Hello ConCappers,
We had a spectacular 2019 and we certainly didn’t expect it. 2020, on the other hand, is more complicated and we wanted to issue this look ahead.
Coronovirus
Since the Chinese government put the city of Wuhan on lockdown in early January, the Dow has fallen over 1,000 points. There have been 9,809 confirmed cases that have resulted in 213 deaths so far.1 Even though the Chinese government has learned from its bout with SARS several years ago and has taken the appropriate steps to contain this outbreak in the short-term, we are still in the dark about how dangerous this disease will be in the long-term. In regards to its affect on the market, the recent selloff may have less to do with this virus than other factors and it is very possible that we are experiencing a general correction as opposed to a long-term selloff.
Davos and Bond Yields
After years of political posturing, Brexit finally happened. As of January 31, 2020, the UK is no longer a part of the European Union. How both entities will fare after this is unknown, but there was an even more pressing matter than Brexit that was prominently discussed at the economic conference in Davos, Switzerland this year: Interest Rates. For some time now, several European countries have been issuing their sovereign bonds at negative interest rates. President Trump even discussed emulating that situation here in the United States, arguing that our interest rates put the American economy at a comparative disadvantage economically.
But the downward pressure on interest rates means that banks make less money, and the downward pressure on bond yields means that more fixed-income investors are either forced into equities or resigned to staying in cash. Either way, this is an experiment in the making, as JP Morgan Chief, Jamie Dimon, mentioned and there is a historical precedent of the propensity of a credit bubble due to the incredibly cheap cost of capital.2
At the moment, the silver lining to low interest rates is that many investors are being forced into the market, and so long as interest rates are as low as they are, certainly dividend-yielding stocks should fare favorably.
Parabolic Returns
There are concerns though, especially in the tech sector. The five largest tech companies now comprise 17.5% of the entire S&P 500.3 Certain equities, for example, have increased 5-fold within the last 6 months, all while boasting meager net earnings. We have seen these types of valuations before and there is usually a return, albeit painful, to normalcy.
That is not to say that the following year may not end up being a good one – election years normally are. Since 1952, the Dow has climbed 10.1% on average during an election year when a sitting president runs for re-election.4 But there is certainly the possibility of a correction (we may be in one right now), and should a threat of an asset bubble rear is head, then we could fall quickly into a recession. As always, we will keep you posted as developments ensue.
All Eyes on the Democratic Nominee
Within the next several months, we will find out who the Democratic Nominee will be. There is no doubt that certain potential nominees would likely impact what occurs in the stock market and many of you will see subsequent protective measures to your portfolios should they occur. With that said, if the market is reflective of the voice of the people, then it has assumed a re-election the current administration. Stay tuned for updates in this area.
Key Dates and Statistics for 2020
Tax Filing Deadline: April 15th, 2020
(Several aspects of the Tax Cuts and Jobs Act were re-activated that includes medical and educational deductions. Here are the details.)
2019 and 2020 IRA Total Contribution Limit: $6,000
(If age 50 and above, $7,000)
2019 IRA Contribution Deadline: April 15th, 2020
2020 401k Total Contribution Limit: $19,500
Thanks,
VJ Arjan, CFP®, ChFC®
CEO
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