Quarter 1 2020 Market Update - What a Difference A Year Makes
- 01.24.20
- Markets & Investing
- Article
Trusted Advisors, helping clients invest, preserve, and distribute wealth since 1973.
January 14, 2020
By Eric W. Hilliard
CERTIFIED FINANCIAL PLANNER ™
Branch Manager
We hope you enjoyed the holiday season with family and friends. January indicates a fresh start and our Market Update letter is getting somewhat of a fresh start as well. In the past our Market Update letters have been titled for the quarter that just ended. Starting with this Market Update we will be titling our piece for the new quarter just begun. While we will continue to summarize the actions of the previous quarter, we will emphasize the current state of affairs and what indicators show going forward.
In addition to reading our investment and economic commentary, please read below about the changes impacting savers that just occurred after passage by congress of The Setting Every Community Up for Retirement Enhancement (SECURE) Act. This was attached to a broad spending bill at the end of 2019 and is the largest financial planning bill since the Pension Protection Act of 2006.
2019 and fourth quarter summary - What a difference a year makes
The fourth quarter of 2018 saw a significant pullback in the stock market after the Federal Reserve raised interest rates and spooked the markets by indicating rates may continue to rise. The S&P 500 lost 13.52% during the 4th quarter of 2018 along with the Santa Clause rally typically experienced during December.
Early 2019 the Federal Reserve softened its stance. Many market pundits believed that was appropriate given a softening economy, which was partly due to the continuing trade conflict between the U.S. and China.
The Federal Reserve lowered rated three times, by .25 basis points each time, during 2019. According to an article November 20, 2019 from The Washington Post titled “Last month, Fed officials said the 3 rate cuts of 2019 were enough” The minutes of the October Fed meeting indicated that most Federal Reserve participants thought this year’s rate cuts were sufficient to support moderate growth in the economy. Since then, news from the Fed has been fairly quiet.
With interest rates low and expected to remain stable for the near future and a growing economy the market turned its focus on corporate earnings and positive news about trade negotiations with China. During the fourth quarter of 2019 investors enjoyed seeing the S&P 500 gain 9.07%. What a difference a year makes!
Please take a moment to review returns of various blended benchmarks and equity and fixed income markets over the past month, year-to-date and the past 12 months.
Returns as of 12/31/19 __________________________________________________________________
Dow Jones Target Risk Indexes December YTD Past 12 months
Dow Jones Aggressive Index 3.33% 27.13% 27.13%
Dow Jones Moderate Aggressive Index 2.72% 22.84% 22.84%
Dow Jones Moderate Index 2.10% 18.60% 18.60%
Dow Jones Moderately Conservative Index 1.46% 14.14% 14.14%
Dow Jones Conservative Index 1.83% 8.13% 8.13%
U.S. Equity Indexes
S&P 500 (Total Return) 3.02% 31.49% 31.49%
RUSSELL 2000 (Total Return) 2.88% 25.52% 25.52%
International Equity Indexes
MSCI EAFE DEVELOPED MARKETS 3.25% 22.01% 22.01%
MSCI EMERGING MARKETS 7.46% 18.42% 18.42%
Fixed Income Indexes
BLOOMBERG BARCLAYS US AGGREGATE BOND (0.07%) 8.72% 8.72%
BLOOMBERG BARCLAYS US CORPORATE HIGH YIELD BOND 2.00% 14.33% 14.33%
Returns provided by Morningstar as of 12/31/19.
How clear does the future look during 2020?
With interest rates on hold for the foreseeable future, unless something significant changes, and if there continues to be progress on trade, the primary focus will likely be on corporate earnings and upcoming Presidential elections.
Corporate earnings are expected to be stronger versus 2019, but expectations are still pretty low. If earnings are stronger than many expect that will be a catalyst to boost markets.
Upcoming elections will dominate headlines for much of 2020 and will likely increase volatility of markets. Americans will be focused on primaries, media reports, political ads and debates leading up to elections. As investors do so, it is important to keep a few things in mind, According to MFS’s piece “Primaries, Caucuses and Elections – Oh My!” Since 1928 the S&P 500 has performed better on average when the incumbent party won the election, regardless of party.
