their skills for the new work environment.

It can be easy to get caught up in election-year predictions, but investors tend to benefit by taking a long-term view: staying focused on their goals and looking past election-year volatility.

Since 1932, the average four-year forward annualized return of the S&P 500 after an election has been 9.3%, and only three presidential elections out of 22 resulted in a negative forward result.

Market returns are determined by many variables, and the trajectory of any given stock is determined by a complex series of inputs. Rigorous bottom-up analysis and active portfolio management can help uncover the companies that may thrive.

Investors searching for income may be irresistibly drawn to the prospect of the highest yielding stocks. But high-yielding stocks often fail to provide consistent income over time. A long-term equity income strategy focused on sustainable dividends can provide a lower risk way to stay invested through the market’s ups and downs. And as their advisor, you can lead clients down the right path so they can avoid the common impulse to chase yield.

Small-cap stocks can play an important role in a well-diversified portfolio. But over the past few years, there’s been a significant divergence in the performance of small-cap growth and small-cap value benchmarks — making it a “tale of two style boxes” for small-cap investors. Prior to the pandemic, small-caps had generally underperformed large-cap stocks, and through the market sell-off, the trend continued. But when we examine the performance of small-cap stocks, some clear distinctions emerge:

 

Dave King: Convertibles are a way to pursue good risk-adjusted return through price appreciation and income. They complement traditional equity income allocations, offering some equity characteristics and some fixed-income characteristics. The casual observer may think that convertibles performance lands midway between the performance of stocks and bonds. But performance has been fairly consistent with the S&P 500 over the past 20 years — with lower volatility and more income. And it's been like that since the early 1970s, which is the beginning of any convertible index.

A CRD is a distribution made from an eligible retirement plan. It can be taken by an IRA account owner or by a participant in a qualified employer plan, if the plan permits. With a new IRS Notice, it’s now clear that a CRD can be used for health or economic reasons when an individual or someone in the individual’s household* is affected by COVID-19.

To apply, people must self-certify that they meet one of the qualifying CRD conditions. A “qualified individual” is any individual, their spouse or their dependent who has received a diagnosis of COVID-19 or experienced adverse financial consequences as a result of the pandemic. In previous regulatory guidance, financial hardship was tied to the individual alone.

 

The rally in equities since March has been impressive, but it’s been driven by a small number of stocks. Finding companies that can outperform becomes an even more valuable skill in narrow markets like we’re seeing now. A purely passive approach could expose portfolios to a large number of stocks that are underperforming the index as a whole.

Traditionally, fixed-income investors looking to generate income with low volatility have relied on products that track the Bloomberg Barclays U.S. Aggregate (the Agg) — a proxy for the bond market composed largely of government-issued debt. The Agg’s performance is primarily driven by changes in interest rates. This served investors well in the long period of falling interest rates, but today’s environment is very different. Yields on safe-haven debt are near zero, so the traditional “low-risk” portfolio has become increasingly susceptible to price volatility. Different times call for a different strategy.

Small-cap stocks can play an important role in a well-diversified portfolio. But over the past few years, there’s been a significant divergence in the performance of small-cap growth and small-cap value benchmarks — making it a “tale of two style boxes” for small-cap investors. Prior to the pandemic, small-caps had generally underperformed large-cap stocks, and through the market sell-off, the trend continued. But when we examine the performance of small-cap stocks, some clear distinctions emerge:

 

A CRD is a distribution made from an eligible retirement plan. It can be taken by an IRA account owner or by a participant in a qualified employer plan, if the plan permits. With a new IRS Notice, it’s now clear that a CRD can be used for health or economic reasons when an individual or someone in the individual’s household* is affected by COVID-19.

To apply, people must self-certify that they meet one of the qualifying CRD conditions. A “qualified individual” is any individual, their spouse or their dependent who has received a diagnosis of COVID-19 or experienced adverse financial consequences as a result of the pandemic. In previous regulatory guidance, financial hardship was tied to the individual alone.

 

? The COVID-19 pandemic has gripped the world this year — and changed our calculus. In 2018 and 2019, growth rates were above the productive capacity of the economy, mainly due to the fiscal policy boost from the 2017 Tax Cuts and Jobs Act. At the beginning of 2020, we expected medium-term growth to return to trend levels of about 2%. The Congressional Budget Office estimated trend growth to be somewhere around 2% as well, but it now expects that the pandemic and its long-term effects have likely reduced trend growth to 1.8% in the medium term.

? The longest expansion on record has come to a screeching halt, and the economy has faced a blow. We expect a large hit to growth in 2Q 2020 and a recovery to begin in the second half of the year. A lot depends on how the economy reopens, as the fear of the virus spread subsides, and how policymakers — monetary and fiscal — respond to the crisis.

? Given the roundtrip in equity...

Traditionally, fixed-income investors looking to generate income with low volatility have relied on products that track the Bloomberg Barclays U.S. Aggregate (the Agg) — a proxy for the bond market composed largely of government-issued debt. The Agg’s performance is primarily driven by changes in interest rates. This served investors well in the long period of falling interest rates, but today’s environment is very different. Yields on safe-haven debt are near zero, so the traditional “low-risk” portfolio has become increasingly susceptible to price volatility. Different times call for a different strategy.