Welcome to the audio commentary around the coronavirus and its impact on the current economic environment. Hear insights from our experts on how best to think about your investments and retirement plan during market turbulence like this. I'd like to now turn it over to Michael Miller, head of retirement Americas Client.

 

Welcome, everybody, and thank you all for joining today. We truly appreciate your time and plan to continue these calls as often as needed to keep you updated on the markets. Today we're going to talk about COVID-19, also known as the coronavirus, and the impact on the current economic environment and implications for those individuals across all generations from these-- those early on in their careers and those that have retired and in these times how to best think about your investments and retirement plan during market turbulence like this.

 

We've asked two JP Morgan thought leaders to join us today to give us their thoughts on what is going on in the markets and how you should think about it for your retirement plan. Sam Azarello is a global market strategist. She spends her days researching and forecasting economic trends to share with our clients all over the world. Katherine Roy is the chief retirement strategist here at JP Morgan Asset Management. She is focused on trends and planning strategies to improve retirement outcomes.

 

Sam, let's start with you. The World Health Organization declared coronavirus a global pandemic. The majority of the country is in a shelter in place, the market shows continued volatility, but this feels very different than from other times we've seen extreme market volatility. Aside from the health and safety implications, why and how is coronavirus impacting the broader economy? And is it really as different as it feels?

 

Thanks, Mike. So it is really different. I would say that COVID-19 is an example of a demand and a supply shock, which is really rare. So if you think back to macroeconomic textbooks, you normally get one or you get the other. You get a demand shock or you get a supply shock. This time around what we're seeing is both.

 

So on the supply side how things are made globally has been completely disrupted, we've seen factories shut down, supply chains closed off, stores shut. On the demand side, what are we seeing? Lost wages, people losing their jobs, unfortunately, people spending less, and all of this combined has led to a lot more market uncertainty than you would normally see.

 

What I would say is that uncertainty is indicative of a wider range of possible outcomes. It basically means we're not really sure where we go from here and that, in turn, is what leads to more market volatility. So markets never like uncertainty, that's safe to say, and we would add that the market swings we're seeing this time are basically reflecting, that massive amount of uncertainty.

 

Now, volatility is uncomfortable and it can be hard to stomach, especially these large daily moves. But what I would say is that the fiscal stimulus package, the CARES Act we've seen that was just passed-- it's over $2 trillion. It's more than three times the stimulus that we saw back in 2008 and this is going to help a lot. It's going to help small businesses, medium-sized businesses. It's going to help individuals who need it most. And, effectively, this fiscal stimulus package is going to reduce some of the uncertainty and help by providing a bridge between where we are right now and where we need to be on the other side of this.

 

Thanks, Sam. Given that we're right in the thick of this uncertainty, Katherine, share with us what we want to remind investors to do in this type of environment.

 

I think Sam said it really well. This is a period of anxiety and I think a lot of people have heightened anxiety, not just because of what's going on in the market, but, to her point, this is a very unique situation in terms of people working from home and not being in full control of how we spend our days.

 

And so one of the things we want to really encourage people to do is-- the best way to fight that anxiety is to focus on what you can control. You can't control what happens in the market or what happens in Washington. And we often put a lot of our emotional energies in trying to understand those two parts of the retirement equation.

 

But the good news is that if you focus on areas that you can control, those are the areas that are really going to drive you to a successful outcome and that's focusing on how much you're saving versus how much you're spending, and staying diversified with an asset allocation, and also saving smart in terms of where you're saving your dollars too from a tax perspective. And so the good news is that when we look back at 2008 and 2009, so a period of similar volatility and stress I would say, participant inertia or actually participants staying the course proved to be highly beneficial.

 

So almost 97% of 401(k) and defined contribution participants continued to make contributions through the volatile market. So if you have the ability to do that, please continue to do that because systematic contributions enable you to take advantage of dollar cost averaging. It's a way of systematically putting a fixed dollar amount into a specific investment where you're buying more shares when their share cost is lower and that really can help you rebound through periods of volatility like this.

 

And also more than 85% of participants did not make an investment change. They didn't change their asset allocation or investment direction going forward. And so that diversification, particularly if it is periodically rebalanced, is going also to be helpful to you as the markets look to recover.

 

So the good news is as a result of those two pieces of action or inaction, I would say, account values for participants through '08 and '09 actually recovered by the end of 2010. So it's actually less than three years, which, thinking back, I think it felt like it took a lot longer for us to get back to or above the height of 2007. And so the fact that it only took less than three years I think is really notable and something to hopefully take some confidence from. So that's number one.

