Fourth Quarter Newsletter
Responsible Guidance: Fourth Quarter 2019 Newsletter, January 2020
Important Changes for 2020
We begin our 2019 fourth-quarter newsletter with these important changes for 2020:
The IRS regularly allows for increasing tax-deferred savings limits on retirement accounts. For example, contribution limits to a 401(k) plan are increasing in 2020 to $19,500 from $19,000 in 2019. Also, if you are over 50, the catch-up contribution is now an additional $6,500 vs. $6,000 last year. Not all retirement accounts are the same and contribution limits can be different for different types of accounts.
At the end of 2019, Congress passed, and the President signed into law the Secure Act (Setting Every Community Up for Retirement.) The new law changed the starting age for people who have not yet started taking Required Minimum Distributions (RMDs) from retirement accounts, accelerated withdrawal options for non-spousal beneficiaries who inherit retirement accounts, and now may allow individuals to continue contributing to certain retirement accounts after age 70 ½ . You can refer to our blog for more detailed information.
Before acting on any of the items above, please contact your Baron Team and your tax professional.
Happy New Year and Happy New Decade!
For the first time, the U.S. just finished a decade without a recession. Returns in 2019 for the general stock market, as measured by the S&P 500, were second best for the decade, coming in slightly below 2013. Every asset class benchmark followed by Baron in 2019 had positive returns. It was a great way to end the year and the decade.
A Global Perspective
A core objective for our customized Baron Financial Group investment strategies is global diversification. Global diversification means including investments based both domestically in the U.S., as well as internationally in developed and developing countries.
There are popular benchmark indexes that provide perspectives about performance of global investments. For equities, we monitor the MSCI ACWI All Cap Index. This index is designed to represent equity investments across 23 developed and 24 emerging markets. The index was up 26.29% in 2019, as equity performance was strong in the fourth quarter throughout the globe. For fixed income (Bonds/CDs), we track the FTSE World Government Bond Index. The index tracks sovereign debt from 20 countries, denominated in their respective currencies and was up 5.90% in 2019.
As previously stated, the U.S. for the first time avoided a recession during a decade. Recent numbers for the economy suggest expansion is still possible, but we will continue to monitor the data for change. On the plus side, recent data for economic growth and jobs remain positive. The yield curve shape has returned to upward sloping from inverted (see Bonds section below) and progress seems to be occurring with global trade. These factors appear to have pushed back fears of an imminent recession. However, there is some softness in other data, such as leading indicators and consumer confidence, and recent geopolitical risks have come into play, causing concerns for possible negative economic impacts. At this point we remain cautiously optimistic.
The Bureau of Economic Analysis (BEA) announced in its third estimate for the third quarter of 2019 that real Gross Domestic Product (GDP) increased 2.1%. This was in line with the second estimate received in November and was a slight uptick from the second quarter growth of 2.0%.
GDP is a measurement of what has already happened. There are, however, statistical measures that give insight into the future. One of those measures is The Conference Board Leading Economic Index® (LEI) for the U.S. The index is an analytical tool that helps signal peaks and troughs in the business cycle. The November LEI, released on December 19th, was unchanged at 111.6 (2016 = 100), following declining readings in September and October.
“The US LEI was unchanged in November after three consecutive monthly declines. Strength in residential construction, financial markets, and consumers’ outlook offset weakness in manufacturing and labor markets,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “While the six-month growth rate of the LEI remains slightly negative, the Index suggests that economic growth is likely to stabilize around 2 percent in 2020.”
We first shared the chart below in our 2018 fourth-quarter letter and believe it is important to continue to track as a potential recession indicator. The blue line represents the LEI, dating back to the year 2000. Since then, we have had two official recessions, which are identified by the shaded gray areas. A recession is typically defined as two consecutive quarters of negative economic growth. Using the last two recessions as a gauge, we believe that the chart suggests that there was significant erosion in the LEI (blue line moved lower) prior to the economy realizing negative growth. Though this is only one tool, we would conclude that economic signals, such as the LEI, suggest that opportunities for economic growth remain and that a recession in the near-term is less likely.
According to the Bureau of Labor Statistics (BLS), the U.S. added 145,000 jobs for the month of December and the unemployment rate finished the year at 3.5%. Jobs in retail and healthcare increased while mining jobs were lost. According to the Household Survey data, the number of unemployed was 5.8 million at the end of December, compared to 6.8 million from a year ago. The Establishment Survey showed that the number of jobs gained in 2019 was 2.1 million vs. 2.7 million in 2018. So, even though there were less unemployed at the end of 2019, the number of jobs added for 2019 was less than the previous year.
The Conference Board Consumer Confidence Index® stands at 126.5 (1985 = 100) in December. The number is higher than our reported number in our third-quarter newsletter but is a reduction from more recent monthly readings.
“Consumer confidence declined marginally in December, following a slight improvement in November,” said Lynn Franco, Director of Economic Indicators at The Conference Board. “While consumers’ assessment of current conditions improved, their expectations declined, driven primarily by a softening in their short-term outlook regarding jobs and financial prospects. While the economy hasn’t shown signs of further weakening, there is little to suggest that growth, and in particular consumer spending, will gain momentum in early 2020.”
