Comfortable With Uncertainty

As the world continues to battle the coronavirus pandemic, we hope you all remain safe and healthy at home as we together face the challenges ahead. We would also like to take this opportunity to thank the healthcare professionals on the front lines for their difficult work and sacrifice to help the world ‘flatten the curve.’ We are all deeply appreciative for what you do.

It is now becoming clear the US is the new epicenter for the virus. As confirmed cases rise, capital markets will become even more fixated on finding the critical point where the exponential growth of cases becomes linear. President Trump recently announced an extension of social distancing guidelines through April 30 in hopes that continuing this practice will have the same impact of reducing the rate of transmission seen in other countries. If Italy serves as a reasonable proxy for the US experience, we could see initial evidence of cases breaking from the exponential growth as early as next week. This is not the same as projecting a peak in overall cases, however, which is probably still several weeks away.

The monetary and fiscal response to this crisis has been swift and decisive. As a colleague recently put it, the Federal Reserve and the US government are reacting to this sudden stop of economic activity with ‘muscle memory’ from the 2008 experience. Though the circumstances are much different, there was a quick realization of the need to provide support to the consumer-driven US economy. On March 27, President Trump signed the highly-anticipated CARES (Coronavirus Aid, Relief and Economic Security) Act to provide $2.2 trillion of fiscal stimulus to the economy. Nearly 50% of the spending package is direct funds for households and small businesses.

As BCA Research commented in a recent note to clients, the passage of this bill shifts the stimulus question from ‘How big?’ to ‘How effective?’ Time will tell, but these actions will clearly help soften the blow from the pandemic fallout and assist an eventual snap back of growth once the world’s greatest economic engine starts again.

From an investment perspective, it is important to remain focused on the long-term horizon. Some investors are describing last week’s broad stock market gains as a clearing or relief rally in which prices rise sharply, but perhaps just briefly, from an oversold condition. Others are confident that the worst is now behind us. Both views attempt to answer the same question: Was that the bottom? It’s tempting to play that game, but ultimately we don’t know. There is undoubtedly going to be shockingly negative real-time economic data being reported over the next few weeks and ongoing market volatility is likely. While we hope the ‘V’ shaped recovery takes hold, we have to acknowledge that it could be a bumpy road that gets worse before it gets better.

However, recognizing we can’t reliably time the bottom is not a reason to wait on the sidelines until things improve. Markets are forward-looking and the bottom will likely occur long before the news improves. On October 17, 2008 Warren Buffett wrote a New York Times op-ed titled ‘Buy American. I Am.’ describing his optimistic view of the US stock market based on investor fear at the time. What happened next depends on your perspective. The S&P 500 fell an additional 25% to its ultimate low in March 2009 before launching into one of the greatest bull markets in history. Does Warren Buffett regret not timing the low? I doubt it. He was comfortable with uncertainty.

Times like this require investors to remove emotion from the equation, as hard as that is, and look past the short-term environment to opportunities that lie ahead. Following is one example of a recent market dislocation that appeared over the last couple weeks.

Municipal Bond Dislocation

As liquidity dried up during the acute phase of the initial sell-off, truly unprecedented yield relationships developed among, of all things, short maturity municipal bonds. An insatiable desire for cash and liquidity prompted outflows from ETFs and mutual funds that own municipal bonds. Lacking sufficient market depth in part due to regulatory constraints from the 2008 financial crisis, the overwhelming amount of bonds out for bid led to lower prices. The lower prices in turn led to additional fear and more selling by investors wondering why this was happening. The selling pressure increased and the negative feedback loop was well underway.

At the peak on March 20, AAA municipal bonds were trading at a 2.83% yield-to-maturity for 3-month and 6-month maturity bonds. Treasury bills paid less than 0.10% at the time. Think about this. For an investor in the highest federal marginal tax bracket, that is a tax-equivalent yield of approximately 4.5% for a AAA municipal bond with a 3-month maturity, or a 440 basis point spread over Treasury yields.

The chart below provides visual context for how unusual this dislocation was within the asset class. It illustrates the average 2, 5 and 10 year maturity yield ratio of AAA muni bonds to equivalent-maturity Treasurys (muni yield divided by Treasury yield) going back to 2000. This ratio hit 604% on March 20. For perspective, at the peak of the 2008 financial crisis this measure reached only 250%. Low Treasury yields distort this calculation somewhat, but it is still an incredible data point.