 

Another area of focusing on what we can control actually can be detrimental. So one thing I would encourage participants to think about is to stay calm, carry on, and actually don't look at your balance because you can't time the market. And what we find is that often people look at their balance or look at where their investments are today and that agita or anxiety gets heightened and they feel like taking control and getting out of the market could be beneficial.

 

And what we know is that if you do that and typically individuals would have that emotional reaction, particularly after very negative days in the market-- they are likely to not only lock in their losses as a result of selling out of those days or after those days, they're likely to miss some of the best days that actually follow quite close to those negative days. So up through the end of 2019, if you had remained invested in the market for a full 20-year period, you would have generated about 6% in the market and have-- if you put in $10,000, have about $32,000 after that 20-year period-- if you had gotten out after some of the bad days and missed those good days, you can cut that return in half or even more depending upon the number of best days that you miss.

 

And so during that period six of the best 10 days occurred within two weeks of the 10 worst days. When we add the first quarter of 2020, it actually gets shorter because we're having those best and worst days-- particularly this year or this time-- is happening much closer to each other.

 

So, for example, on the 12th of March it was the second worst day of the year. The next day, the 13th, it was a Friday, was the third best day of the period. And then it opened on Monday to the absolute worst day of the year. So it's swinging around that much. Again, if you get out after that worst day, you would have missed the third best day so far this year, so really important to stay invested for the long-term. Don't look at your balance and make sure that you're benefiting from those positive days that follow those worst days.

 

Sam, speaking of recession, what are we expecting going forward?

 

Well, we are in a recession. I think we know that. We've seen the employment numbers come in really negative, we're going to see Q2-- second quarter GDP be very negative. But what I would say is we want to think about shapes, so the alphabet soup. We generally use the shape of letters to talk about what a recession could look like and what the path of GDP could look like as we move through the recession and then out into the recovery.

 

So, for example, many people talk about a V-- V as in Victor-- shaped recession. That would be where growth falls, you hit the bottom, bounce off the bottom, and then start to recover. Another example of these letter shaped recessions is a W. Now, a W is actually the worst. A W is what we call a double dip recession. Growth falls, bounces a little bit, but then we head back into a recession, and then we recover.

 

Now, this time around what we're thinking is that the recession is going to be U-shaped, U as in umbrella. So growth is going to drop pretty substantially, pretty significantly. It's going to stall along the bottom and then we're going to surge back on the other side.

 

Now, this type of slowdown, what's it characterized by? I would say it's one main thing and that is demand destruction versus demand that's delayed. And this is a really interesting and important idea that we talk about because delayed demand is fine. Delayed demand you get back on the other side when you're surging.

 

So maybe right now you don't feel comfortable making a big purchase, thinking about what Katherine mentioned, keeping your expenses and everything you can control right in your purview. So maybe you don't buy the car, or the washing machine, or the house now. Maybe you just delay it and then you do that, make those purchases when this all passes. That's delayed demand and that's actually what helps us surge on the other side.

 

Demand destruction, very different. Demand destruction is problematic because you don't get it back. So I always say that I like to go out for Mexican food every Friday night. Obviously, we're not doing that right now. When this all goes back to normal, am I going to necessarily go out for Mexican food twice in a week? I mean, maybe, but probably not. So those lost evenings out, that lost spend in the economy is basically destroyed and we don't get it back. So that's what we're trying to understand, the demand destruction versus the delayed demand and that's going to impact how we come back out of this.

 

But I would just say overall the drop, the stall, and the surge is what we expect. And that surge, which will come because this will pass, it could be late this year or it could be in 2021.

 

OK, makes sense. So how should I be thinking about this depending upon where I am in my retirement journey?

 

Yeah, that's a great question, Mike. And so I'd like to cover two things. Is this volatility something you should be worried about based on where you are in that life cycle and what are some of the powerful levers that you have to take control of if that volatility is something that you should be focused on?

 

So this volatility really exposes people to what we call as a sequence of return risk. And what sequence of return risk means is over your journey of investing for retirement, when you earn those positive returns and when you might experience negative returns is going to have a pretty significant impact on your outcome but only at certain periods of time.

 

So, first and foremost, if you're a young individual, you are in probably your first 20 years worth of saving for your retirement, your savings is the major driver of how your account is growing. Investment return is helpful, but the major, major driver of your account growth is going to be your saving.

 

And so to put it in perspective, if you save $1,000 a year and, let's say, you lose 10%, so you've lost $100, the next year, if you save that $1,000 again, you see how much that dwarfs that investment return, whether it's positive or negative. There will be a point in time, though-- it's typically 20 years in, 15 to 20 years in of your savings journey-- where your account value, particularly if you're a consistent saver, is going to be large enough that 10% swing can be pretty significant.

