The Markets This Week

by Connor Darrell CFA, Assistant Vice President – Head of Investments
Most major U.S. equity indices closed out last week at all-time highs, bolstered by seemingly solidified expectations that the Federal Reserve will opt to cut interest rates when it meets in just a couple short weeks. During his semi-annual testimony on Capitol Hill, Fed Chair Jerome Powell noted that uncertainties surrounding global growth and trade continue to cast a shadow over the economic outlook and that inflationary pressures may remain persistently weak. Despite these risks, the general tone of Powell’s comments was still relatively sanguine, supporting our own view that the economy remains relatively healthy, but that increasing weakness abroad could put a cap on the strength of future growth rates.

Setting Expectations
As long-term investors, one of the most important keys to success is discipline. However, maintaining that discipline over the course of a complete market cycle can be very challenging. Volatility can be difficult to bear, especially when the future seems uncertain and our financial well-beings are at stake. That is why we believe one of the best tools an investor can have is a realistic impression of what can be expected from their portfolio. That way, when that next “crisis” inevitably strikes, the element of surprise is diminished, and a decision based on emotion is less likely to be made.

The S&P 500 closed above 3,000 for the first time in history last week. A variety of factors have allowed stocks to climb to all-time highs this year, including expectations for easy monetary policy from the Fed, perceived progress with U.S.-China trade negotiations, and relatively healthy U.S. economic data. But with the U.S. stock market now up close to 20% over the past six months, it is important for investors to set expectations for the future of long-term returns.

For most of us, remaining disciplined requires an understanding of economic fundamentals and valuations, which are the two most important drivers of long-term returns (not Fed policy or trade relations). It is a core tenet of investing that valuations are an efficient predictor of future returns, and that buying stocks when they are cheap has historically been much more successful than buying stocks when they are expensive. Of course, after a strong 20% run over the course of just six months, stocks are more expensive than they were just a short time ago, but the good news for investors is that by most measures of valuation, stocks are still far from “bubble” territory. The current P/E ratio for the overall market stands at about 17x (meaning that investors are paying $17 today for every $1 of future profits), which is much lower than the 25x level that was seen during the tech bubble in the early 2000s. However, compared to the historical average of about 15x, stocks certainly are not cheap either.

As the current economic cycle continues to mature, it will be important for investors to recognize that from current levels, future returns are likely to be a bit lower than they were during the past several years. Luckily, even returns that are meaningfully lower than those achieved during the bulk of this bull market can still be robust enough in a world where inflationary pressures remain muted. With that in mind, if we are able to successfully reset our expectations, we are likely to put ourselves in a much better position to navigate future volatility with better grace and discipline. Often times, staying invested and avoiding the opportunity costs of missed profits can give us a head start on a prosperous retirement.

“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 and her guests, Rodman Young, CPA/PFS, CFP® from Valley National Financial Advisors and Lori Christine Young, MAPC, MAHS from Counseling and Integrated Spirituality, will discuss: “Surviving the Death of a Spouse”

Questions can be submitted live on air by calling 610-755-8810 or sent in online anytime.

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

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

US ECONOMIC HEAT MAP
The health of the US 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.

CONSUMER SPENDING

A

Our consumer spending grade remains an A. Surveys of US consumers continue to indicate that the consumer is in a strong position.

FED POLICIES

B+

We have increased our Fed Policies grade to a B+ after Jerome Powell commented that “a number” of Fed decision makers believe that the case for a rate cut in the near future has strengthened.

BUSINESS PROFITABILITY

B-

As was anticipated, first quarter earnings revealed a tapering of growth. Expectations for Q2 earnings are also relatively low. However, this is largely a result of the fact that YoY comparisons are made relative to a historically strong 2018.

EMPLOYMENT

A

The US economy added 224,000 new jobs in June, beating consensus estimates by a wide margin. We continue to view the jobs market as very healthy.

INFLATION

B

Inflation is often a sign of “tightening” in the economy, and can be a signal that growth is peaking. The inflation rate remains benign at this time, but as the economic cycle continues to mature, this metric will deserve our ongoing attention.

OTHER CONCERNS

INTERNATIONAL RISKS

7

We have raised our international risks rating to a 7 as a result of rising tensions between the US and Iran, as well as the recent decision by the Trump administration to impose a sales ban on Chinese tech company Huawei. The ban is representative of the risks associated with the growing technology rivalry between the US and China.

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.

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

US ECONOMIC HEAT MAP
The health of the US 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.

CONSUMER SPENDING

A

Our consumer spending grade remains an A. Surveys of US consumers continue to indicate that the consumer is in a strong position.

FED POLICIES

B+

We have increased our Fed Policies grade to a B+ after Jerome Powell commented that “a number” of Fed decision makers believe that the case for a rate cut in the near future has strengthened.

BUSINESS PROFITABILITY

B-

As was anticipated, first quarter earnings revealed a tapering of growth. According to Facset, the blended earnings decline for Q1 2019 is -0.4% (with 98% of S&P 500 companies having reported). However, more than 75% of these companies have reported earnings that were higher than consensus estimates.

EMPLOYMENT

A

The US economy added 224,000 new jobs in June, beating consensus estimates by a wide margin. We continue to view the jobs market as very healthy.

INFLATION

B

Inflation is often a sign of “tightening” in the economy, and can be a signal that growth is peaking. The inflation rate remains benign at this time, but as the economic cycle continues to mature, this metric will deserve our ongoing attention.

OTHER CONCERNS

INTERNATIONAL RISKS

7

We have raised our international risks rating to a 7 as a result of rising tensions between the US and Iran, as well as the recent decision by the Trump administration to impose a sales ban on Chinese tech company Huawei. The ban is representative of the risks associated with the growing technology rivalry between the US and China.

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…?

by Mae Gerhart, CPA – Tax Accountant / Financial Planning Professional
When you leave a job, you can often leave your 401(k) in your prior employer’s plan. Some 401(k) plans require immediate distributions if the balance is $5,000 or less.

If you receive a distribution check from your 401(k) there may be significant tax consequences, such as including it in income and an additional 10% early withdrawal penalty! One way to avoid this penalty is to perform a direct IRA rollover which transfers the money directly from your 401(k) to an IRA.

Some benefits of a self-directed IRA rollover include:

  • Such a transfer can be accomplished tax-free
  • You can increase the investment flexibility and choices in your Rollover IRA
  • A rollover IRA gives you the most distribution features and flexibility in retirement

Distributions from IRAs may qualify for an exception to a 10% early withdrawal penalty before age 59 ½ if used for a first-time home purchase ($10,000 lifetime maximum), qualified higher education expenses for yourself, your spouse, child, or grandchild, or for health insurance premiums for certain unemployed individuals. But it’s all in the name–these exceptions do not work if the money was pulled out of a 401(k)!

It doesn’t always make sense to rollover your 401(k) to an IRA. For example, if you are separating from service in or after the year you reach 55 (50 for qualified public safety employees) or if you hold employer stock in your 401(k), there might be other strategies available.

Please reach out to your financial advisor to help you determine the best course of action for your 401(k) at an old employer.

RELATED ARTICLE: Switching jobs? Don’t make these mistakes with your retirement plan (cnbc.com)