2020 First Quarter Newsletter
While a relatively mild winter in New Haven has made life easier for our local weather forecasters, we suspect that financial market forecasters are frustrated right now. Fast-changing markets in 2019 and the early part of 2020 have kept investors busy. When markets move rapidly, a newsletter risks being out of date between the time we write the last words and the time it reaches our readers. Consistent with our belief that investments should be based on a strategy including goals and an overall financial plan and not just a forecast, this newsletter’s aim is to put current events into the broader context rather than make short-term predictions.
A Great 2019
One of our practices is to start team meetings with a positive focus, reminding ourselves of the many good things that have happened. It sets the right mindset to avoid the temptation of immediately turning to challenges. Similarly, before discussing recent market movements, it is helpful to reflect on the significant returns that risk assets bestowed on their owners last year.
For almost all asset classes, 2019 was a year to celebrate. It was an incredible year for stock markets, with the S&P 500 up 31.5%. Bonds also rallied. Real estate did well, too. It is rare that we see all the major asset classes move together.
Market Review - YTD as of December 31, 2019
Bloomberg Barclays US Aggregate Bond Index
S&P 500 Composite Index
Russell 2000 Index
MSCI EAFE Index
MSCI EM (Emerging Markets) Index
*Source: RJ Quarterly Market Review 4Q 2019
However, it did not feel that way at the beginning of the year, when the S&P 500 had just finished 2018 with a bruising sell-off of -19.78% from its 2018 high (Source: S&P 500 2018 Total Price Returns). At the time, we discussed the need for perspective, writing in our First Quarter 2019 newsletter:
Our impression is that the stock markets in December discounted the worst-case scenario, particularly on political themes. We think the markets had too negative a view and that on the balance it seems unlikely a recession will begin in near term.
During 2019, markets had their share of challenging news and brushed it off. If investors had been told that in a single year a trade war with China would erupt, the President would be impeached, and Iran would attack Saudi oil production (to name just a few issues), they would be forgiven for expecting a big market sell-off. Imagine their disbelief at being told the US stock market had its best performance since 2013.
Markets reward the disciplined and patient, and markets’ returns are always uneven over time. 2019 served as a good reminder of the importance of sticking with a long-term strategy.
Uncertainty in 2020
Today, the novel coronavirus (COVID-19) has replaced geopolitics at the top of the list of possible market concerns. Even Brexit ultimately received little attention when the UK exited the European Union on January 31, 2020.
From an investment point of view, COVID-19 introduces significant uncertainty. On one hand, it seems that a smaller percentage of the people infected are at risk of severe illness than was the case in past epidemics. On the other hand, today’s world is more globally connected. People travel extensively and freely. Supply chains are globally interdependent. Even if the health impacts of the virus on most of the population are minimal, the economic damage from global reactions to the virus could be much larger.
Our belief is that the economic impact of the virus will ultimately pass. It will shave some growth from global GDP. It is possible that this could tip the world into recession, but that is not our base case scenario at this time. We think it more likely that the long economic expansion will have the strength to continue. The immediate uncertainty is presenting investors with uncomfortable daily swings in the market. An investment strategy should be designed to manage this uncertainty while still giving the best possible chance of meeting one’s goals.
A second major point of uncertainty is the US election. Markets do not like uncertainty and may react as the Democratic Party continues its process of selecting a nominee who will then face President Trump in November. We will not indulge in speculation here, because there is so much of it in the popular press already. Markets can react strongly, up or down, to a surprise. In this election, surprises seem likely.
Uncertainty is always inevitable. COVID-19, the election, and other current events are wild cards that may continue to cause market volatility. Investors should not base long-term decisions on short-term factors. Longer term, stock markets should follow the health of the underlying companies and the economy. In the US, the economy remains strong and interest rates are accommodative of further growth. Valuations overseas are attractive relative to US stocks, and there have been early signs that the global economy is bottoming and may pick up. For properly diversified portfolios, there are always both risks and opportunities.
Successful investors can get through these periods using long-term strategies that manage risk, ensure that they have adequate liquidity (typically cash and bonds) to pay life’s unexpected bills, and effectively manage taxes.