The S&P 500, an index consisting of 500 of the largest U.S. domestic stocks, was up a strong 9.07% in the fourth quarter, and 31.49% for 2019. Corporate profitability, domestic economic data, removal of near-term recession fears, and the Federal Reserve’s dovish tone (accepting or promoting lower interest rates) helped domestic stocks continue on a positive track.
International developed country equities (such as those in the European Union), measured by the MSCI EAFE index was up 8.17% in the fourth quarter, bringing the year's total performance to 22.01%. Non-developed, or emerging countries (such as China, India, Brazil or Russia) measured by the MSCI EM index, was up 11.84% for the third quarter, and 18.42% for 2019.
Potential for International stocks to outpace U.S. stocks has been discussed for some time now. Since the end of 2017, we have heard that international-equity investments appear cheap, on a relative basis, to U.S.-based investments. Looking forward, there are some discussions occurring that suggest growth may be turning around outside the U.S. The performance for the fourth quarter of 2019 certainly suggests there may be opportunity building. If a recovery continues to mount, you would expect to see international-equity investments outperform U.S. stocks on a relative basis.
U.S. Domestic Fixed Income (bonds), as measured by the Barclays U.S. Aggregate Bond Index, produced a positive 0.18% return in the fourth quarter, driving 2019 performance to 8.72%.
The 10-year U.S. Treasury bond yield was 1.92% at the end of 2019, which is lower in yield than where it began the year at 2.69%.
The Federal Reserve (Fed) cut short-term rates throughout the year, and investors continued to buy longer-dated Treasury investments driving those rates lower. Speculation about why investors bought longer-term bonds throughout 2019 ranged from buying U.S. debt that looks attractive, (relative to yields offered outside the U.S.,) to concerns over future economic growth and future interest rates.
If you plot interest rates versus the time-to-maturity to earn those rates, you have created what we call a yield curve. In previous newsletters we have written, in great detail, about the changing shape of the yield curve and what that may signal. Specifically, we follow the shape of the yield curve (plot of interest rates for different time periods). Using the U.S. Government 2-year bond rate as a proxy for short-term rates and the 10-year U.S. Government Bond rate as a proxy for long-term rates, we calculate the difference between the rates, which provides a possible indicator for the future direction of the economy. A steep spread (long-term rates higher than short-term rates) indicates possible future economic expansion and fixed-income investors are compensated for taking longer-term risk. A flat spread (long-term rates match short-term rates) is a possible indicator of economic uncertainty and longer-term investors are not being compensated for investing in longer-dated securities. An inverted spread (short-term rates are higher than long-term rates) possibly indicates future economic contraction.
During the third quarter there were times when the 10-year rate was actually lower than the 2-year rate and the yield curve was technically inverted. This caused serious discussions about the possibility of a recession signal. Though an inverted yield curve has historically been a strong recession indicator, the timing of the recession after an inversion occurs is not necessarily imminent.
Throughout the fourth quarter, the curve was able to maintain a steep shape, as the Fed cut short-term rates and the 2-year bond responded to those cuts, while signals of strength in the economy helped the 10-year rate to move higher. 2019 officially ended with a steep yield curve, technically speaking, as the spread between the 2-year and 10-year was 34 basis points (a basis point represents 1/100 of 1%). The spread was 5 basis points at the end of the third quarter.
Though steeper, we think it's safe to say that the bond market continues to be uncertain about the future of the economy. The changing shape of the yield curve has really been occurring since at least 2014, when the spread between the 2-year and 10-year was over 220 basis points (bp).
Housing and Real Estate
Commercial real estate, as measured by the FTSE NAREIT All Equity REIT (Real Estate Investment Trust) Index was basically flat in the fourth quarter, generating a 0.13% return. The index finished the year up 28.66%.
According to Freddie Mac (FM), the average 30-year residential home mortgage rate held steady around 3.70% at the end of 2019. The rate was 4.51% (close to a seven-year high) near the start of 2019. The lower rates may continue to have a positive impact on the housing market. For those who have a current mortgage and have not refinanced in some time, it may be worth looking at potential options.
The Bloomberg Commodity Index (BCOM) increased in the fourth quarter, gaining 4.42%, improving performance to 7.69%. This index expanded coincidently with equity capital markets.
Natural Resources serve as an expected hedge against inflation and offers statistical benefits to portfolios. We continue to monitor our investment choices in this asset class and look to make improvements when possible, as we do for all of our asset classes.
Baron Client Strategies
After a strong year in equities, we are focused on rebalancing portfolios to strategy. We try to be as sensitive as possible to tax implications, which is why a lot of the equity rebalancing needed in taxable accounts was pushed to January of 2020 to extend the time tax events will occur and resulting taxes will be due. Gains recognized in January 2020 means taxes will not be officially calculated and due until April 2021. This delay also allows us to capture any losses that may occur throughout 2020.
