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December 2019
Market Update
(all values as of 06.28.2024)

Stock Indices:

Dow Jones 39,118
S&P 500 5,460
Nasdaq 17,732

Bond Sector Yields:

2 Yr Treasury 4.71%
10 Yr Treasury 4.36%
10 Yr Municipal 2.86%
High Yield 7.58%

YTD Market Returns:

Dow Jones 3.79%
S&P 500 14.48%
Nasdaq 18.13%
MSCI-EAFE 3.51%
MSCI-Europe 3.72%
MSCI-Pacific 3.05%
MSCI-Emg Mkt 6.11%
 
US Agg Bond -0.71%
US Corp Bond -0.49%
US Gov’t Bond -0.68%

Commodity Prices:

Gold 2,336
Silver 29.43
Oil (WTI) 81.46

Currencies:

Dollar / Euro 1.06
Dollar / Pound 1.26
Yen / Dollar 160.56
Canadian /Dollar 0.73

Macro Overview

Markets over the past several weeks have experienced the uncertainty of a phase-one trade deal outlined by U.S. and Chinese trade delegates. Optimism for a probable U.S.-China trade deal stemmed from the progress toward a phase-one agreement that might include a rollback of certain tariffs by both the U.S. and China.

Global equity markets continued to elevate in November against a backdrop of political events and optimism surrounding ongoing trade negotiations. With the year end approaching, focus has shifted to the 2020 election, a phase-one trade deal, the Federal Reserve maintaining target rates, and receding recession concerns.

A broad barometer of the status of the country’s economic well-being is the money supply, which essentially measures the level of cash in savings accounts, checking accounts, CDs, and money market funds. Money supply has grown over 10% during the past quarter, translating into plenty of excess liquidity for financial markets and providing a buffer against any unexpected volatility.

Fixed income analysts expect that the Fed is attempting to normalize interest rates by holding off on any further rate changes until economic data offers a clearer view of where the economy is headed. Analysts believe that subdued inflation expectations by the Fed may leave rates steady heading into 2020.

There are fewer global bonds yielding negative rates, down to $11.9 trillion from a peak of $17 trillion in the summer. A reduction of negative yields is potentially indicative of a stronger global economy, sparking a drive to equities to capture growth prospects. Some economists believe that the president’s objective of a weaker U.S. dollar would be beneficial for both international equities and exports of U.S. products around the world.

Consumers continue to spend at retail stores and on food heading into the holiday season, buoying economic activity throughout the country. Consumer expenditures are an integral part of the nation’s economy, representing over two-thirds of GDP. A continued low-rate environment, along with a strong job market, has allowed consumers to spend generously on retail and food. (Sources: Commerce Dept., Bloomberg, Federal Reserve, BLS)

 

 
the fed is buying $60 billion of Treasury bills each month

Global Markets Elevate – Equity Review

Domestic equities finished November with the highest monthly gains since the summer.

Optimism surrounding U.S.-China trade discussions helped fuel equities higher, with technology, health care, and financials as the leading sectors in November.

The absence of volatility, along with the Federal Reserve maintaining a steady rate environment, was also a catalyst for equities to climb in November. Stock market volatility, as measured by the VIX Index, dropped to its lowest levels since April.

U.S. equity markets have outperformed international equities over the past two years. Historically, a lower U.S. dollar has benefited international stocks, as well as helped increase exports of U.S. products worldwide since a lower dollar makes exported products relatively cheaper. (Sources: U.S. Commerce Department, Bloomberg)

Looks Like QE But It’s Not, Says The Fed – Fixed Income Overview

The Federal Reserve is slowly re-expanding its balance sheet by purchasing $60 billion of Treasury bills each month. Although this action is reminiscent of the Fed’s quantitative easing (QE) program, meant to stimulate economic activity, the Fed denies that it is QE, but rather just a buffer for any possible bond market volatility.

Interest rates are believed by economists to have stabilized for the time being, as the Fed has essentially placed a hold on raising and lowering rates until further notice. The yield on the 10-year Treasury bond ended November at 1.78%, essentially where it’s been for the past two months.

