Happy New Year! Happy new decade. Considering this decade starts with 2020, can we expect perfect vision as to what the future will bring? Probably not. However, we will continue to assess the probabilities and make the best, informed decisions possible. In 2019, there were very few poor investment decisions other than to not invest at all. Every major asset class went up in value. The US stock market rose almost 30%. International markets climbed over 20%. US fixed income markets improved about 10%. Even oil prices eked out a nice return in 2019.
This coming year should be interesting. The election will receive a lot of attention from journalists on the heels of the impeachment of our sitting president. Though the House voted to impeach President Trump, the Senate is extremely unlikely to remove him from office highlighting a major political divide in this country. In a December article of The Wall Street Journal, Gerald Seib referred to a WSJ/NBC News poll showing that 91% of Republicans approve of President Trump while only 6% of Democrats do. That 85% gap is the largest on record. For some perspective, the worst the divide ever got during the Obama administration was 65%. For President Carter, the worst was only 16%, and he was a one-term president.
The polarization seems to be driven at least in part by modern technology and media coverage. The algorithms on our devices stream one-sided news to us. It takes effort to see coverage from multiple perspectives or even to find neutral coverage. For those interested in where those biases lie, use the button to see an infographic on the subject:
At least members of Congress realize American citizens would like them to work to improve the public good even while they debate the merits of impeachment. They recently passed two major pieces of legislation. The first is the new North American Free Trade Agreement (NAFTA), now called The United States, Mexico, Canada Agreement (USMCA). This agreement tweaked NAFTA adding more labor rights and language to protect digital rights.
The second piece snuck its way into the spending bill that funds the government for the next fiscal year. It is called the Setting Every Community Up for Retirement Enhancement (SECURE Act). Clearly, a whole team of wonks was needed to make that acronym work. The Act contains several interesting new rules. For starters, the required minimum distribution age was bumped to 72 from 70½. It is not retroactive, so it only affects people who turn 70½ in 2020 and beyond. Secondly, the Act allows annuities in 401(k) plans. While this probably won’t affect too many of our clients, it will require a close analysis of the implemented provisions; annuities are generally expensive products, but may be appropriate in some situations.
Perhaps the most significant new provision is the elimination of the stretch IRA. Previously, inherited IRAs to non-spouses had to be distributed throughout the beneficiary’s life. Thus, for a child beneficiary, the life of the IRA stretched well beyond the IRA’s original purpose which was to provide retirement income to the original owner. Now, all inherited IRAs must be distributed within ten years. This will create interesting tax situations. People who inherit an IRA during peak earnings years will now pay taxes at the highest possible tax rate. Thus, we’ll need to perform more multi-generational tax planning to create the most efficient strategies. Roth conversions will be even more valuable if they can be done at a lower tax rate during the aging parent’s life. Roth IRAs will also need to be distributed in ten years, but there are no tax consequences.
How strong is the economy? Even this seemingly simple question is open to debate. The nearly 30% rise in the stock market in 2019 suggests a strong economy. However, if it is so strong, why did the Fed need to cut interest rates? Earnings actually fell for S&P 500 companies this year. The entire gain in the market therefore came from a 2% dividend yield and a 30% increase in the market multiple. Of course, the market is generally forward looking. The 19.8% drop in the S&P 500 in the fourth quarter of 2018 could simply have been in anticipation of the earnings recession we’ve had this year. The rebound in 2019 is suggesting a pickup in earnings growth for 2020. Presently, analysts do expect a 14% rise in earnings.
The economy as measured by Gross Domestic Product has been stunningly steady and consistent at around 2%. This has been true for much of the past decade despite recovering from a financial crisis. It is the first full decade without a recession in US history, though GDP fell during two quarters in 2011. Recoveries from financial crises are notoriously difficult because the major deleveraging that usually takes place stunts growth. It is therefore not surprising GDP hasn’t grown faster. The low growth makes the economy more susceptible to shocks. This makes a decade long streak all the more impressive. Still, we would normally see government debt as a percentage of GDP shrink after such a long recovery. It’s actually going the other way. Could we be borrowing against tomorrow’s growth for gains today? There are a lot of positive trends for 2020: Earnings are growing, the tariff wars are subsiding, the Brexit deal is nearing, and all this while employment growth continues, and interest rates are stable. Beyond that, well, we’ll probably need a new prescription to see what follows.
White Pine Vision
We officially hired Michael Molitor as a research assistant. Michael is a recent MSU grad, so our ‘house divided’ adds another to the green team. He is presently working toward a Chartered Financial Analyst (CFA) designation and sat for level I in December. There are two major designations in the investment advisory space: CFA and CFP. A CFA is a graduate level program that focuses on valuation analysis, portfolio management, and ethics. To pass, you must successfully complete three rigorous tests that are each six hours long and have over four years of work experience in the field.
Will Johnson, hired just over a year ago, has the other designation, a Certified Financial Planner. The CFP is also a graduate level program. It is broader in scope, though not as deep in any one subject. It covers general areas of retirement planning, insurance, estate planning, taxes, and ethics. CFPs must complete a course that covers these major topics, pass a six-hour exam, and have three years of work experience.
As many of you know, our team spends lunch time sharing the challenge of the Wall Street Journal crossword puzzle nearly every day. While each of us might struggle to complete a puzzle alone, our diversified knowledge base usually allows us to quickly finish it together. This serves as an apt metaphor for the team we are building here at White Pine. Each talented member’s skill set complements the others’ abilities and adds to the strong ethical and family-oriented culture Russ has carefully cultivated. The meaningful work we do and relationships we form at White Pine are extremely fulfilling, and we eagerly look forward to serving our clients to the very best of our collective abilities in 2020 and beyond.
Anthony J. DiGiovanni, CFA