February 2020 Perspective
Market & Economic Outlook — Coronavirus
Entering the New Year, our outlook for the global financial markets was relatively cautious, and it remains so today. We believe that given the extent of the strong rebound we had in 2019, with the S&P 500 up over 28%*, the US equity market was long overdue for a little breather and a correction of between 5 to 10%. While no one can predict what will spark a correction, it was evident to us that the market has been too complacent over these past few months. Even with signs of US economic growth starting to slow, and a multitude of extraordinary events such as the China trade situation, Iran conflict, Impeachment proceedings… and others, every market sell-off was met with strong buying. To us, this appeared to be a little irrational.
As I write this, the Dow Jones Industrial Average is now down 3.64% or 1055 points (2:33 P.M) and although it is not fun to watch, I do believe that this is healthy for the markets. You can’t have the strong year that we had in 2019, without having prices correct and find a new level of support. It is also important that corporate earnings and economic fundamentals be somewhat in sync with the market’s valuation. In our view, valuations were a little stretched. It now appears that the long-overdue correction is upon us and the coronavirus was the spark.
Originating in mainland China, the Coronavirus outbreak is proving to be particularly challenging for the elderly, and those with compromised immune systems. Thus far, it is resistant to vaccines and despite extensive containment efforts, the virus has now begun to spread internationally, further increasing anxiety. It is important to note that most international cases have been among people that have visited Wuhan. However, the virus has a reported incubation period between one and 14 days before symptoms appear, this trend could change and the number of cases across China and abroad could grow substantially.
Economic Outlook and the Coronavirus
Economic fundamentals remain positive and should help to support equity markets. While US GDP growth has slowed somewhat, it is still growing and expectations are for GDP growth of approximately 2% in 2020 with no recession in sight. Interest rates remain low with accommodative monetary policy, employment remains strong with US payrolls expanding in January by 225,000 far exceeding expectations. Of course, the unknown magnitude and duration of the coronavirus outbreak pose downside risks to the global growth outlook and the full and lasting impact on global economies and financial assets remain unclear.
In our view, it is too early to draw conclusions about the long-term impact of the coronavirus. Experts still do not have enough data to determine how lethal the virus really is. This week’s global economic data was quite strong and supportive, but it did not include the impact of the coronavirus. There is no question that the spread of the coronavirus has already reached a level where it will have a noticeable impact on China’s economy. On the Brightside, the Chinese government has responded quickly with a wide‑ranging set of short‑term stimulus measures to counter the economic impact and any initial market panic. Once the outbreak subsides, there is the potential that the Chinese economy could experience a strong rebound.
What should investors do now?
As I’ve emphasized in the past, it is never wise to make investment decisions based on short term market activity, emotion, or panic. We do believe that this is a correction and it will pass, however, it must first run its course. When the market reacts like it has today, with fast-paced activity and wide swings, it can easily snap back with news of positive developments.
I want to emphasize that investors should not abandon their long-term strategic asset allocations. We do believe, however, that it is prudent to adopt a more defensive posture to portfolio strategies. Now could be a good time to rebalance portfolios and adjust equity strategies by allocating into the sectors, industries, and fundamental factors that could provide less volatility and possibly outperform in a late-stage cyclical economy. Historically, during a late-stage economic cycle, quality companies that can use their competitive advantages to drive profit growth regardless of economic conditions, have outperformed (Source: Blackrock).
Most likely, the coronavirus outbreak will remain a key concern in the coming months as the virus spreads and uncertainty remains high. As a result, markets around the world are likely to remain volatile, however, the volatility will most likely be both on the downside, as well as the upside. As in the past, volatility will create opportunities and at PWA, we welcome those opportunities to rebalance portfolios and take advantage of lower prices for our long-term client accounts.
Do you understand the risk in your Portfolio?
At PWA, we can help you with a complimentary Risk Analysis Review. We use sophisticated portfolio analytics to run stress tests on portfolio allocations. We can then provide you with a report on how a portfolio may perform in different economic and market scenarios. The more informed you are about how your investments are positioned, the more you can relax, sleep well, and enjoy the things you love most.
Contact us at 800-499-4143 extension 3 or send an email to firstname.lastname@example.org with any questions you may have.
As I write this, the Dow Jones Industrial Average is now down 3.64% or 1055 points and although it is not fun to watch, I do believe that this is healthy for the markets.
Eleven Ways to Help Yourself Stay Sane in a Crazy Market
Keeping your cool can be hard to do when the market goes on one of its periodic roller-coaster rides. It’s useful to have strategies in place that prepare you both financially and psychologically to handle market volatility. Here are 11 ways to help keep yourself from making hasty decisions that could have a long-term impact on your ability to achieve your financial goals.
1. Have a game plan
Having predetermined guidelines that recognize the potential for turbulent times can help prevent emotion from dictating your decisions. For example, you might take a core-and-satellite approach, combining the use of buy-and-hold principles for the bulk of your portfolio with tactical investing based on a shorter-term market outlook. You also can use diversification to try to offset the risks of certain holdings with those of others. Diversification may not ensure a profit or guarantee against a loss, but it can help you understand and balance your risk in advance. And if you’re an active investor, a trading discipline can help you stick to a long-term strategy. For example, you might determine in advance that you will take profits when a security or index rises by a certain percentage, and buy when it has fallen by a set percentage.
