VNFA NEWS

Service Team Promotions
We are pleased to announce the promotions of Stefany Allen to Senior Administrative Assistant, and of Donna Young to Vice President, Client Service.

Stefany has been part of the VNFA team since February 2018, helping clients as Administrative Assistant to Founder & Chairman, Tom Riddle.

Donna has been at the firm since 1989. She has worked alongside Tom and many of his clients as one of VNFA’s first employees. In addition to her role as service representative, Donna is Head of Clients Services and Designated Principal.

Both Donna and Stefany will continue to serve Tom’s clients as part of their day-to-day responsibilities. Stefany will also support other advisor and clients, and Donna will be providing leadership and training for VNFA service team members.

The Markets This Week

by Connor Darrell CFA, Assistant Vice President – Head of Investments
U.S. equities generated gains for the second consecutive week as investors seemed to grow more confident in efforts to keep the novel coronavirus contained. International equities retreated on Thursday and Friday however after a significant surge in the number of confirmed cases of the disease. The surge in confirmed cases followed a diagnostic reclassification by Chinese authorities, which led to an overnight increase of about 15,000 cases. Markets seemed to interpret the diagnostic change more as a byproduct of shortages in available testing kits than as an issue with the integrity of reporting (which has been a concern for some as a result of China’s questionable handling of the SARs epidemic in 2003).

For now, we see no reason to adjust our already elevated assessment of geopolitical risks (see this week’s Heat Map for more details). The World Health Organization suggested late last week that cases of the virus outside of China’s Hubei Province (the epicenter of the outbreak) were levelling off, which seemed to help contribute to the market’s muted response to the overnight rise in confirmed diagnoses. The greatest risk to the global economy at this time remains supply chain disruptions, which are likely to continue until after cases of the virus have peaked. Manufacturing within China has taken a significant hit due to factory and plant closures as well as travel restrictions within the country. We will get another glimpse at hard data on Chinese manufacturing at the end of February with the release of China’s monthly PMI data, which is likely to show contraction. 

We would consider an additional elevation of our geopolitical risks rating should one of two things materialize; either a substantial increase in the death rate or evidence of an acceleration in the rate of contagion beyond infected provinces in mainland China (i.e. internationally). Currently, the death rate continues to hover right around 2%, though it has inched a little bit higher in recent weeks and currently stands at about 2.5%. Should that number begin increasing materially, it would suggest to us that either reporting integrity has been below standard or that the virus has been more severe than initially anticipated. With respect to contagion, the incredibly forceful travel restrictions imposed within China seem to have been effective in stalling the spread of the disease. However, should evidence begin to emerge that contagion has reaccelerated on an international scale, this would indicate to us that the significant economic impacts of the disease would not be confined to mainland China. We view such a scenario as low probability at this time, but it is a risk that deserves our ongoing attention.

Politics and Investing With so much news flow coming out of China with respect to the coronavirus, it has been easy to overlook all that has gone on in U.S. politics over the past several weeks. What is particularly interesting about the current state of domestic politics is that it seems there are those on both ends of the political spectrum who voice concerns about what an opposition victory might mean for their investment portfolios. Our belief is that investors should do their best to disentangle politics from investing, as the controlling political party has historically had very little influence on market returns over time. We anticipate that markets may experience short-term bouts of volatility simply as a result of how polarizing the 2020 campaign may be, but we expect the focus of markets to remain elsewhere until we have more clarity on who the Democratic candidate may be. Following the results in Iowa and New Hampshire, it appears that it may be quite some time before that clarity is realized. The first real opportunity to narrow the pack will come on March 3, when over 34% of available delegates will be up for grabs on “Super Tuesday”.

The Numbers & “Heat Map”

THE NUMBERS
Sources: Index Returns: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized excluding dividends. Interest Rates: Federal Reserve, Freddie Mac

U.S. ECONOMIC HEAT MAP
The health of the U.S. economy is a key driver of long-term returns in the stock market. Below, we grade 5 key economic conditions that we believe are of particular importance to investors.

US ECONOMY

CONSUMER HEALTH

VERY POSITIVE

The consumer has been the bedrock of the US economy through much of the current expansion and we have seen little to suggest that this cannot continue.

CORPORATE EARNINGS

NEUTRAL

Corporate earnings growth was weak throughout 2019 as a result of slowing in the global economy and trade policy uncertainty. However, analysts are expecting mid to high single digit earnings growth in 2020, which will be important to sustaining recent levels of equity returns.

EMPLOYMENT

VERY POSITIVE

The economy added 225,000 new jobs in January, exceeding consensus expectations. The report also indicated that the unemployment rate ticked up to 3.6% as a result of more people looking for jobs. The expansion of the labor force should be taken as an additional sign of the confidence

Americans have in the health of the labor market.

INFLATION

POSITIVE

Inflation is often a sign of “tightening” in the economy and can be a signal that growth is peaking. Recent inflationary data has increased slightly, but inflation remains benign at this time, which bodes well for the extension of the economic cycle.

FISCAL POLICY

POSITIVE

The Tax Cuts and Jobs Act of 2017 lowered the effective tax rates for many individuals and corporations. We view the cuts as a tailwind for economic activity over the next several years.

MONETARY POLICY

POSITIVE

With the Federal Reserve expected to refrain from any further adjustments to interest rates without a material change in the economic outlook, it is unlikely that changes in Fed Policy will disrupt the economic cycle in the near future. Furthermore, the low absolute level of interest

rates remain a positive for markets.