A week later, this relationship has already begun to normalize as municipal bond yields decline and the supply/demand imbalance improves. This example serves as an early reminder during this uncertain time that short-term price volatility feels unsettling in the moment, but it can also generate dislocations from fair value.

Ultimately, we don’t know the path of this economic crisis the same way we didn’t know the path of prior recessions (and this will soon be an official recession). Market volatility will create opportunities along the way and a thoughtful, long-term investment plan remains the best way to avoid ill-advised reactions to market gyrations. The investment team at Oxford is working tirelessly to uncover great long-term opportunities, sometimes temporarily disguised as scary and uncertain.

Thank you for the trust you place with Oxford. Speaking on behalf of the entire Investment Management Group, we take that responsibility very seriously and look forward to guiding client investment portfolios through this most recent challenge.

The above commentary represents the opinions of the author as of 4.1.20 and are subject to change at any time due to market or economic conditions or other factors.The information above is for educational and illustrative purposes only and does not constitute investment, tax or legal advice.

Unpacking the Coronavirus Aid, Relief and Economic Security Act (CARES Act)

The last two weeks have seen a flurry of federal and state announcements regarding tax relief and business measures related to COVID-19. The Internal Revenue Service has issued several notices regarding tax filing and payment deadlines. Many governors and states have also pushed back tax filing and payment deadlines. Congress has passed, and the President has signed, several COVID-19 relief and stimulus packages. The largest of which, the Coronavirus Aid, Relief and Economic Security (CARES) Act, was signed into law on March 27, 2020.

The CARES Act has significant provisions related to individuals, in the form of direct payments and retirement plan changes, and businesses, particularly related to lending options and tax credits. The following is a summary of the various provisions for individuals and businesses under the CARES Act.


Rebate Checks

  • Single filers, with an adjusted gross income (AGI) of $75,000 or less, will receive $1,200. Those who file as Married Filing Jointly, with an AGI of $150,000 or less, will receive $2,400. The amount will be phased out as AGI increases. Those with an AGI of $99,000 for Single filers and $198,000 for married filing jointly filers will not receive any rebate.
  • An additional $500 will be paid for each child, under the age of 17, to those whose AGI is below the full eligibility limit of $75,000 or $150,000 depending on their filing status.
  • The 2019 tax return will determine eligibility and amount of the rebate check. If a 2019 return has not yet been filed, then 2018 tax returns or Social Security records will be utilized. Amounts received are not considered income and are treated as a refundable tax credit on the 2020 tax return.

Retirement Account Modifications

  • 2020 Required Minimum Distributions (RMD) requirements are waived for IRAs and certain defined contribution plans. The delay also applies to 2019 RMDs that needed to have been taken by April 1, 2020.
  • No 10% penalty will apply for amounts, up to $100,000, that may be withdrawn from retirement accounts for coronavirus-related purposes if made during 2020. Amounts withdrawn are included in income, but may be spread out over three years. In addition, the funds may be recontributed within three years. Coronavirus-related purposes include being diagnosed with COVID-19, having a spouse or dependent diagnosed with COVID-19 or experiencing adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19 or other factors as determined by the IRS.
  • Loans of up to $100,000 may be taken from retirement accounts and IRAs for those impacted by the coronavirus. An individual may self-certify that they have been impacted by the coronavirus, which has the same meaning as referenced above for coronavirus-related purposes.

Charitable Contribution Limits for 2020

  • The 60% limit is suspended for 2020 cash contributions made by individuals to public charities but not to supporting organizations or donor-advised funds.
  • Individuals that take the Standard Deduction on their 2020 return may take up to $300 for cash charitable contributions to public charities but not to supporting organizations or donor-advised funds.


Delayed Payment of Employer Payroll Taxes

  • If eligible, an employer can defer the payment of the employer portion of Social Security taxes (6.2%), with remittance occurring in two installments, December 31, 2021 and December 31, 2022.

50% Employee Retention Payroll Tax Credit for Employers Closed as a Result of COVID-19

  • The refundable payroll tax credit is equal to 50% of the first $10,000 in wages, including health plan benefits, per employee.
  • If a business has more than 100 full-time employees, only wages related to employees that are not providing service to the employer as a result of COVID-19 are eligible for the credit.
  • Eligible businesses are those that had operations suspended due to orders from a government entity limiting commerce, travel or group meetings or have a 50% reduction in gross receipts year over year in a calendar quarter.

