Bob’s Journal for 6/25/20
Some Notable Events That Grabbed My Attention This Week
IRS Expands RMD Waiver
The IRS provided some big tax breaks for those who took required minimum distributions (RMDs) early this year and also for people who took RMDs from inherited IRAs.
The much-awaited detailed guidance explains how RMDs are affected by the Coronavirus Aid, Relief and Economic Security (CARES) Act. The big news is that people who took RMDs early in 2020 have an extended deadline to return the RMDs tax-free to their IRAs or other qualified plans.
The CARES Act waived RMDs for 2020. Any RMD that would have been required in 2020 before the CARES Act no longer is required. That waiver applies to RMDs for both original IRA owners and those who inherited IRAs.
People who took their RMDs before the CARES Act was enacted had up to 60 days to roll them over to their IRAs or other retirement plans. A rollover within 60 days kept the distribution from being included in gross income.
Those who took their RMDs early in the year appeared to be stuck. They took the RMDs well before the CARES Act was enacted. The 60-day rollover period already expired before the CARES Act took effect.
But the new IRS guidance gives them a new deadline to roll over the RMDs to an IRA. Anyone who took a distribution in 2020 that would have been an RMD if not for the CARES Act waiver have until August 31, 2020, to roll over the distribution to an IRA. This will count as a valid tax-free rollover even if it occurs more than 60 days after the distribution.
There were two other benefits in the new IRS guidance. Two restrictive rules on rollovers are suspended.
Under the guidance, beneficiaries of inherited IRAs who took their RMDs in 2020 can roll them over tax-free to an IRA by August 31, 2020. Normally, an RMD from an inherited retirement plan can’t be rolled over.
In addition, the IRS suspended the once-every-12-months limit on IRA rollovers. That means someone who took multiple distributions as part of an RMD, such as someone who scheduled monthly distributions, can roll all or part of those distributions back to an IRA and can do them in more than one transaction. Also, someone who used a rollover in late 2019 isn’t prohibited from using a rollover on a 2020 distribution.
These changes are in IRS Notice 2020-29.
Stocks: One of the Best Quarters Ever
There’s still another week before the quarter closes. If the market indexes don’t lose too much value in that week, the quarter will enter the history books.
According to the number-crunchers at Bespoke Investment Group, the S&P 500 at recent levels would record its best quarter in 45 years. It would be topped by only the 21.59% quarterly gain in the first quarter of 1975. A modest additional gain in the next week would make this quarter the best quarter in 80 years, topped only by the second quarter of 1938.
Another likely hallmark for this quarter is it could be only the second quarter in which a 20% quarterly loss was followed by a 20% quarterly gain. The only other time that happened was in the second and third quarters of 1932.
Despite the strong return this quarter, it might not be good news. The quarters in 1932 and 1975 that I mentioned turned out to be rallies in extended bear markets.
Are Five Stocks All That Matter?
A common theme of investment commentary for at least a year, but especially since the March market bottom, is that only five or six stocks are driving the indexes higher.
There’s some truth to that. The five largest positions in the S&P 500 account for a higher percentage of the index than ever.
Those five stocks are Apple (APPL), Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOG) and Facebook (FB).
Various studies found the five stocks account for a higher percentage of the S&P 500’s returns the last few years than usual and that the average stock has returned substantially less than the index.
It is normal for a capitalization-weighted index to be dominated by a small number of stocks. The stocks that have done best recently tend to occupy a larger and larger share of the index and drive its returns.
Yet, it’s easy to overstate the importance of a few stocks. Take a look at the NASDAQ 100. The index’s return for the second quarter, as of early this week, exceeded 30%. The same five largest stocks had an average return of 37% for the quarter. The returns for the stocks ranged from 25.99% for Alphabet to 45.23% for Facebook.
There are 95 other stocks in the NASDAQ 100 index. The returns of the five largest stocks trailed the returns of 18 stocks. Four stocks have gained more than 80% for the quarter.
It is important to fully understand the importance of a few stocks to an index’s performance. The largest stocks usually dominate the index’s returns over any period. But other stocks also move the index and are worth considering.
In addition, the largest stocks in an index change over time. Often it can take a decade or so. But the largest stocks and top performers of one period often lag the index’s returns and become smaller percentages of the index as time goes on. Focusing on the current largest stocks that are dominating the index often is a bad long-term strategy.
The Data
New unemployment claims declined for another week, coming in at 1.480 million compared to 1.508 million the previous week. But the new claims were higher than economists expected.
This is the 14th consecutive week with more than one million claims. Weekly claims never were higher than one million before the coronavirus pandemic.
The good news is that continuing unemployment claims declined by 767,000 to 19.52 million.
Durable Goods orders in May increased 15.8%. That compares to a revised decline of 18.1% in April and economists’ expectations for only a 10% increase in May.
Excluding Transportation, orders increased 4.0% in May.
Core Capital Goods orders, an important measure of business investment, increased 2.3% in May. That compares to a 6.5% decline in April.
The economy still is contracting in June but is doing much better than in May, according to the PMI Composite Flash Index mid-month reading.
The Services sector portion of the index increased to 46.7 from 36.9 in May. The Manufacturing sector increased to 49.6 in June from 45.2 in May. The composite for the economy increased to 46.8 from 36.4 in May. Any reading below 50.0 indicates the sector is contracting.
Existing home sales plunged in May, according to the National Association of Realtors (NAR). Sales declined 9.7% for the month and are down 26.6% over 12 months.
The decline is largely due to the lockdown orders in effect for March and April, because May’s final sales would be for contracts signed in March and April. Also, there’s a shortage of homes available for sale in most markets.
Applications for mortgages have been rising and indicate existing home sales should rise over the next few months.
Sales of new homes, however, rebounded in May. Those sales increased 16.6% above April’s sales and were up 12.7% over 12 months.
The Federal Housing Finance Agency (FHFA) House Price Index found that house prices nationally increased 0.2% in April and were up 5.5% over 12 months.
Manufacturing in the mid-Atlantic region is turning around, according to the Richmond Fed Manufacturing Index. The index was reported at 0 for June, which compares to negative 27 in May and negative 53 in April.
The 27-point surge is the largest one-month move in the manufacturing index and follows last month’s 26-point surge. The June reading is the first non-negative one for the index since March.
The third estimate for gross domestic product (GDP) in the first quarter was unchanged. GDP declined at a 5.0% annual rate. Real consumer spending also was unchanged, declining 6.8% in the quarter. And the GDP Price Index reported inflation for the quarter at an annualized rate of 1.4%.
The Markets
The S&P 500 declined 2.00% for the week ended with Wednesday’s close. The Dow Jones Industrial Average lost 2.46%. The Russell 2000 fell 2.41%. The All-Country World Index (excluding U.S. stocks) dropped 0.99%. In contrast, emerging market equities gained 0.88%.
Long-term treasuries rose 1.54% for the week. Investment-grade bonds lost 0.26%. Treasury Inflation-Protected Securities (TIPS) added 0.82%. High-yield bonds fell 1.32%.
In the currency arena, the U.S. dollar increased 0.08%.
Energy-based commodities fell 0.49%. Broader-based commodities lost 0.52%. Gold rose 2.12%.
Bob’s News & Updates
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