Macro Overview

Financial markets experienced a bountiful decade for stocks and bonds, as a low rate environment fostered by the Federal Reserve and technological advances driven by innovation, catapulted values higher. The 2010 decade was the first decade to avoid a domestic economic recession, with accelerated growth in various sectors including technology, healthcare, and industrials.

A calm in the markets was displaced as tensions in the Middle East spurred concern early in the new year. Global equity, bond, and commodity markets reacted to developments in the region that unleashed a wrath of unease.

International markets advanced in 2019, propelled by low interest rates and a gradual global expansion. Robust gains in global equity markets came about against a backdrop of negative rates in parts of the world, traditionally representative of dismal economic dynamics. Historically low rates during the past decade also incentivized governments and companies worldwide to borrow, boosting growth in expansion and capital investments globally. The Federal Reserve plans to keep rates where they are, with no expected increases or decreases unless inflationary pressures become prevalent. Inflation has been surprisingly contained even with the unemployment rate at a 50-year low along with a gradual economic expansion.

The IRS is providing annual inflation adjustments for over 60 tax provisions, including tax rate schedules, exemptions, and standard deductions. Notable increases affecting many tax payers include the standard deduction for married, filing jointly up to $24,800, and 401k contribution limits up to $19,500 for 2020. The tax code allowing for a $3,000 write off for capital losses, such as on stocks and mutual funds, is an unindexed provision that isn’t changing and hasn’t had an increase since 1977.

The Federal Reserve continued to inject liquidity into the financial markets via buying bonds and actively participating in the repo market at the end of 2019. Many analysts believe that the Fed’s actions have dampened volatility ensued by the recent upheaval in the Middle East. (Sources: IRS, Labor Dept., Federal Reserve, CBO.gov., U.S. Treasury, Tax Policy Center)

Median Household Income Rose Modestly Over Decade – Consumer Income

The recent rise in wages is a fundamental benefit to the economy and financial markets as viewed by economists, although the monetary stimulus that helped accelerate markets over the past decade, has been considered artificial by some economists.

Historically low rates for loans to purchase homes and automobiles have enabled prices to rise without significant increases in loan payments. Modest gains in wages over the past decade have been buffered by the low rate environment. Wages, as measured by the Bureau of Labor Statistics, rose 29% from 2010 to 2019, which equates to roughly 2.9% wage growth per year. The 50-year average for inflation as measure by the Consumer Price Index (CPI) is 4%.

Since wages over the past decade have barely kept up with inflation, wage gains have not been as meaningful for workers. Median household income rose from $49,276 in 2010 to $63,688 in 2019. Inflation is a challenge for workers as wages need to keep up and offset higher living expenses. Fortunately, inflation remained tepid during the past decade, offering minimal increases for most expenses. The concern has been that if inflation should pick up, then a modest rise in wages might not offset higher expenses.

Sources: BLS, Dept. of Labor, Federal Reserve Bank of Minneapolis, FRED

Rates Expected To Stay Steady – Global Fixed Income Overview

Fixed income markets are expecting that the Federal Reserve will maintain interest rates steady through 2020, with no anticipated increases or decreases. Performance was positive across all bond sectors in 2019, with yields stabilizing towards the end of the year.

Ending the year at 1.92%, the yield on the 10-year Treasury bond is still the highest yield available among the developed government bond market. Government bond yields in developed economies such as Germany and Japan were still negative at the end of the year.

To shore up liquidity at the end of 2019 to avert a market disruption, as occurred in December 2018, the Fed injected billions of dollars into the repurchase-agreement market, also known as the repo market, and also bought roughly $400 billion of bonds since October 2019. The strategy has been very similar to the Fed’s quantitative easing program enacted during the financial crisis, also known as Q.E.

Sources: Federal Reserve, U.S. Treasury