Net Operating Loss (NOL) Change

  • If the NOL occurred in 2018, 2019 or 2020, it may be carried back to the five preceding years.
  • Tax years 2018-2020 will not be subject to the NOL deduction limit, previously set at 80% of taxable income.

Paycheck Protection Program

  • $350 billion was allocated to help small businesses keep workers employed during the COVID-19 crisis. This comes in the form of federally-guaranteed loans from the Small Business Administration that may be forgiven if the borrower either maintains its payroll or restores its payroll after the COVID-19 crisis ends.
  • Eligible businesses include a business with fewer than 500 employees or an individual who is self-employed or operating as a sole proprietor or independent contractor.
  • The maximum loan amount is 2.5x the business’ average monthly payroll costs, not to exceed $10 million. Compensation of an employee’s annual salary in excess of $100,000 is excluded from the calculation. The interest rate shall not exceed 4%.
  • If there is not a reduction in the number of full-time equivalent employees, then the loan can be forgiven in an amount that is equal to the amount spent by the borrower during the 8-week period beginning on the loan date for payroll costs, rent and utility payments. The amount of the loan forgiveness cannot exceed the principal and is not included in taxable income.
  • Employers that take advantage of the loan provisions herein may not also take advantage of the payroll tax credit available under the Families First Coronavirus Response Act.

Changes to “Excess Business Loss” Limitations Regarding Pass-through Losses

  • Under the Tax Cuts and Jobs Reform Act of 2017 pass-through losses were limited to $250,000 for an individual or $500,000 for a married couple filing jointly.
  • The limitation is repealed in its entirety retroactively to tax years 2018 and 2019 as well as 2020.
  • The prior law limitations on excess business loss will return and be effective for tax years 2021-2025.

Multi-Family Real Estate Borrower’s Relief

  • Borrowers of federally backed mortgage loans regarding residential real estate for one to four family occupancy can seek up to 360 days of forbearance.
  • Borrowers of federally backed mortgage loans regarding residential real estate for occupancy of five or more families can seek up to 90 days of forbearance. Borrowers must have been current on all loan payments as of February 1, 2020.

Charitable Contribution Limits for 2020

  • The 10% limit is increased to 25% for 2020 cash contributions made by a corporation to public charities but not to supporting organizations or donor-advised funds.

Employee Student Loans as Educational Assistance

  • An employer may make up to $5,250 in student loan payments during 2020 and the employee may exclude this amount from gross income as an Employer-Provided Educational Assistance Benefit.

Technical Correction to the Tax Cuts and Jobs Act of 2017 regarding Bonus Depreciation

  • Qualified Improvement Property is now eligible for 100% Bonus Depreciation and is assigned a 20-year class life under the Alternative Depreciation System and is effective for property placed in service after December 31, 2017.
  • This results in an immediate tax refund opportunity for those businesses previously limited in the 2018 and 2019 tax years.

The combination of loans and tax credits to businesses and direct tax rebates and tax relief to individuals are designed to help offset the personal and business economic impacts of the COVID-19 minimization efforts and shelter-in-place orders. It remains to be seen if additional economic measures will be needed; however, the tax provisions as enacted serve as a significant first step.

As always, your Oxford team of advisors are available to discuss these matters further as you assess the potential advantages of the CARES Act for you and your family.

The information in this presentation is for educational and illustrative purposes only and does not constitute investment, tax or legal advice.

March Madness

The COVID-19 (coronavirus) crisis has expanded rapidly, taking on a more serious tone with each passing day. What was initially derided by skeptics as “just the flu” and a political hoax has now become an all-out declaration of war on an unseen invader. Countermeasures have escalated from hand washing and fist bumps to border closures, social distancing, lockdowns and mass business stoppages. Stock market investors hate uncertainty and the resulting market declines have been nothing short of breathtaking, bringing new meaning to the expression “March Madness.”

Like many companies, most Oxford associates are working from home as we attempt to do our part to keep our employees’ families safe and “flatten the curve.” But rest assured, we are fully functional and fully engaged – and laser focused on meeting the needs of our clients.