2. Know what you own and why you own it
When the market goes off the tracks, knowing why you originally made a specific investment can help you evaluate whether your reasons still hold, regardless of what the overall market is doing. Understanding how a specific holding fits in your portfolio also can help you consider whether a lower price might actually represent a buying opportunity.
And if you don’t understand why a security is in your portfolio, find out. That knowledge can be particularly important when the market goes south, especially if you’re considering replacing your current holding with another investment.
3. Remember that everything is relative
Most of the variance in the returns of different portfolios can generally be attributed to their asset allocations. If you’ve got a well-diversified portfolio that includes multiple asset classes, it could be useful to compare its overall performance to relevant benchmarks. If you find that your investments are performing in line with those benchmarks, that realization might help you feel better about your overall strategy.
Even a diversified portfolio is no guarantee that you won’t suffer losses, of course. But diversification means that just because the S&P 500 might have dropped 10% or 20% doesn’t necessarily mean your overall portfolio is down by the same amount.
4. Tell yourself that this too shall pass
The financial markets are historically cyclical. Even if you wish you had sold at what turned out to be a market peak, or regret having sat out a buying opportunity, you may well get another chance at some point. Even if you’re considering changes, a volatile market can be an inopportune time to turn your portfolio inside out. Well-thought-out asset allocation is still the basis of good investment planning.
5. Be willing to learn from your mistakes
Anyone can look good during bull markets; smart investors are produced by the inevitable rough patches. Even the best investors aren’t right all the time. If an earlier choice now seems rash, sometimes the best strategy is to take a tax loss, learn from the experience, and apply the lesson to future decisions. Expert help can prepare you and your portfolio to both weathers and take advantage of the market’s ups and downs. There is no assurance that working with a financial professional will improve investment results.
6. Consider playing defense
During volatile periods in the stock market, many investors reexamine their allocation to such defensive sectors as consumer staples or utilities (though like all stocks, those sectors involve their own risks, and are not necessarily immune from overall market movements). Dividends also can help cushion the impact of price swings.
7. Stay on course by continuing to save
Even if the value of your holdings fluctuates, regularly adding to an account designed for a long-term goal may cushion the emotional impact of market swings. If losses are offset even in part by new savings, your bottom-line number might not be quite so discouraging.
If you’re using dollar-cost averaging — investing a specific amount regularly regardless of fluctuating price levels — you may be getting a bargain by buying when prices are down. However, dollar cost averaging can’t guarantee a profit or protect against a loss. Also consider your ability to continue purchases through market slumps; systematic investing doesn’t work if you stop when prices are down. Finally, remember that the return and principal value of your investments will fluctuate with changes in market conditions, and shares may be worth more or less than their original cost when you sell them.
8. Use cash to help manage your mind-set
Cash can be the financial equivalent of taking deep breaths to relax. It can enhance your ability to make thoughtful decisions instead of impulsive ones. If you’ve established an appropriate asset allocation, you should have resources on hand to prevent having to sell stocks to meet ordinary expenses or, if you’ve used leverage, a margin call. Having a cash cushion coupled with a disciplined investing strategy can change your perspective on market volatility. Knowing that you’re positioned to take advantage of a downturn by picking up bargains may increase your ability to be patient.
9. Remember your road map
Solid asset allocation is the basis of sound investing. One of the reasons a diversified portfolio is so important is that strong performance of some investments may help offset poor performance by others. Even with an appropriate asset allocation, some parts of a portfolio may struggle at any given time. Timing the market can be challenging under the best of circumstances; wildly volatile markets can magnify the impact of making a wrong decision just as the market is about to move in an unexpected direction, either up or down. Make sure your asset allocation is appropriate before making drastic changes.
10. Look in the rear-view mirror
If you’re investing long term, sometimes it helps to take a look back and see how far you’ve come. If your portfolio is down this year, it can be easy to forget any progress you may already have made over the years. Though past performance is no guarantee of future returns, of course, the stock market’s long-term direction has historically been up. With stocks, it’s important to remember that having an investing strategy is only half the battle; the other half is being able to stick to it. Even if you’re able to avoid losses by being out of the market, will you know when to get back in? If patience has helped you build a nest egg, it just might be useful now, too.
11. Take it easy
If you feel you need to make changes in your portfolio, there are ways to do so short of a total makeover. You could test the waters by redirecting a small percentage of one asset class to another. You could put any new money into investments you feel are well-positioned for the future, but leave the rest as is. You could set a stop-loss order to prevent an investment from falling below a certain level, or have an informal threshold below which you will not allow an investment to fall before selling. Even if you need or want to adjust your portfolio during a period of turmoil, those changes can — and probably should — happen in gradual steps. Taking gradual steps is one way to spread your risk over time, as well as over a variety of asset classes.
Remember that while they’re sound strategies, diversification, asset allocation, and dollar-cost averaging can’t guarantee a profit or eliminate the possibility of loss. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.
