After more than a year’s worth of trade-war lunges, parries and ripostes, “phase one” of the U.S.-China trade agreement was signed this week. While it was overshadowed in the headlines by the House sending the articles of impeachment to the Senate for trial, traders seemed to signal their approval of the deal. The markets sprinted to new highs on the news, with the Dow Jones Industrial Average closing over 29000 for the first time.
For the year through Thursday, both the Dow and the broader S&P 500 index have returned 2.7%. The MSCI EAFE index, a measure of developed international stockA financial instrument giving the holder a proportion of the ownership and earnings of a company. markets, is up 0.6%. As of Thursday, the yieldYield is a measure of the income on an investment in relation to the price. There are several ways to measure yield. The current yield of a security is the income over the past year (either dividends or coupon payments) divided by the current price. on the Bloomberg Barclays U.S. Aggregate BondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. index has declined to 2.24% from 2.29% last week, and from 2.31% at 2019’s end. On a total return basis, the U.S. bondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. market has gained 0.6% for the year.
So, after all of the tariffs, tweets and talks, what were the two economic powerhouses able to agree upon?
For its part, China committed to increasing imports of U.S. goods by $200 billion over two years, which includes importing $40 billion in agricultural products. It’s not clear exactly how or if China will be able to reach those numbers. The country also agreed to open its financial system to foreign firms and to not pressure companies to hand over proprietary technology.
While there is no guarantee that the countries will stay on good terms, seeing the leaders of the two largest economies in the world cooperate and reach agreement is better than playing tit-for-tat with higher and higher tariffs.
In turn, the U.S. agreed to remove China from its list of currency manipulators, and to reduce—but not eliminate—tariffs. In fact, 25% tariffs remain on about $250 billion worth of Chinese imports, and the reduction only took tariffs from 15% to 7.5% on other goods. By Moody’s estimate, the effective tariff rate only fell from about 5% to 4.6%—still much higher than the pre-trade-war tariff rate of 2%.
So, the U.S. can claim it got concessions out of China without giving up much and maintaining the tariffs as future bargaining power. China, on the other hand, is saying that it only agreed to things it was already working toward, like an increasingly open financial system.
It’s no surprise both sides are claiming political points, as this deal was more of a media show than a resolution. While there is no guarantee that the countries will stay on good terms, seeing the leaders of the two largest economies in the world cooperate and reach agreement is better than playing tit-for-tat with higher and higher tariffs.
Dow 30000 May Not Mean Much…
Both the S&P 500 and Dow hit record highs when the trade deal was signed Wednesday—as mentioned above, the Dow closed above 29000 for the first time. Though it’s not nearly as big of a number, the S&P 500 crossed a milestone of its own by closing above 3300 on Thursday. Whenever a major index crosses these “big round number” thresholds, headline writers celebrate—but we’d urge investors to hold onto their confetti.
As the Dow has slowly swelled over the past few decades, each 1,000-point increment in the index makes up a smaller percentage of the whole. To get from 29000 to 30000, the Dow needs a gain of 3.4%. That’s not a big move to get to a very big number, and with yesterday’s close of 29297.64 (up 0.9% from Wednesday), it’s already more than a quarter of the way there.
…But Small Numbers Can Mean a Lot
Speaking of rising prices, inflation ticked up slightly in 2019. The Consumer Price Index (CPI) increased 2.3% in 2019—core CPI was up 2.2%. Any increase in inflation can provoke a response from the Federal Reserve, but we don’t think that this level of inflation will push the central bank’s policymakers to raise the fed funds rate.
While we have yet to see the final numbers on the Fed’s preferred measure, core PCE (personal consumption expenditures), it tends to come in a little below CPI. It’s a good bet that core PCE will be below the Fed’s target inflation rate of 2% (it rose only 1.6% year-over-year through November 2019) and that they’ll stay on course by holding off on any interest-rate changes in the near term.
Given the record-low rates of unemployment, we’ll monitor the inflation rate carefully in the months to come.
Financial Planning Focus:
Flexible Spending Account Deadlines Approaching
If you have a flexible spending account (FSA), have you checked the balance recently? The deadline to spend that money may be fast approaching.
An FSA is an employer-sponsored account you can use to pay for a wide range of medical services and products each year (co-pays, prescriptions, procedures, eyeglasses and much more; see the IRS’ list here or contact your plan sponsor for details). The money you contribute to an FSA is not taxed, but there are strings attached.
Some plans have a use-it-or-lose-it policy, meaning you have to completely drain the account by the deadline or forfeit whatever is left back to your employer. Other plans will allow you to roll up to $500 over to the next year, but anything left in your FSA above that amount will also be forfeited. Your employer can choose to offer either a grace period for drawing down your balance or a rolloverThe process of transferring funds from one retirement account to another, typically without incurring a tax. benefit, but not both.
Spending deadlines vary depending on your employer, so it’s a good idea to ask your plan administrator when your 2019 contributions will disappear or if you are allowed to roll funds over. For plans that follow the calendar year, the grace period for spending last year’s FSA savings runs out by March 15 (otherwise, the grace period extends 2.5 months past the end of the plan year). Whether your deadline is sooner than that or not, start strategizing on how to use that cash—are there any medical supplies you can stock up on? Do you have any receipts from doctor’s appointments that you could have reimbursed?
If you have any questions about your company’s FSA plan deadlines or benefits, or what kinds of expenses qualify, your human resources or benefits team should be able to point you in the right direction.
Earlier this year, we covered the SECURE Act, the most significant new legislation affecting retirement investing in more than a decade. In the latest episode of The Adviser You Can Talk To Podcast, Adviser Investments Vice President of Wealth Services Patrick Carlson sits down with Vice President Bob Lepson and Account Manager Geoffrey Turner to take a deeper dive into the broad themes and most significant provisions of the new legislation.
Next week, we get reports on existing home sales, leading economic indicators and manufacturing and service sector gauges. Perhaps more significantly, earnings reports begin to stream in, with bellwethers like United Airlines, Halliburton, Capital One, Netflix, Johnson & Johnson, Texas Instruments, Intel, Procter & Gamble, Union Pacific and more scheduled to share their results and outlooks.
Please note that our offices, and the markets, will be closed on Monday to mark Martin Luther King Jr. Day. We will be open and ready to assist you on Tuesday.
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 17, 2020, prior to the market’s close.
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