Importantly, we are also calm. This isn’t Oxford’s first bear market. We have successfully navigated tech bubbles, terrorist attacks and financial market meltdowns. We will get through this latest challenge as well.

Where Do We Go From Here?

The number of new infections will continue to increase rapidly for a period of time and the gloomy headlines will get even worse before they get better. Nobody knows how deep or lengthy the economic downturn will be, but it is clear second-quarter GDP growth will be ugly – perhaps the worst any of us have ever seen. A global recession, perhaps even a depression, appears inevitable.

Many market pundits believe this will be a painful but short-lived event, primarily isolated to the second quarter. They forecast a rapid decline in new COVID-19 infections once the more extreme countermeasures being adopted today are in place for 2-4 weeks. These actions, combined with warmer spring weather, will allow for the economy to start to reopen and normalize, possibly starting around May. Under this “V-shaped” scenario, many businesses would experience meaningful short-term stress but the vast majority would survive. Economic growth could potentially be quite solid – even strong – over the second half of 2020.

We hope these optimistic forecasts prove correct, but it is wise to also prepare for a more protracted period of economic decline and market disruption. Despite all the steps taken to date, the US has not fully adopted China’s effective but more draconian approach; nor has the US proven capable of the wide-spread testing successfully implemented by South Korea. Sad to say, slowness in recognizing the threat and a lack of resources may have put the US on a path similar to Italy, which has seen area hospitals overrun and has displaced China as the virus’ global epicenter. Under this scenario, recovery may look more like a “U” or a “Nike swoosh” than the aforementioned “V”.

At the risk of being cited for alphabet abuse, there is one other scenario that worries us. Trump will be under tremendous pressure during an election year to declare containment and reopen the US economy as soon as possible. When that occurs, undoubtedly new infection rates will have declined, but the disease will still not be fully eliminated. Actual containment could prove fleeting, especially when summer turns to fall and virus season re-flares. This double-dip scenario could take the form of a “W” and be especially treacherous for investors to navigate. Watching China and South Korea as they attempt to reopen their economies will be instructive.

As one of my colleagues recently noted, this is a medical crisis and we need a medical solution. Social distancing, zero-percent interest rates and trillion-dollar bailouts will soothe the wound but not heal it. Ultimately, we will be living with COVID-19 until a vaccine is widely available, which many experts say is at least 12 months away. Various promising therapeutics are also frantically undergoing testing and could provide nearer-term relief.

What Should Investors Do?

Oxford doesn’t know whether the recovery will ultimately look like a V, U, W or a swoosh (or maybe something else entirely); nobody does. One thing we are confident of, however, is that we WILL recover. And while it may take 12 months or more to develop a cure, we doubt it will take near that long for markets to find a bottom. Investors are forward looking. Signs of a slowing rate of infection or meaningful progress on a vaccine/therapeutic will be met with enthusiasm. Policy actions, such as a massive fiscal stimulus package, will also help prop up markets. The point is, market bottoms are impossible to time but this one is likely only weeks or months away, not years.

As you can imagine, the Oxford Investment Fellows are working tirelessly to assess the rapidly evolving investment landscape and monitor our clients’ portfolio positions. Some of the important issues we are watching include:

  • The path of the virus
  • Economic impact
  • Global policy response
  • Credit and liquidity conditions
  • Long-term fundamentals
  • Market valuations

As boring as it may sound, our advice is to stay disciplined and stay diversified. When we start getting the upper hand on this awful virus, a combination of investor optimism, pent up consumer demand and economic stimulus will likely result in a sharp bounce off the bottom. We don’t recommend trying to time the bounce but we do encourage leaning into it by thoughtfully rebalancing individual positions and asset classes. We are also on the hunt for new ideas, as we believe the broad indiscriminate selling of financial assets is creating opportunities not seen in years – in both public and private markets.

Most importantly however, our advice is to stay safe! At this historic period in time, all of us must keep an appropriate perspective and put our health – and the health of our loved ones – above all other considerations. This war will be won but the worst of the fighting still lies ahead.

The above commentary represents the opinions of the author as of 3.24.20 and are subject to change at any time due to market or economic conditions or other factors.The information above is for educational and illustrative purposes only and does not constitute investment, tax or legal advice.