While news leading up to the election is likely to impact markets along the way, especially particular individual sectors, investors should distance themselves from how they emotionally feel about the election. The fact is that while the President does have some influence on markets, such as one supporting lower regulation and lower taxes will support markets, one supporting high amounts of regulation and higher taxes will be a drag on markets, longer-term trends in company earnings, worker productivity and global economies matter more than who wins the election.
A new issue that arose in the early days of 2020 was the increase in conflict with Iran. Thankfully, after a limited retaliatory strike by Iran after the U.S. killed Iran’s top general, both Iran and the U.S. seem to be backing off, indicating neither wants the situation to escalate. Hopefully that will continue to be the case. Markets did pull back a bit on the initial news, but actually held up quite well. That is an indication of the market’s current strength. Markets were due for a rest anyway after the returns delivered during the fourth quarter, so likely a pause or small pullback would have happened regardless.
Catching up?
We have been observing that during the past few months a few areas that have underperformed U.S. equity markets for some time have been gaining strength:
- International Markets have begun performing better after a very long period of underperformance versus U.S. markets as some economies of countries outside the U.S. have improved. Some market experts believe we have been due for a shift where international investments ‘catch up’ to the U.S., delivering outperformance.
- Commodities, including gold, copper and energy all gained relative strength and finished off 2019 well. We are watching to see whether this trend holds. The U.S. dollar was strong relative to other currencies for the first 3 quarters of 2019, but it has weakened relatively over improving economic indicators globally and better trade news, This trend, which is expected to continue, could favor commodities, as well as emerging markets.
- China related investments have performed better ever since news of progress in trade negotiations.
Important changes brought on by The Setting Every Community
Up for Retirement Enhancement (SECURE) Act
Congress’ year-end spending package makes some significant changes for savors and their heirs. Many are favorable for investors as explained in this Raymond James article titled “11 Key Financial Planning Takeaways of the SECURE Act” To read the full article, please use this link:
Below we highlight three of the changes. Many additional provisions of the Act are favorable to savers such as allowing grad students and care providers to save more, enhanced auto-enrollment for 401(k) plans, ability for part-time employees to participate in 401(k)s, and allowances for penalty-free withdrawals from retirement plans for child birth or adoption. There is one disappointing change regarding “stretch” inherited IRAs, which is covered below.
- Removal of age 70 ½ restriction for IRA Contributions – If you are currently below 70 ½ and plan on working into your 70s this is good news. Now those working past 70 1/2 can continue to contribute to an deductible IRA. A single saver over 70 1/2 can contribute up to $7,000 as a deductible contribution and a couple could contribute $14,000 in total ($7,000 per person).
- New Requirement Minimum Distribution age is 72, up from 70 ½ - The Required Minimum Distribution (RMD) age has been increased from 70 ½ to 72. If you have not yet reached age 70 ½ by the end of 2019 you now will be required to begin RMDs at 72 instead. If you did reach age 70 ½ by the end of 2019, your required date for beginning RMDs has been set and you must continue taking them. This allows additional time for your IRAs and 401(k)s to grow.
- “Stretch” Provisions for Inherited IRAs restricted – The SECURE Act includes a tax-generating provision that requires most beneficiaries to distribute their non-spousal inherited IRA account over a 10-year period, rather than allowing the beneficiary to spread distributions over their life expectancy. The 10-year period ends December 31st of the 10-year anniversary of the original owner’s death.
The new rule will affect beneficiaries of account owners who pass in 2020 and beyond.
In addition to spousal beneficiaries, there are a few exceptions to the rule. These include if the beneficiary is disabled, chronically ill or not more than 10 years younger than the deceased IRA owner. Also, if the beneficiary is a minor, there is an exception, allowing the child to stretch distributions until the child reaches the age of majority. At that point the 10-year rule kicks in.
If the IRA owner’s spouse is the beneficiary, RMDs are still delayed until the end of the year the deceased IRA owner would have become 72 (formerly 70 ½).
History is on the side of 2020 bringing more market gains
According to “The January Barometer” by Jeffrey Saut of Saut Strategy™, written January 6, 2020 the years that followed the 32 years since 1928 with 20% or greater gains in the S&P 500 have seen the index rise an average of 10.46%.
Additionally, Saut goes on the write that in election years the S&P 500 has rallied about 9% on average and has been positive 86% of the time.