The presidential race is promoting bond buyers to consider municipal bonds in order to hedge against any possible increase in tax rates. The tax-free interest payments generated by municipal bonds have historically benefited certain investors in the higher tax brackets. (Source: Federal Reserve)

Presidential Candidate Tax Proposals Influence Voter Turnout – Politics In Review

Taxes and income inequality have become a primary agenda topic for several presidential candidates. Various proposals from the candidates include repealing the Tax & Jobs Act, removing the step-up basis for inherited assets, increasing capital gains tax, imposing a financial transaction tax, and eliminating the tax deduction for mortgage interest on a second home.

Presidential election voter turnout is tracked by the Bipartisan Policy Center, which monitors voter turnout by state. The 2016 presidential election saw an estimated 55% of the voting-age population turn out to vote. Who actually turns out to vote can be driven by the candidates’ policies and how they may affect individuals. The number of voters has varied over the years and has historically been very difficult to predict. (Source: Bipartisan Policy Center)

 
it took an income of $515,371 to be part of the top 1% of earners in 2017

Medigap Plan F Phasing Out – Medicare Benefits Update

Of the ten Medicare supplemental plans, known also as Medigap, the single most popular plan, Plan F, will be eliminated at the end of the year to new subscribers. 

Retirees who turn 65 after 2019 will no longer have Plan F as an option. Plan F is the most expensive supplemental option since there are no deductibles, no co-pays, and no additional bills after a doctor’s visit. 

Plan G will become the most comprehensive plan after Plan F is phased out to newcomers. Plan G is almost identical to Plan F, with the exception that it requires a Medicare deductible payment before insurance pays any benefits.

A Medigap policy supplements expenses not covered by Medicare, including co-payments, co-insurance, and deductibles.  Medigap policies are sold by private insurance companies and vary in pricing and coverage from state to state. 

The following are important aspects regarding Medigap policies:

In order to secure Medigap coverage, one must have Medicare Part A and Part B.

A Medigap policy only covers one person, not a married couple. Therefore, each person needs their own separate policy.

Any standard Medigap policy is guaranteed renewable, even with a pre-existing condition.

Medigap does not cover prescription drugs. Medicare Part D does offer coverage for prescription drugs.

Medigap policies generally don’t cover long-term care, vision, dental care, hearing aids, eyeglasses, or private nursing. (Source: medicare.gov)

What It Takes To Be In the Top 1% Of Earners – Fiscal Policy

According to the most recent data released by the IRS, it took annual earnings of $515,371 to be part of the top 1% of earners in 2017. The amount of income required to crack the top 1% mark increased 7.2% from the prior year, equal to an additional $37,106 in income.

Of the 138,945,000 individual tax returns filed in 2017, 1,432,952 returns fell into the top 1% category. The top 50% tax earners were, on the other hand, more representative of taxpayers across the country, with an income threshold of $41,740. There were over 71 million taxpayers that fell into the top 50% in 2017.

(Source: IRS, www.irs.gov/statistics/soi)

 
u.s. agricultural exports to china grew 700% from 2000 to 2017. 

U.S. Agricultural Exports To China Decline – Trade Policy Review

China is the largest export market for U.S. agricultural products, with over $28 billion of exports in 2017. Agricultural U.S. exports to China have generally increased over the past couple decades, with a 700% increase from 2000 to 2017. 

Agricultural products exported to China include soybeans, cotton, pork, corn, and wheat. Soybeans account for the single largest agricultural export, representing over 50% of China’s soybean imports in 2017 alone.

Fallout from the trade disputes have recently given other countries the opportunity to capture Chinese agricultural market share from the U.S. Agriculture-producing countries including Brazil, Australia, Canada, and Ukraine have all been able to increase exports to China as U.S. exports have fallen. The risk to U.S. exporters is that these alternate suppliers may take permanent market share away from the U.S.

Demand for U.S. exports may also be affected by slowing global growth. The International Monetary Fund is estimating a 3% growth rate for the global economy in 2019, a drop from 3.6% in 2018. Among those countries expected to see a decline in growth are China, Japan, and the United States. China’s forecast is primarily due to trade tensions and a drop in exports. India, meanwhile, continues to grow at a favorable rate compared to both emerging and developed economies.

(Sources: U.S. Department of Agriculture, IMF)