Another Wild Week

The longest bull market in history was brought to an abrupt end last week by the COVID-19 (coronavirus). While the US economy was in generally good shape from both a consumer (low unemployment) and business (wide profit margins) perspective, the slowdown in economic activity over the coming weeks will be dramatic. Positive test results have been reported in all 50 states, large gatherings have been cancelled, colleges and universities are sending students home and more than 32 million students are affected by K-12 school closings, with many opting for online learning. In a sign that might be most troubling for the digital generation: Apple has closed all stores outside of China, Taiwan and Hong Kong until March 27.

To add insult to injury for market participants, the breakdown of talks between OPEC and Russia led Saudi Arabia to announce a dramatic increase in oil production. This pushed prices down 30% early last week, and they are now down more than 50% since January 1. While this will benefit consumers in the intermediate term, it puts tremendous pressure on US oil producers. Over the past decade the US has more than doubled its output and became the largest global producer. Much of this production has been done through hydraulic fracturing (fracking), which is not economical with oil priced in the low to mid $20s.

During these times of market stress and anxiety producing headlines, it is important to remember that a key part of portfolio construction is diversification. This is the process of making investments across multiple markets (stocks, bonds, cash and others), which react differently to economic news. While most investors closely follow the S&P500, which is an index of large US stocks and is down more than 25% YTD, the bond market as measured by the Bloomberg Barclays US Aggregate Index is up slightly in 2020 as investors moved to the safety and security of fixed income. In addition, clients who have exposure to alternatives such as niche growth strategies have seen a degree of downside protection in recent weeks.

Another facet of prudent portfolio management is a rebalancing program. This is the process of shifting capital between stock, bonds and other asset classes so the portfolio does not stray too far from its target allocation. While a dogmatic approach is not necessary, and we must be mindful of trading costs and taxes, it is important to be clear-eyed about the long-term plan.

Lastly, market downturns can activate a “fight or flight” response and cloud an investor’s memories of calmer days. This is why having an Investment Policy Statement, which was deliberately and thoughtfully prepared, is so important. This document should continue to serve as the North Star for a portfolio. The chart below reflects how higher returns are ultimately the result from investors’ emotional overreaction to periods of market stress.

Beyond what we can control as investors, we look next to policy makers. The Federal Reserve has been active in recent weeks through its 50 bps rate cut on March 3, and an additional cut on Sunday March 15, which brought rates back to zero. Furthermore, it has announced a large program to ensure liquidity in the overnight lending markets for banks, and plans to purchase up to $700 billion of Treasury and mortgage-backed securities in the coming months. While many of the steps taken to limit the spread of COVID-19 had come from state and local officials, last week the President declared a state of emergency which has activated FEMA. Additional support to consumers and small businesses are also being considered by Congress. As further testing capabilities come online, we expect the number of cases to rise significantly. This, in conjunction with information on the scope of the economic impact, will prompt some very severe headlines. Although the financial markets look forward, we do anticipate meaningful volatility in the weeks to come.

Since our founding in 1981, Oxford has been singularly focused on helping our clients achieve their long-term goals. Our decades of professional experience tell us that investors are rewarded for being patient and disciplined through periods of turmoil and uncertainty. The depth and experience of our team allows us to build and manage diversified portfolios that have stood the test of time (and previous bear markets). While we will remain at an appropriate social distance based on the CDC’s recommendations, our team is fully available to discuss your portfolio or other questions on your mind.

The above commentary represents the opinions of the author as of 3.17.20 and are subject to change at any time due to market or economic conditions or other factors.The information above is for educational and illustrative purposes only and does not constitute investment, tax or legal advice.

The Financial Landscape – March 2020

Global Macro Environment

Global Growth Slows As COVID-19 Spreads
Supply chains are being disrupted, oil prices are plummeting and schools in the US are starting to close. Risk of a recession has risen in the last few weeks as efforts to stop the COVID-19 virus via quarantines are having a negative economic impact. The US consumer has been the workhorse holding up the global economy but it remains to be seen if this can continue, especially if the virus effects causes schools to close and/or factories to shut down nationwide. Congress passed an $8B emergency spending bill last week to support the virus response. It seems a further coordinated response is likely as risks grow with both the human cost of the virus (health) and the cost of a recession (economic). One positive area of the US economy continues to be housing. With the entire yield curve below 1%, every mortgage in the US is a possible refinance candidate. A spike in such activity could provide additional spending for the US consumer. Finally, employers added 273,000 jobs in February and the jobless rate was 3.5%, signs of labor-market strength before COVID-19 spread widely in the US. Wages increased 3.0% from a year earlier in February, consistent with recent months.