 

If you've been able to accumulate, let's say, $300,000 by the time you're 40, a 10% return, positive or negative-- that's now meaningful dollars, that's $30,000, which is three times that $10,000 saving that you might be doing. So at that point, that's really when you want to de-risk, but that's also when the sequence of returns that you experience is going to start having a bigger impact on your outcome because your wealth is greatest. And so when your wealth is greatest is typically five years before you retire and just on the other side. And so that is really where, if you have negative returns or volatility that is generally more negative than positive, that can really affect either the wealth you have available to support yourself in retirement or how long your portfolio and investments might last as you spend in retirement.

 

So the good news is, again, looking back to '08 and '09, we do see the largest 401(k) balances for those consistent savers who were close to retirement-- they did see the biggest drawdown in '08 and '09, but the good news is they too did recover, again, with consistent savings and diversification by the end of 2010 as well. So it's really important to be aware-- that's really the area where you really have to focus on volatility and its impact on you. And that's where you want to be well-diversified. You want to make sure that you're also controlling another really big lever, which is spending.

 

So if you've retired and you're-- you don't have sources of income to help replenish or save into your portfolio, we know, based on our research, that spending and drawing off of your portfolio, particularly if it's struggling through a difficult market-- that really can ravage your portfolio. So this is where spending, and adjusting your spending, and, as Sam mentioned, delaying, or deferring, or trying not to tap your portfolio at this moment and lock in those losses is going to be particularly important.

 

Now, two other points here. If this sequence of return-- again, five years before your retirement or five years after you've retired-- if you're experiencing these volatile markets, one of the questions we get for people who've retired is what-- should I just start Social Security early, potentially at a much discounted rate, in order to protect my portfolio as well? And that's really something you're going to have to talk to an expert about, a financial professional, or run some numbers yourself really to see and balance the implication of taking Social Security early at reduced value.

 

So what I mean is that's before your full retirement age, so somewhere between 62 and 66, let's say. You're going to get a reduction in your income and that's for life. And so that's a decision that's really going to affect you, not just today, but how much income you're going to have when you're 70, 80, 85, et cetera. So it needs to be done thoughtfully and not just as a knee-jerk reaction as it is an income source that may be available to you but taking it early may or may not make sense based upon your personal situation.

 

And the last area here is just understanding if you need cash for an unexpected expense or to cover a gap in income, often people turn to taking loans from their 401(k)s. And so we just want to make sure that people are aware that if you do that, you're obviously trading off some of your long-term opportunity for your retirement assets for the need for that today. But if you can, as you're repaying that loan, think about contributing a little bit more than just repaying the loan.

 

Because what unfortunately happens when you take a loan, if you just pay back the loan plus the interest, what you lose out on during that period of time is the free money of a company match that you might be entitled to based on the rules of your plan. So you want to make sure, as you're making that trade-off, if that is something you need to be doing, that you're really trying to course correct by saving more after you've taken that loan as you repay it so that you continue to benefit from that company match and your long-term savings and outcome are less impacted as a result of that.

 

And, Katherine, if an uncertainty continues, what should participants focus on?

 

I think it's all about saving and again that's back to that control factor. And we know how important savings is and so again, particularly in this time, where we might be spending less on other things, trying to be smart about that. So when I think about what participants should focus on is saving smart, getting the match, taking an opportunity to reflect and potentially commit today to saving more tomorrow-- so I'll talk a little bit about that-- and then lastly saving diversified.

 

So saving smart-- shifting what you're not spending now purposefully into either your emergency reserve fund-- hopefully you have one-- or if you don't, you could use potentially that additional income that you're not spending to build one up now because we all are feeling this stress and having that emergency reserve fund is really important because life happens like it is now. And having liquidity is really important so you don't need to take that 401(k) loan.

 

And so in my particular situation, I'm not commuting. All of us probably are not commuting. I'm saving on train tickets and subways. But if you drive to work, I'm sure there's gas savings, particularly with where gas prices are right now as well. So be thoughtful and actually set up-- pay yourself first. Set up an autosave option at your bank to be able to save that money directly. It's going to be really important so that you can build that emergency reserve fund for you-- for yourself proactively.

 

So make sure you have-- you're saving smart, you have that emergency reserve fund, you're saving into your 401(k) plan at least up to the match, if not higher. So that's why the save to the match is really important, it's free money. It's going to be a 50% to even 100% return on every dollar you put in, depending upon the match rules of your employer. So that's really important in order to maximize your savings to get that match.

