What a difference a year makes!

During the 4th quarter of 2018 year we had a drop in the markets. This was primarily due to the Federal Reserve (“The Fed”) raising and threatening to continue to raise interest rates – unnecessarily, in our view, and scared the investing community. The Fed usually raises interest rates when there is inflation and the economy is getting too “hot”. That was not the case in 2018 and the Fed realized their error in January of 2019. They then declared that the economy was “just right” and that no more interest rate increases would be needed. Plus, they correctly reduced interest rates in 2019. This was the right call and the economy and the investment community responded with one of the best years in the markets in quite a while.

Ironically, early in 2019, many investors fled the stock market in reaction to the drop in late 2018. Only to find that the markets had rebounded and then some by the Spring and Summer. Then over the Summer of 2019 the news was full of incorrect scary stories about a pending “recession” right around the corner. We disagreed then. But we saw many investors pull out of the markets over these unfounded forecasts. Many investors missed 2019 due to the gloomsters and doomsayers on TV and newspapers. We have seen these threatening stories almost every month for years…and they have been consistently wrong.

Are stocks expensive?? We do not think so. With a growing economy and low interest rates on Bonds and CDs stocks are priced reasonably at this point. There is little to compete with stocks at this stage.

The worst thing investors can do is be scared into bad short term decisions over fear and trying to time the market drops based on wrong-headed politically-driven news stories. 2019 is a classic case in point. 

So why are the markets up. Its all about the economic conditions, which we have been speaking about for the past few years. The excellent news is that we have:

1-Low Interest rates; Great for housing/construction/automobiles/investment

2-Low oil/gas/energy prices:This leads to low inflation.

3-Tax Cuts: This has given the economy a great boost. More money in the pockets of the middle class and businesses 

4-Lower cost of business regulations coming out of DC. This had been a big problem for business for years. Less lately –  Great for business and markets.

5-Best employment/hiring/jobs situation in decades: Tax savings are being used for hiring and investment 

These are all good things for business. There are also other good things going on.

Trade deals:

We have seen a new first stage trade deal negotiated with China-finally. In North America the “USMCA” trade deal between the US and Mexico and Canada will be a positive replacement for the 25 year old “NAFTA” trade deal. There was also a trade deal negotiated with Japan. Not well publicized. There was also some trade progress with Europe and more is expected. The elimination of trade concerns will be a positive to investors and the business community. This will lead to more hiring and more investment. 

Many investors ask us what will cause us to be concerned. If oil and interest rates rise too much, too fast, that would be a concern. If the politicians in DC raise taxes on businesses in the next few years and add a lot of new expensive regulations that would also be a huge problem for Wall Street. And hiring would grind to a near-halt. There are no winners in this scenario. We do not expect these anti-investment problems to happen anytime soon.

Retirement news:

These have been some changes to the IRA and 401k rules in the past month. Congress passed a new set of regulations called the “SECURE ACT.” There are several notable items in this new law.

The age at which we are all required to begin making withdrawals from our IRA accounts and 401k plans has been raised from 70-½ up to age 72. We are waiting for more clarity on the details of this, especially for folks who are currently between 70-½ up 72, to understand what happens in 2020.

Also, in the past when a person turned 70-½ they were no longer allowed to contribute to their IRAs. This rule has been eliminated and post age 70-½ IRA contributions are now allowed.

One more item of interest; When a non-spouse inherits an IRA (typically from a parent) they were allowed to stretch out the IRA payments to themselves over their expected lifetime. This has been changed. Non-spouses who inherit an IRA must now withdraw all the money within 10 years of the persons death. We are awaiting more details on this topic also. We are not in favor of this change but we need to deal with it going forward. There may be some subtle technicalities in this rule so it is important to review each situation with us.

As we finish this commentary we have been reviewing the events in the Middle East during the New Year’s week. The politicians and pundits can debate the international relations aspects but for investment and economics this is a temporary nuisance to markets. The price of oil jumped a few dollars/barrel. We have seen many Middle East mini-crisis come and go over the decades. This one does not rise to the level of affecting the markets or US economy in any significant way. The US is self-sufficient on energy for the first time. We are not hostage to Middle East producers. The oil prices will calm down. The situation would have to enter a major escalation phase and oil would have to be much higher to worry much and nothing indicates that to us. The stock market, as always, will continue to have ups and temporary downs. We have recently been near all time market high levels. By definition this means that the stock market has never failed to bounce back from the many short term temporary drops we have seen over the years. It is simply a bumpy ride. Volatility is normal. Those of us who prosper from investing must ignore and withstand routine volatility in order to achieve these gains. 

As usual this commentary is based solely the opinions of Arnie Magid, Brian Cassidy and Daniel Kelly. Nothing in the above written material is endorsed by, or written by, or provided by Cambridge Investment Research, Inc., or by any other outside party or firm.

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