China’s Manufacturing Purchasing Managers Index (PMI) plunged to a record low of 35.7 in February vs. 50 in January. This result means a sharp contraction is likely and some research providers have forecasted a (-5%) fall for GDP quarter over quarter annualized. China decided that their “antidote” for the COVID-19 virus was to shut the economy down. The effects look increasingly likely to linger into the second quarter as well.

Leading indicators were improving in Europe but the COVID-19 virus is now interrupting that recovery. Average lead times for the delivery of inputs lengthened significantly in February signaling supply-side constraints. According to European manufacturers, the COVID-19 virus-related factory shutdowns in China are linked to the decline in vendor performance.

Given the current global economic climate, coordinated action to aid growth seems more and more likely. The G7* announced they are ready to cooperate on actions to support the economy and guard against risks from COVID-19. Other recent policy responses are detailed below:

  • February 26 – Hong Kong’s government announced stimulus measures worth HK$120B.
  • March 1 – Italy’s government announced a 3B Euro stimulus package.
  • March 3 – World Bank announced it would make available up to $12B in funding for countries to improve their responses to the COVID-19 outbreak.
  • March 4/5 – House and Senate passes $8B emergency COVID-19 funding package.

Fed Cut 50bps In Emergency Move
The Federal Reserve cut 50bps last week in an emergency move that was unanimous by the FOMC. The market believes this wasn’t enough and is currently placing an 85% probability of the Fed cutting rates by 75bps at the next meeting. If additional rate cuts do occur, rates would be just above the zero bound, leaving the Fed with little ammo if a recession were to occur.

Market Observations

US Equities
US equities experienced a very difficult February. The week of February 23 was the fourth worst week since 1950, as US equities lost over (-11.4%). February 24 and 25 trading days both saw a decline of 3%. For the month, the S&P 500 was down (-8.2%) and small cap stocks via the Russell 2000 fell (-8.4%). The sell-off has continued in March with more than 45% of the companies in the S&P 500 down at least 20% as of March 6. Global supply chain disruptions continue to weigh on American companies that are exposed to China. The energy and financial sectors were hit the hardest during the month and travel-related companies, such as airlines and hospitality stocks, continue to suffer.

International Equities
International economies tend to be more trade dependent and thus are more sensitive to economic conditions in China. As a result, the viral outbreak and supply chain uncertainty negatively impacted returns for the month. Developed international was down (-9.0%) while emerging markets finished (-5.3%). Once the viral outbreak becomes contained, the improved economic picture and cheap valuations relative to the US could provide a tailwind for international equities.

Fixed Income
The 10-year treasury yield fell below 1% for the first time after the Fed cut rates and since has continued to hit new lows. Investors piled into safe-haven assets resulting in a positive month for the Bloomberg Barclays US Aggregate Index (+1.8%). Investment grade spreads currently remain okay but high yield spreads significantly increased, up to 550bps, on March 6. Given the weight energy companies have in the high yield space, this result wasn’t a complete surprise.

Real Assets
Real assets experienced a difficult month as MLPs (-14.1%) and natural resources (-11.3%) saw double digit declines, while real estate was down (-8.2%). Oil prices have now fallen to multiyear lows as the Organization of the Petroleum Exporting Countries (OPEC) and Russia failed to reach a deal for production cuts amid sinking demand caused by COVID-19. Saudi Arabia then announced it would unleash a torrent of crude into well-supplied energy markets setting up a possible market-share war that has no end in sight.

*Includes Canada, France, Germany, Italy, Japan, UK and US Source: Strategas

This Financial Landscape represents the consensus of the Oxford Investment Fellows as of 3.12.20 and is subject to change at any time due to market or economic conditions or other factors. Statistical data is derived from third party sources believed to be reliable and has not been independently verified by Oxford. The information above is for educational and illustrative purposes only and does not constitute investment, tax or legal advice.