GLOBAL CONSIDERATIONS

GEOPOLITICAL RISKS

NEGATIVE

Our assessment of Geopolitical Risks is NEGATIVE at this time as a result of the continued spread of the coronavirus. Encouragingly, the disease remains largely confined to mainland China, but the situation is fluid. The virus poses a threat to economic growth, manufacturing activity, and

consumer spending in affected regions.

ECONOMIC RISKS

NEUTRAL

Due to low inflation and weak economic activity, central banks around the world remain in a very accommodative stance. We have seen some recent evidence of modest recovery in places like Germany, but overall, we expect global economic growth to remain modest.

The “Heat Map” is a subjective analysis based upon metrics that VNFA’s investment committee believes are important to financial markets and the economy. The “Heat Map” is designed for informational purposes only and is not intended for use as a basis for investment decisions.

“Your Financial Choices”

The show airs on WDIY Wednesday evenings, from 6-7 p.m. The show is hosted by Valley National’s Laurie Siebert CPA, CFP®, AEP®.

This week, Laurie will address: “Listener Tax Questions.” Listeners can call 610-758-8810 during the live show, or submit questions online at yourfinancialchoices.com/contact-laurie

Recordings of past shows are available to listen or download at both yourfinancialchoices.com and wdiy.org.

The Markets This Week

by Connor Darrell CFA, Assistant Vice President – Head of Investments
Global equities recorded healthy gains last week as optimism rose that the economy could remain resilient in the face of the new coronavirus outbreak. At this point, the total impact on economic activity remains impossible to quantify, and investors can expect markets to remain jittery until the virus is eventually contained. We have seen little over the last week that would help us to update our current assessments of contagion and severity. The death rate among those infected still sits at around 2%, and while the rate of contagion has also remained somewhat stable, a recent Chinese research report suggests that the virus can spread in multiple ways. Both of these metrics deserve our ongoing attention, as they can help us to assess the potential magnitude of the disease’s impact on the economy, as well as whether the economic effects will largely remain confined to mainland China.

At present, the most impacted areas of the market outside of Chinese equities have been at the sector level. The travel and industrial sectors, as well as some commodity markets have seen more volatility than most other assets as a result of the immediate impacts of quarantines and reduced global travel demand. The technology sector is one that has continued to perform well but could come under pressure if recent containment efforts in China fall short and the virus is able to spread beyond the Hubei Province. One of the biggest differences between the SARS outbreak of 2003 and the current situation is that China is now a much larger component of the global economy, particularly in the technology supply chain. While Hubei province itself is not a major technology hub within China, there are multiple neighboring provinces which contain key production centers for many key inputs in the production of smart phones, TVs, and semiconductors.

The Numbers & “Heat Map”

THE NUMBERS
Sources: Index Returns: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized excluding dividends. Interest Rates: Federal Reserve, Freddie Mac

U.S. ECONOMIC HEAT MAP
The health of the U.S. economy is a key driver of long-term returns in the stock market. Below, we grade 5 key economic conditions that we believe are of particular importance to investors.

US ECONOMY

CONSUMER HEALTH

VERY POSITIVE

The consumer has been the bedrock of the US economy through much of the current expansion and we have seen little to suggest that this cannot continue.

CORPORATE EARNINGS

NEUTRAL

Corporate earnings growth was weak throughout 2019 as a result of slowing in the global economy and trade policy uncertainty. However, analysts are expecting mid to high single digit earnings growth in 2020, which will be important to sustaining recent levels of equity returns.

EMPLOYMENT

VERY POSITIVE

The economy added 225,000 new jobs in January, exceeding consensus expectations. The report also indicated that the unemployment rate ticked up to 3.6% as a result of more people looking for jobs. The expansion of the labor force should be taken as an additional sign of the confidence

Americans have in the health of the labor market.

INFLATION

POSITIVE

Inflation is often a sign of “tightening” in the economy and can be a signal that growth is peaking. Recent inflationary data has increased slightly, but inflation remains benign at this time, which bodes well for the extension of the economic cycle.

FISCAL POLICY

POSITIVE

The Tax Cuts and Jobs Act of 2017 lowered the effective tax rates for many individuals and corporations. We view the cuts as a tailwind for economic activity over the next several years.

MONETARY POLICY

POSITIVE

With the Federal Reserve expected to refrain from any further adjustments to interest rates without a material change in the economic outlook, it is unlikely that changes in Fed Policy will disrupt the economic cycle in the near future. Furthermore, the low absolute level of interest rates remain a positive for markets.

GLOBAL CONSIDERATIONS

GEOPOLITICAL RISKS

NEGATIVE

Our assessment of Geopolitical Risks is NEGATIVE at this time as a result of the continued spread of the coronavirus outside of mainland China. The virus poses a threat to economic growth and consumer spending in affected regions as a result of the “fear factor” it induces.

ECONOMIC RISKS

NEUTRAL

Due to low inflation and weak economic activity, central banks around the world remain in a very accommodative stance. We have seen some recent evidence of modest recovery in places like Germany, but overall, we expect global economic growth to remain modest.

The “Heat Map” is a subjective analysis based upon metrics that VNFA’s investment committee believes are important to financial markets and the economy. The “Heat Map” is designed for informational purposes only and is not intended for use as a basis for investment decisions.

Did You Know…?

Mid-February Tax Reminders
We need each of our tax clients to complete a questionnaire every year as part of our return preparation process. Our team has either sent you a paper copy or a link. Please make sure you complete this and deliver it to us, in addition to your tax documents. Click here to access the online questionnaire.

S Corporation and Partnership returns with a December 31 year-end are due March 16! Send us your information as soon as you have all or most of it together so that we can get ahead of this deadline.