At the beginning of the year with lots of headwinds facing stocks and the bull market entering its 11th year, not even the most optimistic market watchers would have predicted a year as strong as 2019, when nearly every asset class was up strongly. It was a sharp contrast to 2018 when nearly everything was down. A repeat performance this year is highly unlikely, however, there is reason to believe the market could continue to rise in 2020. Some of the positives include a relatively strong job market and U.S. consumer and a low bar for corporate earnings which were mostly flat in 2019.
Additionally, the Federal Reserve is unlikely to depart from its accommodative stance in an election year. It is important to note, though, that any time the market goes for a full decade without a recession or significant decline in stock prices there is a considerable risk of mean reversion, and today’s worry list remains long. Just to name a few, there is the violence in the Middle East, the simmering global trade war, uncertainty surrounding the presidential election and a slowdown in manufacturing. Given this balanced picture of where things stand, investors should remain diversified and long on stocks in 2020 but with a sense of caution.
Earnings Rebound as the Next Catalyst
With the Federal Reserve’s ammunition to support the market somewhat more limited and valuations already creeping up, there are not as many possible catalysts for a continued rally in 2020. The most likely driver will be corporate earnings, which were largely flat in 2019 despite a relatively strong economy. The benefit of flat earnings in 2019 is an easier basis for comparison in 2020, and we expect stronger earnings to help support the market.
De-Globalization and Geopolitical Uncertainty
Globalization was thought to be an unstoppable wave that would rapidly transform developing markets and lift all boats in its rising tide with better economic cooperation and increased trade. To the surprise of most experts, however, with the Trump administration’s trade war with China, Brexit and the rise of protectionist, nationalist leaders across the globe have driven a widespread shift toward de-globalization. The implications of this movement are hard to predict. It is likely to result in a less certain global economy and a possible increase in trade wars, violence and instability. Geopolitical events will likely be a major factor in the markets in 2020. Amid global uncertainty, however, the U.S. market remains the best safe haven.
Are “Unicorns” the New Dot Com Bubble?
With the implosion of heavily hyped co-working start up WeWork, the decline of Uber and a string of disappointing “unicorn” IPOs, some of the magic seems to have gone out of flashy Silicon Valley start-ups. The inflated valuations of many of these companies were driven by venture capital and other private equity companies with lots of capital aggressively chasing start-ups with no profit in the hopes that they will become the next Google or Facebook. As many of these former stars disappoint, there is increasing concern that the whole private equity asset class has become inflated, reminiscent of the 1990’s internet bubble where companies with no profit drove a huge bull market and then crashed. While this is concerning, because these companies are closely held private investments, the risk is somewhat more contained than the Dot Com boom and less likely to create a systemic crash. Most areas of the market still have reasonable valuations based on sound fundamentals.
Financial Planning Update: What You Should Know About the SECURE Act
In the last days of 2019, President Trump signed into law the wordily-named Setting Every Community Up for Retirement Enhancement (SECURE) Act, which some experts have called the largest change in retirement rules in more than a decade. Still, the changes are not earth-shattering and mostly consist of minor adjustments with the aim of making retirement plans more accessible and extending age limits to adjust for increasing life expectancy. Most the new rules will benefit investors, with a few notable exceptions. Though there are many rule updates and a lot of additional nuances to each rule, here is an overview of some of the more impactful changes: 1) The age for taking required minimum distributions for IRAs, 401(k)s and other tax advantaged retirement plans starting in 2020 has been extended from 70.5 to 72. 2) The rule eliminates the maximum age cap for contributions to IRAs (it was previously 70.5) so you can keep contributing indefinitely assuming you are still earning income. 3) Small business employers will be given incentives (tax credits) for offering employees 401(k) plans and will have more options for lower cost multi-employer plans. 4) Annuities are now included among the investment options allowed in 401(k)s and the fiduciary duty for these products is shifted from the employer to the provider of the product. 5) The law eliminates the so-called “stretch” IRA for non-spouse beneficiaries, requiring that the inheritor liquidate the plan over 10 years, rather than more gradually over his or her lifetime. Numbers 1-3 above are benefits for people trying to save for retirement and reduce taxes. Number 4 could result in In the last days of 2019, President Trump signed into law the wordily-named Setting Every Community Up for Retirement Enhancement (SECURE) Act, which some experts have called the largest change in retirement rules in more than a decade. Still, the changes are not earth-shattering and mostly consist of minor adjustments with the aim of making retirement plans more accessible and extending age limits to adjust for increasing life expectancy. Most the new rules will benefit investors, with a few notable exceptions. Though there are many rule updates and a lot of additional nuances to each rule, here is an overview of some of the more impactful changes:
1) The age for taking required minimum distributions for IRAs, 401(k)s and other tax advantaged retirement plans starting in 2020 has been extended from 70.5 to 72.