A Turn for the Worse

Since our last update on the new coronavirus (February 27) the outlook has dimmed considerably, both for the spread of the virus and for the global economy. As of March 9, confirmed cases of the coronavirus surpassed 110,000, and more than 4,000 have died. The World Health Organization says the outbreak is close to being labeled a pandemic now that over 100 countries have been affected.

Around the world, local and national governments are implementing measures to contain the spread of the virus. These measures often include various forms of social distancing, school closures and work-from-home programs. In extreme cases, mandatory quarantines such as those in Hubei Province, Italy and cruise ships have been put into effect. As expected, these measures are helpful in containing the spread of the virus but can have a detrimental effect on economic output as global supply chains are disrupted.

A hat-tip to my friend Han Yik at the World Economic Forum for sharing the chart below. This illustration highlights the importance of implementing controls early in order to maintain the rate of transmission of the virus below the capacity of the healthcare system. In situations of uncontrolled transmission, such as the cases in Wuhan Province and Italy, the number of confirmed cases grows at a pace beyond the capacity of their healthcare system.

The situation in Italy has unfolded precipitously in recent days and presents the latest case study of uncontrolled transmission. On February 20, Italy had 3 confirmed cases of coronavirus. That number grew to 3,858 by March 5 and over 9,172 by March 9. On Monday evening, in the latest attempt to limit transmission, the Italian government announced the extraordinary measure of calling for a national quarantine with severe travel restrictions.

As discussed in prior updates, containment measures are causing significant disruptions in global supply chains. Following decades of globalization, it’s often the case that products are manufactured with components from multiple countries. When suppliers from one or more countries fail to deliver their parts it has ripple effects throughout the global economy.

Demand shocks are also having a dramatic impact on some industries. Demand for hospitality, leisure and travel, for example, have declined significantly. In recent days, we have seen announcements of cancelled sporting events, concerts, festivals, conferences and even work-related travel. The State Department and the CDC are now urging Americans to avoid cruise ships.

Adding insult to injury, OPEC rattled oil markets over the weekend by opening the spigots and pumping excess supply into the global markets. The price of oil collapsed from a recent high of $65 in January, to less than $30 before bouncing back to $33. This development puts severe strain on the oil sector in the US, which by some estimates needs prices to remain above $50 in order to remain profitable. In turn, deteriorating credit conditions in the oil sector are spilling over into the financial sector and other lenders to these companies.

The net result of all these developments has been a dramatic spike in volatility as markets accelerated the “risk-off” trend. Equity markets around the world suffered severe losses on Monday on top of the corrections suffered in recent weeks. Most European markets entered bear market territory (losses greater than -20% from the prior peak) and the Dow Jones Industrial Average suffered its worst loss in 12 years.

The flight to safety led to sharply lower yields in the Treasury bond market. For the first time in history, on Monday the entire US Treasury yield curve was below 1% when the 30-year Treasury bond briefly reached a level of 0.7%.


The outlook is for continued volatility in the near term. Keep in mind, financial market volatility goes both ways: there will be strong “up” days mixed with “down” days. The very nature of this crisis is highly unpredictable, as nobody knows exactly where “hot-spots” of uncontrolled virus transmission will occur.

The Federal Reserve cut interest rates by 0.5% last week and is likely to cut rates again in the near term. However, monetary policy can help alleviate the consequences of economic disruptions but it doesn’t solve the problem. Fiscal policy may help, especially if it comes in the form of measures to dispel uncertainty about the virus. This could include Federal support for ample virus testing resources, real-time apps to track virus transmission and tax relief for the hardest hit sectors of the economy.

With regard to your investments, as always it’s important to ensure you have the right balance of “safe” assets and “risky” assets. As mentioned in recent updates, we’re seeing some investments hold steady and some are even appreciating during the recent bout of volatility. High quality bonds, of course, are providing a strong ballast to investment portfolios. As always, we will continue to monitor the situation, closely review clients’ portfolios and will report periodically as needed.

On a personal note, we strongly encourage everyone to follow CDC guidelines for prevention and treatment.


The above commentary represents the opinions of the author as of 3.10.20 and are subject to change at any time due to market or economic conditions or other factors. The information above is for educational and illustrative purposes only and does not constitute investment, tax or legal advice.

