What a difference a year makes. 2018 ended with a swooning market, rising interest rates and escalating tariff tensions. 2019, on the other hand, ended with declining interests, trade tensions subsiding and markets vaulting to new all-time highs. The US Budget deficit01, which now exceeds a Trillion dollars, is a serious concern having widened for four consecutive years, especially during a period of economic growth and full employment. The supposed increase in tax revenues resulting from the 2017 supply-side tax cuts has yet to lower the deficit. One can imagine what’s likely to happen to the deficit during the next recession?
The SECURE ACT, 02 which was sneakily passed by attaching it to a must pass Appropriation Bill to fund the government, unfortunately has some dramatic implications for newlyinherited Beneficiary IRAs. The ACT essentially eliminates the stretch IRA and requires non-spousal recipients to liquidate the inherited IRA within 10 years rather than over their lifetime. The required liquidation represents an incredibly large stealth tax hike that greatly accelerates tax collection on those assets. On the positive side, the ACT provides incentives to small employers to encourage retirement savings of employees. Additionally, the age for Required Minimum Distributions has been increased to age 72 from 70 1/2.
“Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria”, said the late Sir John Templeton, the legendary value investor, laying out the four stages of a Bull market. With Bear Market return data now expunged from mutual fund data, don’t be enamored with 10-year return data being touted by many fund families. Focus on data going back to the early 2000’s, which represents two full market cycles to better understand the risk/return characteristics of a fund in both Bull and Bear Markets. What the Bull market giveth, a Bear market can taketh away so caution is the watchword!
The low interest rate for longer policy of world-wide central banks has perturbed valuations causing asset bubbles03. Given this is now the longest Bull Market04 in history, equity valuations are high with respect to many historic metrics05. An inverted yield curve06, which occurred last year, has frequently been a precursor to economic downturns07, but not always. With the economy being at or near full employment, wage push inflation08 may eventually result in higher inflation as businesses compete for employees.
Conflicting economic signals make for a confusing investment environment. Declining CEO confidence09 has resulted in lower corporate spending. With the effects of the corporate tax cuts wearing off, lower capital expenditures10 are also a concern to the continued economic expansion as are geopolitical tensions.
Factors working in favor of a continued economic expansion are low inflation, low energy costs, relatively low interest rates, 50-year low unemployment and central bank liquidity all act as economic stimulus. Tariffs have been a headwind and have slowed global growth but have subsided somewhat as of late with the signing of USMCA and China Phase 1 trade agreements.
With this being the longest economic expansion11 and Bull market in history, investors have but a distant memory of the financial crisis of 2008 and the historic recovery that followed, which has had numerous setbacks along the way. This market is reminiscent of the late 90’s market with this being one of the longest periods with Growth outperforming Value12, which likely culminates with sector rotation when this Bull market comes to fruition.
Where the market goes from here is anyone's guess but this Bull market, as with ALL Bull markets of the past, will eventually succumb to a recession and Bear market. Market volatility will likely continue and is exacerbated by unexpected exogenous events and geopolitical tensions. Given the impeachment trial of the President, 2020 will likely be a contentious election year13, which may increase uncertainty for the equity markets.
If you have any concerns because of market volatility or the current Geopolitical environment, a member of the Iron Belt Partners Team will gladly discuss any concerns and schedule an appointment to meet if necessary. Our contact information is:
Lindsay M. Turchetta lturchetta@wradvisors.com (724) 493-9473
John D. Martin JDMartin@wradvisors.com (412) 925-7031
Working as a team in an effort to better serve our clients!
01 Source: “US government’s annual budget deficit largest since 2010” on Reuters.com by Lindsay Dunsmuir
02 Source: “With President’s Trump’s signature, the SECURE ACT is passed” on Marketwatch.com by Alessandra Malito
03 Source: “‘Mother of all bubbles’ could blow up the economy if profits don’t improve” on Marketwatch.com by Shawn Langlois
04 Source: “Longest bull market in history is cracking as 'artificial support' fades” on CNBC.com by Stephanie Landsman
05 Source: “S&P 500 is now more overvalued than ever” on MarketWatch.com by Chris Matthews
06 Source: “Yield curve and predicting recessions” on FAS.org by Mark Keightley and Marc Labonte
07 Source: “After yield curve inverts, here’s how the market tends to perform since 1978” on MarketWatch.com by Mark DeCambre
08 Source: “Why wages are finally rising, 10 years after the Recession” on NYTimes.com by Ben Casselman
09 Source: “CEO Confidence Plunges to Lowest Since 2008 Crisis in Warning Sign” on Investopedia.com by Mark Kolakowski
10 Source: “Capital Spending outlook another worry ahead of earnings” on Reuters.com by Caroline Valetkevitch
11 Source: “This is now the longest economic expansion in history” on cnbc.com by Yun Li
12 Source: “Dominance of growth over value is a trade that’s nowhere near over” on MarketWatch.com by Ryan Vlastelica
13 Source: “The year leading up to a presidential election tends to be below average” on MarketWatch by Mark Hulbert
This communication is meant to be general in nature and should not be construed as investment or financial advice related to your personal situation. You should consult your tax, legal, and/or financial advisor prior to making any financial decisions. The views expressed here are those of the authors, John Martin & Lindsay Turchetta, and not necessarily those of LPL Financial. Information is based on data gathered from what are believed to be reliable sources. The opinions, and other information contained in this article are subject to change continually and without notice of any kind. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties, which change over time and may not come to pass.
Investments are not guaranteed and are subject to investment risk including the possible loss of principal. Past performance is not indicative of future results. 02/20
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