2) The rule eliminates the maximum age cap for contributions to IRAs (it was previously 70.5) so you can keep contributing indefinitely assuming you are still earning income.
3) Small business employers will be given incentives (tax credits) for offering employees 401(k) plans and will have more options for lower cost multi-employer plans.
4) Annuities are now included among the investment options allowed in 401(k)s and the fiduciary duty for these products is shifted from the employer to the provider of the product.
5) The law eliminates the so-called “stretch” IRA for non-spouse beneficiaries, requiring that the inheritor liquidate the plan over 10 years, rather than more gradually over his or her lifetime. Numbers 1-3 above are benefits for people trying to save for retirement and reduce taxes. Number 4 could result in more pricey and complex investment options in retirement plans, reversing the trend towards low cost, passive index funds. Number 5, for some people, mainly high net worth families trying to pass on wealth to children in a tax-efficient manner, results in the loss of a substantial benefit.
What We’re Reading
- 2020: What a Time To Be Alive: A common theme in history is that progress happens too slowly to notice while setbacks happen too quickly to overlook. It’s a shame, because the amount of progress we’ve made during most of our lifetimes is both astounding and overlooked. … (Article)
- A Guide to the Markets from JP Morgan: This report contains many detailed charts explaining the state of the economy and the markets at the end of 2019. … (Article)
- Apple contributed more than 8% and Microsoft more than 6% of the S&P 500 return in 2019: The two tech giants surged 85% and 54% this year, respectively. … (Article)
- The Bias of Behavioral Economics – Seeing Bias Wherever it Looks: Despite increasing influence and Nobel Prizes some critics are questioning the widespread use of this psychological perspective on markets. … (Article)
Market Snapshot
For Week Ending 12/31/2019 (Cumulative Returns) 1
Did You Know?
How did the Market Perform During Times of War? You might be Surprised
From the start of [World War I] in 1914 until the war ended in late 1918, the Dow was up more than 43% in total or around 8.7% annually. World War II had a similarly counter intuitive market outcome. … From the start of WWII in 1939 until it ended in late 1945, the Dow was up a total of 50%, more than 7% per year. So, during two of the worst wars in modern history, the U.S. stock market was up a combined 115%. .… (Article)
Presented by the Investment Committee of Lake Street, an SEC Registered Investment Adviser.
- Source – Morningstar, Inc. Global Stocks is represented by MSCI ACWI Index, Developed Markets is represented by MSCI EAFE Index, and Emerging Markets is represented by MSCI EM Index. Corporate Bonds is presented as the Bloomberg-Barclays U.S. Aggregate Bond Market Index. Municipal Bonds is presented as the Bloomberg-Barclays Municipal Bond Market. High Yield Bonds is presented as the Bank of America-Merrill Lynch U.S. High Yield Index. 10 Year Treasury refers to the valuation of a 10 Year Treasury Note, a debt obligation issued by the U.S. Department of the Treasury. Fed Funds Target represents upper limit of the federal funds target range established by the Federal Open Market Committee. Inflation Rate provided for the purposes of this report by the U.S. Bureau of Labor Statistics. Unemployment Rate calculated by the U.S. Bureau of Labor Statistics. WTI Crude Oil refers to the price of a barrel of West Texas Intermediate (NYMEX) Crude Oil. Gold – Spot Price relates to the valuation of an ounce of gold, as traded on the NYSE Arca Exchange. U.S. Dollar refers to the U.S. Dollar Index (DXY). All Returns are denominated in USD (United States Dollar), unless otherwise explicitly noted.
The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon.
