Stock markets began the new year (and decade) by setting records on positive China-related news, only to suffer a setback when the killing of a notorious Iranian general by the U.S. military escalated investor concerns around the globe.
The U.S. airstrike Thursday evening sent oil prices surging and took some wind from Wall Street’s optimistic sails, putting downward pressure on stock prices. That said, for all the drumbeats of the potential for war, traders’ response was muted, with the markets opening down about 1.2% before regaining some ground by mid-afternoon.
The conflict between the U.S. and Iran demands close attention; further escalation may well create economic and market ripples. If, for instance, oil prices go significantly higher, inflationary pressures might ensue. At the same time, higher oil prices would benefit those companies that produce, transport and refine crude, while harming those that are heavily reliant on fuel prices, like airlines.
As you know, our portfolios are designed with these risks in mind. The fund managers we have partnered with diligently analyze the impacts of any change in the economic or geopolitical winds. Likewise, our in-house investment team has the ability to become more defensive if conditions warrant doing so—but we make such decisions based on the facts we know rather than the fears we’re sold. Our tactical strategies are designed to become more defensive if conditions warrant doing so—but we move based on the market’s price signals, not at the drop of a fearsome headline. Traders’ relative lack of alarm (so far) at the news out of Iraq suggests that it will take more than the heat from a single global hotspot to upset what has been a long bull market for stocks.
In sum, we’ve got your back and will always do our level best to help you secure your financial future.
As noted, the year started strong and markets were up on Thursday, the first trading day of 2020, with the Dow Jones Industrial Average increasing 1.2% and the broader S&P 500 index jumping 0.9%—both to new records. In closing out 2019, the Dow Jones Industrial Average and the S&P 500 index returned 25.3% and 31.5%, respectively. The MSCI EAFE index, a measure of developed international stock markets, was up 22.0%. The yield on the Bloomberg Barclays U.S. Aggregate Bond index has declined to 2.30%, down from 2.34% last week. It was 3.28% at 2018’s end. On a total return basis, the U.S. bond market gained 8.7% in 2019.
Looking Back at a ‘Record’ Decade
The end of the decade has flooded us with retrospectives covering those who died, those who tried and everything in between. On the investment front, it was a solid 10 years of gains by any measure, but contrary to market pundits’ beliefs, it was not a record-setting decade.
To give you just one example, while the S&P 500’s annual total return of 13.6% over the 10-year period starting in 2010 is a far sight better than the 0.9% annual decline we suffered through in the 2000s, it falls well short of the pace of gains achieved in the 1980s (17.5%) and 1990s (18.2%).
At Adviser Investments, we take each day, month and year as it comes rather than trying to predict the unpredictable. What we know is that the investment markets can be fickle, but ultimately, they are a wealth-generating engine that is hard to beat—so long as you remain calm, disciplined and diversified.
Keeping an Eye on Bonds
Speaking of diversification, while the bull market in stocks garners most of the headlines, don’t ignore the bond market. We know it pays to be prudent. Bond yields are an extremely good predictor of returns in the fixed-income markets and the long bond bull market has brought yields to uncharacteristically low levels. To give you a sense of what we’re talking about, 10 years ago, the bond market’s yield was 3.3% and over the ensuing decade, bonds returned an annualized 3.6%. Today, the bond market’s yield is about 2.3%. History suggests that we can expect returns over the next decade to run between 1.3% and 3.3%.
Bonds will continue to provide some shock absorption in our portfolios—particularly during periods when we’ll need it the most.
While the returns look to be parsimonious, bonds will continue to provide some shock absorption in our portfolios—particularly during periods when we’ll need it the most—but we would not count on them to make us rich. That’s why we’ll continue to build diversified portfolios of bonds and stocks to meet your specific needs and objectives.
***** Financial Planning Focus
SECURE Act Impacts
In the flurry of holiday merry-making, you may well have missed some important news for your retirement savings: Late last month, Congress passed the SECURE Act, which includes some significant new rules affecting how we all save and plan for retirement. Here are five of the biggest changes that may impact your bottom line—and your tax bill.
Invest Longer, Take Distributions Later. Under the SECURE Act, the required age for taking minimum withdrawals from your qualified retirement accounts has been pushed back from 70½ to 72, effective January 1, 2020. This allows additional time to grow your tax-deferred retirement money (and using a whole-number age makes it easier to figure out when you need to start). The change, however, is no help for those under age 72 already taking required minimum distributions (RMDs): The clock has not reset and you must stick with the old schedule. Additionally, those who reached age 70½ in 2019 must take their first RMD by April 1, 2020.
More Time to Contribute to Traditional IRAs. Under previous law, you were unable to contribute to a tax-deductible IRA after age 70½. Now, if you continue to have “earned income” (a.k.a. a paycheck) in your 70s, you and your spouse can keep making those contributions. (It’s not covered by the SECURE Act, but it’s worth knowing that employee-sponsored 401(k) plans also have no upper age limit on contributions while you are still working.)
Annuities in 401(k)s. Don’t be surprised to see more annuities popping up as investment options in your 401(k) plan. Currently, fewer than 10% of 401(k) plans offer annuities; the SECURE Act includes provisions incentivizing their addition. Note that while annuities can be a useful tool for some retirees, we don’t consider them well-suited to all by any means. If you are considering making any changes to your 401(k) investment strategy and would like our advice, please give us a call.
Inherited IRAs Must Be Wound Down. The government wants inheritors of IRAs to pay their taxes sooner rather than later. Previously, people who inherited traditional IRAs could withdraw money throughout their lifetime (this is still the case for IRAs inherited by year-end 2019). Under the new SECURE Act, inheritors will need to drain an inherited IRA within 10 years.
Charitable Distributions Remain. Many retirees opt to make charitable distributions from their IRAs to help reduce taxes. Even though the SECURE Act bumps the RMD age threshold to 72, qualified charitable distributions (QCDs) are unaffected. After hitting 70½, you can still make charitable distributions from your IRA of up to $100,000 per year. However, if you’re still working and adding money to your IRA accounts after 70½, those additions will reduce your annual QCD limit dollar for dollar.
The changes we’ve mentioned will affect many retirees, but there is much more to this sweeping new law, including many wrinkles that may bear on your specific situation. We recommend consulting with us to see what the SECURE Act means for you. Please don’t hesitate to contact your portfolio team here at Adviser Investments. We’re happy to help!
After the holiday interruptions, next week returns to a more regular schedule of economic reports, and we’ll be getting a read on the current state of the jobs market, factory orders, consumer credit and service sector gauges.
As always, please visit www.adviserinvestments.com for our timely and ongoing investment commentary. In the meantime, all of us at Adviser Investments wish you a safe, sound and prosperous investment future.
Please note: This update was prepared on Friday, January 3, 2020, prior to the market’s close.
This material is distributed for informational purposes only. The investment ideas and opinions contained herein should not be viewed as recommendations or personal investment advice or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.
Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.
Past performance is not an indication of future returns. Tax, legal and insurance information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice, or as advice on whether to buy or surrender any insurance products. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. We do not provide legal advice, nor sell insurance products. Always consult a licensed attorney, tax professional, or licensed insurance professional regarding your specific legal or tax situation, or insurance needs.
Companies mentioned in this article are not necessarily held in client portfolios and our references to them should not be viewed as a recommendation to buy, sell or hold any of them.