Domestic Staff: Risks, Rewards and Retention

By JULIA S. WEAVER, J.D., LL.M., Chief Wealth Planning Officer & Family Office Fellow and JAY E. OUELLETTE, JR., CPA, CGMA, Private Family Services Supervisor

Domestic staff. The people who care for your family, your pets, your home, legacy properties and luxury assets. Your staff sees you at your best. They see you at your worst. Managing domestic staff is unlike any other employer-employee relationship. However, for both the family’s protection and for the best interest of the staff member, it is crucial to maintain the same parameters of professional employment as in any other employment relationship, perhaps even more so.

This article focuses on areas to consider in maintaining these professional boundaries, such as compensation issues and tax implications, liability protection, resources to enhance key staff retention, as well as services available to assist families in streamlining this onerous process.

Many families use local agencies or personal references to source talent for their domestic staffing needs. Once sourced however, families should consider the scope of background checks and the proper onboarding of new staff. Ideally, this process should mimic that of the proverbial ‘corporate America,’ with an extensive background check and verified employment eligibility prior to hiring, followed by an overview of job responsibilities and all policies and procedures. For the ultimate protection of the family, and to set proper expectations for staff, these items should be memorialized in a thoughtful Employee Manual that includes compensation topics, paid time-off, behavior expectations, disciplinary and termination procedures, benefits and your policy for employee evaluations and potential merit pay raises.

In determining compensation, it is important to understand the keys to properly classify domestic staff. If a family wrongfully assumes they can compensate staff as an independent contractor, and not as an employee, the family is at risk for various employment liabilities and becomes responsible for the employment taxes due.

The IRS lists criteria for the proper classification of a worker, including the following:

Behavioral Control – A staff member is an employee when the family directs or controls the work performed.
Financial Control – A staff member is an employee if they receive a regular wage amount based on hourly, weekly or other periods of time. They are also likely to use equipment provided by the family.
Relationship – A staff member is an employee if the relationship will continue indefinitely or for a period of time, rather than for a specific project.
The burden of proof is on the family to prove independent contractor status. Using the right-to-control tests above, we find that most domestic staff are, in fact, W-2 employees. As such, a family is required to withhold Social Security and Medicare taxes and pay employer payroll taxes. Fortunately, there are an abundance of payroll resources for this aspect of domestic staffing, including online payroll service providers or a family’s CPA firm.

Further, by properly categorizing your staff as employees, they have the protection of receiving unemployment compensation should circumstances arise where your family no longer needs their services. Also, workers’ compensation insurance will reimburse your staff for qualifying medical expenses and lost wages if they are injured on the job. Without these protections in place, the family may be personally liable for such claims. Further, many homeowner’s policies exclude employees working in the home from coverage. The family must also be attentive to the minimum wage requirements in their state. The employee’s hours for all time worked should be maintained on a weekly time card, lest the family be liable for unpaid overtime claims.

Unfortunately, many families erroneously believe their work is done once they address these compensation issues. However, just as the family desires a highly professional staff, the family should provide the staff with a highly professional HR structure. By creating and educating staff on your policies and procedures, your family is better protected from wrongful termination, discrimination and harassment claims. Further, for your coveted key staff, a professional employment structure protects your family from the high financial and emotional cost of staff turnover. Retention of key talent is as relevant for your family as it is for a business.

Most families, however, are not equipped with the knowledge, or the time, to deal with HR responsibilities such as proper hiring and non-discrimination procedures, knowing the laws around mandated sick pay and paid leave programs, creating proper policies and procedures or drafting an Employee Manual, to name but a few. There are service providers, however, for outsourcing HR services for domestic staff, which can significantly reduce the risks associated with being an employer.

Some of these providers assume the role of Employer of Record for the family’s domestic staff, thereby assuming the duties, functions and risk relative to payroll and compensation, as well as HR services including health insurance benefits, 401(k) plans, Employee Manuals customized with the family’s preferences, new hire packets that ensure compliance with labor laws, mandatory maintenance of employment and payroll records, as well as ongoing HR support for the staff and guidance for the family.

Ensuring your domestic staff receives the highest level of professionalism will help your family source and retain the most professional domestic staff. Your Oxford team of advisors can guide you through the decision points and can educate your family on service providers available to enhance the successful employment of your domestic staff.

The information in this presentation is for educational and illustrative purposes only and does not constitute investment, tax or legal advice.