We will be watching for danger signs, but currently most signs continue to favor additional market gains in 2020, although probably lower gains than 2019.
Please check in periodically with our web page and social media sites for updates:
Facebook: https://www.facebook.com/hfgraymondjames
LinkedIn:
Eric Hilliard, CFP®, Branch Manager https://www.linkedin.com/in/ewhilliard/
Wade Stafford, CFP®, Associate Financial Advisor https://www.linkedin.com/in/ericwstafford/
Jenny Hilliard, Investment Executive: https://www.linkedin.com/in/jennyhilliardrj/
Please let us know of any significant changes in your life or situation that could impact your financial plan. In the meantime, we continue to follow the processes we have developed over the years that enable us to provide you our very best. Thank you for your trust in me and in our practice.
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DJ GLB Aggressive Index - The DJ GLB Aggressive is a total-portfolio index that allow investors to evaluate the returns on their portfolios considering the amount of risk they have taken. These profiles are defined based on incremental levels of potential risk relative to the risk of an all-stock index. It's made up of composite indices representing the three major asset classes: stocks, bonds and cash. The asset class indices are weighted differently within each relative risk index to achieve the targeted risk level. The weightings are rebalanced monthly to maintain these levels. The DJ GLB Aggressive index is 100% of All Stock Portfolio Risk.
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DJ GLB Moderate Aggressive Index - The DJ GLB Moderate Aggressive is a total-portfolio index that allow investors to evaluate the returns on their portfolios considering the amount of risk they have taken. These profiles are defined based on incremental levels of potential risk relative to the risk of an all-stock index. It's made up of composite indices representing the three major asset classes: stocks, bonds and cash. The asset class indices are weighted differently within each relative risk index to achieve the targeted risk level. The weightings are rebalanced monthly to maintain these levels. The DJ GLB Moderate Aggressive index is 80% of All Stock Portfolio Risk.
DJ GLB Moderate Conservative Index - The DJ GLB Moderate Conservative is a total-portfolio index that allow investors to evaluate the returns on their portfolios considering the amount of risk they have taken. These profiles are defined based on incremental levels of potential risk relative to the risk of an all-stock index. It's made up of composite indices representing the three major asset classes: stocks, bonds and cash. The asset class indices are weighted differently within each relative risk index to achieve the targeted risk level. The weightings are rebalanced monthly to maintain these levels. The DJ GLB Moderate Conservative index is 40% of All Stock Portfolio Risk.
DJ GLB Moderate Index - The DJ GLB Moderate is a total-portfolio index that allow investors to evaluate the returns on their portfolios considering the amount of risk they have taken. These profiles are defined based on incremental levels of potential risk relative to the risk of an all-stock index. It's made up of composite indices representing the three major asset classes: stocks, bonds and cash. The asset class indices are weighted differently within each relative risk index to achieve the targeted risk level. The weightings are rebalanced monthly to maintain these levels. The DJ GLB Moderate index is 60% of All Stock Portfolio Risk.
The Dow Jones Industrial Average is an unmanaged index of 30 widely held stocks. The S&P 500 is an unmanaged index of 500 widely held stocks. The MSCI EAFE (Europe, Australia, Far East) index is an unmanaged index that is generally considered representative of the international stock market. MSCI Emerging Markets Index is designed to measure equity market performance in 23 emerging market countries. The index’s three largest industries are materials, energy and banks. The Russell 2000 is an unmanaged index of small cap securities. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. The Bloomberg Barclays U.S. Corporate High Yield Bond Index is composed of fixed-rate, publicly issued, non-investment grade debt, is unmanaged, with dividends reinvested and is not available for purchase. The index includes both corporate and non-corporate sectors. The corporate sectors are Industrial, Utility and Finance which include both U.S. and non-U.S. corporations. An investment cannot be made in these indexes. Index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. The performance noted does not include fees or charges, which would reduce an investor's returns. Asset allocation and diversification do not guarantee a profit nor protect against a loss. Any Opinions are those of Eric and Jenny Hilliard and are not necessarily those of RJFS or Raymond James. Investing in commodities is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising. Raymond James is not affiliated with and does not endorse the services or opinions of Jeff Saut.
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