Happy New Year It is the last day of 2019! Our offices will be closed one more time tomorrow on New Year’s Day and re-open on Thursday morning, January 2. We wish you all a happy, safe and prosperous new year.
We Are Hiring Our team is seeking a full-time Investment Research Analyst to serve as an active contributor and centralized resource for the investments department.valleynationalgroup.com/join-our-team
Time for Taxes A New Year means it is time for our team to start sending out tax questionnaires and related instructions for the tax prep season. If you have engaged us to prepare your tax return, we will be sending out the information you need from us and guidance about what we need from you, starting next week.
The SECURE
Act was signed into law on December 20. SECURE stands for Setting Every
Community Up for Retirement Enhancement. The Act changes a number of rules related
to tax-advantaged retirement accounts. Investopedia.com
provided this overview of the major provisions:
Make it easier for small businesses to set up 401(k)s by increasing the cap under which they can automatically enroll workers in “safe harbor” retirement plans, from 10% of wages to 15%.
Provide a maximum tax credit of $500 per year to employers who create a 401(k) or SIMPLE IRA plan with automatic enrollment.
Enable businesses to sign up part-time employees who work either 1,000 hours throughout the year or have three consecutive years with 500 hours of service.
Encourage plan sponsors to include annuities as an option in workplace plans by reducing their liability if the insurer cannot meet its financial obligations.
Push back the age at which retirement plan participants need to take required minimum distributions (RMDs), from 70½ to 72, for those who are not 70½ by the end of 2019.
Allow the use of tax-advantaged 529 accounts for qualified student loan repayments (up to $10,000 annually).
Permit penalty-free withdrawals of $5,000 from 401(k) accounts to defray the costs of having or adopting a child.
Encourage employers to include more annuities in 401(k) plans by removing their fear of legal liability if the annuity provider fails to provide and also not requiring them to choose the lowest-cost plan. (This could be something of a double-edged sword. Employees will need to look extra-carefully as these options.)
One other key change in the new
bill is paying for all this: the removal of a provision known as the stretch
IRA, which has allowed non-spouses inheriting retirement accounts to stretch
out disbursements over their lifetimes. The new rules will require a full
payout from the inherited IRA within 10 years of the death of the original
account holder, raising an estimated $15.7 billion in additional tax revenue.
(This will apply only to heirs of account holders who die starting in 2020.)
If you have questions or concerns about
how the SECURE Act may affect your retirement planning and outlook, contact
your service team for more information.
by Connor Darrell
CFA, Assistant Vice President – Head of Investments The
last full week of 2019 yielded additional positive returns for both stock and
bond investors. It has been a stellar year for investment returns, with the
S&P 500 poised to end the year up over 30% and the Barclays Aggregate Bond
index set to close things out with almost a 9% gain. For U.S. equities, this
would only be the 15th time since 1937 that market returns exceeded
30% in a single calendar year. Important to consider however, is that the
market’s strong returns this year were generated as a result of what analysts
refer to as “multiple expansion” and not earnings growth. Multiple expansion occurs
when stock prices rise faster than corporate earnings, meaning that stocks
become more expensive on a relative basis. Interestingly, the opposite occurred
in 2018, when stocks generated negative returns despite earnings growth well
over 20%. Over the long run, it is earnings growth that tends to be the primary
driver of returns, and while both 2018 and 2019 produced the opposite result in
isolation, when taken together, earnings growth actually does have strong
explanatory power over the past 24 months.
Following the significant multiple
expansion that took place this year, the current price to earnings multiple for
S&P 500 stocks is about 18.1, quite a bit above the historical average of
15.2. Moving forward, if U.S. equities are going to continue to climb higher,
earnings growth will need to once again assume the role of primary catalyst. According
to Refintiv, analysts are calling for mid to high single-digit earnings growth
in 2020, which would be a marked improvement over 2019 earnings growth. Whether
this is enough to support higher than average multiples remains to be seen. Investors
can take solace in the fact that the underlying economy continues to show
evidence of firming up and that the U.S. consumer remains on solid footing,
both of which should help to support corporate earnings throughout the next
year.
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.
CONSUMER SPENDING
A
Our consumer spending grade remains an A despite recent softening in retail sales numbers. US consumer confidence remains high, and we anticipate a strong holiday shopping season. The consumer has been the bedrock of the US economy through much of the current expansion.
FED POLICIES
B+
With the Federal Reserve expected to refrain from any further adjustments to interest rates without a material change in the economic outlook, we have downgraded our Fed Policies grade to a B+. The low level of interest rates remains a positive for markets but sentiment will likely no longer be aided by anticipated rate cuts.
BUSINESS PROFITABILITY
B-
As was largely expected by markets, corporate earnings growth was weak during Q3 as a result of the global slowdown and trade policy uncertainty. However, according to Factset, 75% of S&P 500 companies reported a positive earnings surprise, meaning things were not quite as weak as many had feared.
EMPLOYMENT
A
November’s headline jobs growth number of 266,000 smashed consensus estimates and provided further evidence that the US economy remains on solid footing.
INFLATION
A
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.
OTHER CONCERNS
INTERNATIONAL RISKS
6
Following progress made on two key geopolitical concerns (Brexit and US/China trade relations), we are reducing our International Risks metric to a 6. Other key areas of focus for markets include the rising economic nationalism around the globe and escalating tensions in the Middle East.
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.