Planning for the SECURE “Setting Every Community Up for Retirement Enhancement Act”
Late in 2019, Congress passed the SECURE Act, one of the most significant changes to retirement law in years. The most notable changes aim to help businesses offer retirement benefits to employees. There are also key provisions that affect individuals. Some of the biggest changes for individuals are:
- Changes to the way inherited retirement accounts must make distributions. A major change is that many inheritors (beneficiaries) of IRAs and other retirement accounts will no longer be able to stretch the distributions over their lifetime. For example, a child who has reached age of majority must now distribute all the money within 10 years of inheriting the account. For many trusts, the inherited accounts must be distributed over 5 years. This may affect many estate plans. The rule provides significant tax-planning opportunities, because it does not specify in what year the distributions must be made. There are exceptions. For instance, spouses inheriting IRA accounts will still be able to adopt them as their own accounts using their own life expectancy to calculate Required Minimum Distributions (RMDs).
- Change to the age for beginning Required Minimum Distributions for those not already taking them, to 72. This may mean individuals who have both taxable and retirement accounts need to review their retirement income strategies for tax opportunities.
- The permitting of contributions to IRA and Roth IRA accounts past the age of 70 for those who have earned income. For many clients, this may also include “backdoor” Roth IRA contributions.
- Minor Changes to 529 College Savings Plans, including the ability to use up to $10,000 to repay qualified education loans of the plan beneficiary.
- Reversal of the “Kiddie Tax” changes that took effect in 2018. This rule caused children’s income to be taxed at the same rate as trusts and estates, which is often much higher. Now the child’s tax rate will be based on the parents’ income once it is over a certain threshold. Parents have the option to refile their children’s taxes for 2018 and 2019 under the new rule if there is a benefit to do so.
We are proactively discussing these changes in our meetings with clients, and we welcome any questions you may have.
Happenings at Kreitler Financial
Charlie was named a Forbes Best-in-State Wealth Advisor for 2020.ˡ It is an honor to be selected, and we are thankful to everyone who contributed to making it possible.
Bob was given the Good Scout Award by the Connecticut Yankee Council of the Boy Scouts of America. The award recognizes his contributions to the New Haven Community in promoting youth education and other community efforts.
Bob was also named as one of 100 Game Changers by the United Way of Greater New Haven² for his efforts in supporting New Haven education.
Bernadette Huang CFP®, CFA®, celebrated her 5th anniversary as a member of our team in February. Congratulations, and thank you.
Kreitler Financial was a sponsor of the 2020 LEAP Year Event. The Leadership, Education & Athletics in Partnership organization provides community- and school-based programs designed to achieve positive outcomes for children living in high-poverty urban neighborhoods.
With warm regards,
Charles F. Kreitler, CFP®
President, Kreitler Financial
Robert P. Kreitler, CFP®
Founding Partner, Kreitler Financial
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Charles and Robert Kreitler, CFP® and not necessarily those of Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of the author's and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represent approximately 8% of the total market capitalization of the Russell 3000 Index. The MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 22 developed nations. The MSCI Emerging Markets is designed to measure equity market performance in 25 emerging market indices. The index's three largest industries are materials, energy, and banks. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market.
1The Forbes ranking of Best-In-State Wealth Advisors, developed by SHOOK Research, is based on an algorithm of qualitative criteria, mostly gained through telephone and in-person due diligence interviews, and quantitative data. Those advisors that are considered have a minimum of seven years of experience, and the algorithm weights factors like revenue trends, assets under management, compliance records, industry experience and those that encompass best practices in their practices and approach to working with clients. Portfolio performance is not a criteria due to varying client objectives and lack of audited data. Out of approximately 32,000 nominations, more than 4,000 advisors received the award. This ranking is not indicative of advisor's future performance, is not an endorsement, and may not be representative of individual clients' experience. Neither Raymond James nor any of its Financial Advisors or RIA firms pay a fee in exchange for this award/rating. Raymond James is not affiliated with Forbes or Shook Research, LLC. Please visit https://www.forbes.com/best-in-state-wealth-advisors for more info.
2The non-financial related awards are not based in anyway on the individual's abilities in regards to providing investment advice or management. This ranking is not indicative of advisor's future performance, is not an endorsement, and may not be representative of individual clients' experience. Raymond James is not affiliated with Connecticut Yankee Council of the Boy Scouts of America and United Way of Greater New Haven