Uncertain economy, tough markets raise investors’ hard questions

Sheltering at home has left consumers, savers and investors with a lot of time to watch the market, count their emergency monies, check credit scores, wait for stimulus checks, worry about the future, consider their next moves and ask a lot of questions.

Hoping to do a small public service, today I’ll answer the most common questions I’ve seen in April. Let’s go!

Q: I don’t want to miss the rally. Is it time to buy stocks yet?

A: The Standard & Poor’s 500 is down more than 15 percent year-to-date, but up about 11 percent in the last month, so if you’re asking when to buy, you’re timing isn’t awesome.

That said, this may well be a bear-market rally, an upturn in the middle of a downdraft. They’re great for traders, but fool’s gold for average investors.

For long-term investors with far-flung time horizons, it’s always time to invest. Dollar-cost average into stocks and funds – buying regularly regardless of when prices are up or down – and time typically gives you the win.

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Yet if you’re looking for signs that the market is rising and can hold the rally, consider the “200-day moving average,” which basically is the market’s average level for the last year of trading days. When the market crosses above the average, it’s a bullish sign; the 200-day moving average for the Standard & Poor’s 500 is roughly 3015, meaning it has a way to go.

Q: Is the worst over?

A: Time will answer this question, but it’s hard to believe it is. Typical bear markets last six to 24 months, and warning signs are flashing everywhere.

Legendary investor Warren Buffett, for example, likes a valuation metric called the “market cap to GDP ratio.” I won’t explain how it works here; all you need to know is that it is trading at extremely high levels despite all of the looming economic problems (recession, unemployment, etc.). That suggests that stocks are overheated, meaning there’s trouble ahead.

I hope I’m wrong.

Q: Is this what they call a dead-cat bounce?

A: The media loves that colorful term, which comes from the idea that even a dead cat will bounce if it falls far enough and fast enough. Ultimately, it’s a temporary recovery in prices after a big drop.

The market’s rebound from its March swoon likely qualifies as a dead-cat bounce, but individual investors should worry less about the bounce than about the way such rebounds end, typically with a thud. Don’t be suckered into buying in the hope that you have perfect timing.

Q: Should I sell my dividend-paying stocks if they cut their dividend?

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A: An individual situation, but a decision facing many investors as companies cut or suspend dividends.

In crisis times, if the prudent course for management involves reducing or curtailing distributions, shareholders should be good with the decision. A company that preserves cash now should be positioned to reinstate dividends when the economy reopens.

That said, if you rely on dividend income, a cut should make you evaluate if you have the right stock for your strategy, something with a fortress balance sheet that should withstand a crisis. Do the analysis; by itself, a cut or suspension should not be an automatic sell signal in times like these.

Q: What do you think of the stocks that will benefit from finding a COVID-19 vaccine or a cure? How about airlines, cruise lines and energy stocks?

A: Pharma plays tied to beating coronavirus are on the rise, as a group, even though the industry has a poor record of coming up with vaccines against novel viruses. You’re buying high into a highly unpredictable field with wildly speculative stocks that could give up recent gains based on a rumor at tomorrow’s press briefing. That applies to diversified funds and ETFs in the space; if you don’t have a high degree of confidence in your pick – and asking the question is proof that you don’t – keep your powder dry.

On the flip side, the most troubled industries are super cheap. The problem is that they could stay that way for years. If you can’t afford to be patient, wait at least until we see how the industries respond to reopening; they will still be bargain-priced then.

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Q: How can I do the best with or make the most of my stimulus check?

A: The answer here depends on your financial situation; it could be different for you, your children, your parents, your neighbors, your co-workers and your Facebook friends.

That said, the answer for everyone lies somewhere along this decision tree, so find your spot and go from there:

•  If current income isn’t covering monthly bills – most notably food and medication – use the payment there first. Be opportunistic – if you’re eligible for temporary relief being offered on things like FHA loans, federally backed mortgages and student loans – consider skipping those payments to make the stimulus money go further. (Make sure you’re eligible to skip those payments without damaging your credit.)

•  If your issues involve paying the mortgage or rent – and there’s no relief in sight from the bank or landlord – keep the roof over your head.

• If you’re covering food, medicine and shelter but are in danger of missing utility bills or car payments, use the stimulus there. While most local governments have notified utilities that they can’t shut off service, and most car lenders are willing to offer some forbearance, don’t fall behind on your bills if you can avoid it.

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If missing a payment is unavoidable, tell the lender first. It creates a record showing you were trying to do the right thing.

• If bills are paid, replenish or expand your emergency fund.

Studies show that Americans are woefully unprepared for emergencies, and those surveys never contemplated that an “emergency” would look like what we’re living through now.

If you don’t have a fully funded emergency reserve and the stimulus can top off your tank, go for it.

• Pay down high-rate debt.

If bills are covered and reserves are full, improve your financial position with high-impact debt reduction. It will make you financially safer and more stable no matter how things play out.

• If you’re in good shape in all of those ways, the stimulus can help fund your retirement plan, a Roth IRA or a health-savings account. Count yourself extremely lucky to be able to do that at a time when most people had to spend the money earlier up the line.

Q: If I don’t get a stimulus check – I have back taxes to file – will I miss out on the money? Is it gone forever?

A: Technically, the stimulus is a tax credit for 2020 that is being advanced to eligible taxpayers. Thus, if you’re eligible but don’t receive a check or an electronic deposit, you will get a credit next year when you file your 2020 return (your eligibility is based on the 2020 return, and not on your earnings from the past).