The beginning of the year is a great time to review your plan and needs for the year. Our ultimate goal is to help you plan for and meet those financial goals and objectives. Regularly handling the controllable items will hopefully keep you on track financially and help avoid any major mistakes or the need for major adjustments later on.
No matter the economic environment, our basic principles remain:
Create a globally-diversified and risk-appropriate strategy. Validate the investment choices versus peer investments. Rebalance when needed. Test the strategy in a comprehensive financial plan and obtain regular feedback to update information and advance your financial position.
Your Service Plan
One of our primary roles is to educate our clients to make informed decisions about reaching their goals. Critical to that process are plan reviews, a process that focuses our attention on your goals, takes account of any changes in your situation and allows us to alter the course as necessary. For more specifics, check out our “What You Can Expect” document by clicking the button below.
Your Personal Economysm
You may have heard us say that we are happy to help clients with issues outside of investing that may have an impact on their financial lives. We say things like “Lean on us when you are making a decision with anything with a dollar sign involved.” So, we added this new section as a reminder of all our services and to share ways in which we have helped clients outside of investing.
We recommend periodically reviewing the beneficiaries listed for eligible investment accounts, such as IRAs and 401(k)s, as well as insurance policies? Did you have any additions to your family recently that may want you to update beneficiaries? Reach out to us if you need help updating your beneficiaries.
Also, if you contribute to a company sponsored 401(k) plan, the allowable limits for tax-deferred contributions have increased for 2020, as we outlined at the beginning of the letter. You should maximize contributions to tax-deferred and tax-exempt savings accounts whenever possible, especially when you can contribute to a plan that offers matching contributions, such as a company-sponsored 401(k).
After a solid economic decade that saw equity performance across the globe exceeding expectations in 2019, hopefully you find yourself in better financial shape. Though we hope economic expansion and financial prosperity continue, it is a prudent time to review your "Personal Economy" by taking stock of your resources and planning for lifestyle needs. Whether you are planning for short-term events occurring in 2020, or longer-term financial goals like retirement, remember to focus on what you can control. Reach out to us to help plan and position yourself as best as possible for projected success in the coming decades.
One important and exciting addition to our website is the online client-portal tab, which will allow you access to view your account information. The client login requires a username and password to gain access through the portal. Please let us know if you would like to create your portal login or if you would like to learn more about what the portal provides.
Would you like to enroll in paperless Baron statements? Paperless statements will be accessible through our online client portal in the “Documents” section. You must be enrolled in the client portal in order to view your paperless statements. You will receive an email notification each quarter your statements are posted. Contact Baron at 1-866-333-6659 or at firstname.lastname@example.org to enroll.
For educational content, please visit our Website Blog. The Baron Advisors are often called upon by journalists for their insights on financial planning and investing. They are quoted in such prestigious media outlets as The New York Times, CNBC.com, and NJMoneyHelp.com, among others.
We would like to thank all of you who attended our recent holiday receptions held in New Jersey and Florida. In honor of our clients and friends, and in the spirit of the season, a donation has been made to the Fair Lawn Food Pantry in Fair Lawn, New Jersey and to the All Faiths Food Bank in Sarasota, Florida. Representatives from both organizations attended our holiday parties and spoke about how they help those in need. Our youngest “intern”, Joshua Suazo, son of Associate Financial Planner, James Suazo, added his thoughts on the subject!
We are proud of our many philanthropic efforts, which include pro-bono work, as well as monetary donations to the National Association of Personal Financial Advisors Consumer Education Foundation (NAPFACEF), whose purpose is to provide objective financial guidance on a pro-bono basis. We proudly donate to the Adopt-A-Soldier Platoon, (whose mission is to support the welfare of active members and veterans of the U.S Armed Forces), Spectrum for Living (serving adults with developmental disabilities), and the SCARC Foundation Capital Campaign (serving people with developmental disabilities), among others. In addition, we are thrilled to have the opportunity to speak to the Pediatric Residency Program residents at New York Medical College about money and finances – to best inform them on relevant financial issues they will encounter as they begin their professional lives. We are proud to help!
Baron Financial Group is also proud to announce that Advisors Anthony Benante, Victor Cannillo, and Nicholas Scheibner are recognized as 2020 Five Star Wealth Managers in New Jersey. Anthony and Victor are proud to be multi-year award recipients for the past 9 years in New Jersey. Anthony is also a multi-year recipient for wealth managers in Sarasota, Florida. Check out our blog post for more information on the Five Star Wealth Manager Award.
Wishing all a happy, healthy, and prosperous New Year!
Baron Financial Group, LLC
This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of January 10, 2020 and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Baron Financial Group to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. You cannot invest directly in an index. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client or prospective client’s investment portfolio. Historical performance results for investment indices and/or categories generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. Inclusion of index information is not intended to suggest that its performance is equivalent or similar to that of the historical investments whose returns are presented or that investment with our firm is an absolute alternative to investments in the index (if such investment were possible). Investors should be aware that the referenced benchmark funds may have a different composition, volatility, risk, investment philosophy, holding times, and/or other investment-related factors that may affect the benchmark funds’ ultimate performance results. Therefore, an investor’s individual results may vary significantly from the benchmark’s performance.