 

Autoescalation or the save more tomorrow idea is really, really powerful because it enables us at times like this when we're reflecting upon our future and thinking about how could I commit to saving more tomorrow so I felt more secure with my retirement outcome, you can actually make that election today and systematically put it into effect over a period of time. So what autoescalation allows you to do is to say, look, I want to stay where I am today, but I want to increase my contribution by a percent, by a 2%, whatever you want to put in for a period of time up to a maximum contribution level that then I want to stay at.

 

So, for example, you might start at 3%, increase a percent a year, cap yourself at 10%. So you're getting to that 10% target, but you're doing it in a gradual way that will help you hopefully adjust your spending in the future, take advantage of potential income increases as well, and get to that higher target, hopefully, in a sustainable way.

 

And then lastly, I think it's always helpful to look at where you're saving and how you're taking advantage of all the different tax options that are available to you because we know we want to get to retirement with some pre-tax or tax-deferred money in a 401(k), some Roth-- maybe Roth 401(k) or Roth IRA, and some taxable assets so that you have diversification from a tax perspective that's really going to let you have more flexibility and control in retirement when you're using those various account sources to build your retirement income plan and manage your taxes, how taxable your Social Security is, and what your Medicare premiums look like post-retirement. So that's really where that save diversified-- think about all your sources and make sure you're saving smartly across all of them.

 

Thank you, Katherine. So we've all seen investors grappling with whether to buy or sell amidst this uncertainty and markets are down double digits from previous peaks. So the question is, Is the sell up over or do we have more to go? Sam, what do you expect from all of this?

 

So it's going to feel like an unsatisfying answer, but it's the truth and we just don't know. It could go either way from here. And I think, unfortunately, no one has a crystal ball. But we can take some strength in that idea that if we're not sure which way things are going, it makes sense-- in some sense just to stay the course because we just have to ride it out.

 

And the market could be at a bottom, it very well could be. We've seen the fiscal stimulus come in, that's provided a support. We seem to have paused on down day after down day. That being said, a lot of this comes back to something that I would argue is not in any of our wheelhouses, and that's looking at virus data and understanding vaccines.

 

So the truth of the matter is we might have hit a bottom, or it might be that we have more volatility and it's really going to depend on how the virus behaves, and how the virus behaves in terms of impacting the economy, and if the economy stays shut down. So the market might react very negatively as the data, which we expect to be negative and we expect to be-- show us that we're in a recession. As it comes out, we might have tremors.

 

So we've had the earthquake now there's tremors from all of this. And I think it's how does the market react to the tremors and that I'm not convinced anyone knows. But what I will say what is working? What is going well right now?

 

The government fiscal stimulus was a massive support for small businesses, individuals, and many others-- those who need it most. And that's been a huge pillar of support. Another big pillar of support-- a little bit more in the weeds-- has been what the Federal Reserve has done. So many of you might have seen that the Federal Reserve took interest rates back to zero. That's not the only thing they did.

 

The other thing they've been doing is pumping water into the financial pipes. Just like you're plumbing at home, you never worry about your plumbing until there's a problem with it. Well, there's financial plumbing too. There's financial plumbing in the markets. And it's always about keeping water or what I call liquidity, which is really just money, flowing through those pipes to keep everything running smoothly. And the Federal Reserve has done a really fantastic job with making sure there's enough water-- money-- flowing through the financial pipes. So on the fiscal side, on the monetary side, we have a lot of support, people doing what they need to.

 

So all of that said, I would argue the key point is that overall, over time, the economy and the markets spend more time growing and going up than the opposite. I really want everyone to remember that because it doesn't necessarily come top of mind when we're in moments like this, but all of the data backs me up. And the extension of this thought, of this idea that the economy and the markets spend more time going up, growing than the opposite-- the extension of that thought is that we have to get and stay invested because it's still one of the main ways we take income and transform it into wealth. And this is true of our retirement accounts, it's also true of our taxable brokerage accounts. And with that, I'll turn it back to Mike.

 

Thank you, Sam. So we've talked a lot today about what's happening in the markets. While good to understand this is largely out of individual investors control, can each of you give your one key takeaway that is within the investor's control to action?

 

So I'll go first. I think focusing on what you can control, making sure you're looking and being smart about your savings strategy. And then, secondly, keep calm, carry on, and just don't look at your account balances.

 

And then I would agree with Katherine 100%. And then I would say getting and staying invested is still one of the main ways we take income and transform it to wealth. And the power of that cannot be underestimated.

 

Great. Sam and Katherine, thank you very much for your comments as well as those closing takeaways and action items for individuals. For all of you listening, please make sure to visit jpmorganfunds.com to review our up-to-date content, including collateral on managing-- managed through those volatile markets, our principles for successful retirement, and for our long-term investing principles. Please continue to stay healthy and have a great rest of the week.

 

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