The SECURE Act and Your Retirement Savings
This legislation expands savings opportunities for workers and includes new requirements and incentives for employers that provide retirement benefits.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act was enacted in December 2019 as part of a larger federal spending package. This long-awaited legislation expands savings opportunities for workers and includes new requirements and incentives for employers that provide retirement benefits. At the same time, it restricts a popular estate planning strategy for individuals with significant assets in IRAs and employer-sponsored retirement plans.
Here are some of the changes that may affect your retirement, tax, and estate planning strategies. All of these provisions were effective January 1, 2020, unless otherwise noted.
Benefits for Retirement Savers
Later RMDs. Individuals born on or after July 1, 1949, can wait until age 72 to take required minimum distributions (RMDs) from traditional IRAs and employer-sponsored retirement plans instead of starting them at age 70½ as required under previous law. This is a boon for individuals who don’t need the withdrawals for living expenses, because it postpones payment of income taxes and gives the account a longer time to pursue tax-deferred growth. As under previous law, participants may be able to delay taking withdrawals from their current employer’s plan as long as they are still working.
No traditional IRA age limit. There is no longer a prohibition on contributing to a traditional IRA after age 70½ — taxpayers can make contributions at any age as long as they have earned income. This helps older workers who want to save while reducing their taxable income. But keep in mind that contributions to a traditional IRA only defer taxes. Withdrawals, including any earnings, are taxed as ordinary income, and a larger account balance will increase the RMDs that must start at age 72.
Tax breaks for special situations. For the 2019 and 2020 tax years, taxpayers may deduct unreimbursed medical expenses that exceed 7.5% of their adjusted gross income. In addition, withdrawals may be taken from tax-deferred accounts to cover medical expenses that exceed this threshold without owing the 10% penalty that normally applies before age 59½. (The threshold returns to 10% in 2021.) Penalty free early withdrawals of up to $5,000 are also allowed to pay for expenses related to the birth or adoption of a child. Regular income taxes apply in both situations.
Tweaks to promote saving. To help workers track their retirement savings progress, employers must provide participants in defined contribution plans with annual statements that illustrate the value of their current retirement plan assets, expressed as monthly income received over a lifetime. Some plans with auto-enrollment may now automatically increase participant contributions until they reach 15% of salary, although employees can opt out. (The previous ceiling was 10%.)
More part-timers gain access to retirement plans. For plan years beginning on or after January 1, 2021, part-time workers age 21 and older who log at least 500 hours annually for three consecutive years generally must be allowed to contribute to qualified retirement plans. (The previous requirement was 1,000 hours and one year of service.) However, employers will not be required to make matching or nonelective contributions on their behalf.
Benefits for Small Businesses
In 2019, only about half of people who worked for small businesses with fewer than 50 employees had access to retirement benefits.1 The SECURE Act includes provisions intended to make it easier and more affordable for small businesses to provide qualified retirement plans.
The tax credit that small businesses can take for starting a new retirement plan has increased. The new rule allows a credit equal to the greater of (1) $500 or (2) $250 times the number of non-highly compensated eligible employees or $5,000, whichever is less. The previous credit amount allowed was 50% of startup costs up to $1,000 ($500 maximum credit). There is also a new tax credit of up to $500 for employers that launch a SIMPLE IRA or 401(k) plan with automatic enrollment. Both credits are available for three years.
Effective January 1, 2021, employers will be permitted to join multiple employer plans (MEPs) regardless of industry, geographic location, or affiliation. “Open MEPs,” as they have become known, enable small employers to band together to provide a retirement plan with access to lower prices and other benefits typically reserved for large organizations. (Previously, groups of small businesses had to be related somehow in order to join an MEP.) The legislation also eliminates the “one bad apple” rule, so the failure of one employer in an MEP to meet plan requirements will no longer cause others to be disqualified.
Goodbye Stretch IRA
Under previous law, nonspouse beneficiaries who inherited assets in employer plans and IRAs could “stretch” RMDs — and the tax obligations associated with them — over their lifetimes. The new law generally requires a beneficiary who is more than 10 years younger than the original account owner to liquidate the inherited account within 10 years. Exceptions include a spouse, a disabled or chronically ill individual, and a minor child. The 10-year “clock” will begin when a child reaches the age of majority (18 in most states).
This shorter distribution period could result in bigger tax bills for children and grandchildren who inherit accounts. The 10-year liquidation rule also applies to IRA trust beneficiaries, which may conflict with the reasons a trust was originally created.
In addition to revisiting beneficiary designations, you might consider how IRA dollars fit into your overall estate plan. For example, it might make sense to convert traditional IRA funds to a Roth IRA, which can be inherited tax-free (if the five-year holding period has been met). Roth IRA conversions are taxable events, but if converted amounts are spread over the next several tax years, you may benefit from lower income tax rates, which are set to expire in 2026.
If you have questions about how the SECURE Act may impact your finances, this may be a good time to consult your financial, tax, and/or legal professionals.
1) U.S. Bureau of Labor Statistics, 2019
The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.
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