“How many times does the end of the world as we know it need to arrive before we realize that it’s not the end of the world as we know it?”
– Michael Lewis
In today’s hyper-partisan environment, how one views the current economic and market conditions largely depends upon which political party they most align with. Recently 79% of Republicans rate the national economic conditions as “excellent” or “good” compared to just 33% of Democrats, one of the largest gaps ever recorded by the Pew Research Center.
The major stock indexes finished slightly positive for the quarter, with the S&P 500 ending up 1.2% over the trailing 3 months and over 18% year to date. The market seems to be shrugging off the impeachment inquiry into President Donald Trump, the ongoing trade war with China, an attack on Saudi Arabia’s energy production network, and a debacle at WeWork that forced the ouster of their CEO.
It’s entirely possible that we could duplicate 2018’s calendar year ride which also started out strong yet ended in negative territory. Real GDP growth has slowed to 2.3% year over year and will likely finish 2019 at or below 2% growth which is decent, but not great. Earnings per share growth has tempered while the price-to-earnings ratio of the S&P 500 has risen to 16.8, slightly more expensive than the 25 year average. While the unemployment rate should be celebrated for hitting another low at 3.5% and businesses added 136,000 jobs last month, it also causes concern that all of the skilled workers are occupied and unable to further help thriving businesses to fill positions and expand. In addition, business optimism is subdued while consumer confidence and spending remains strong. All of which is to say that some economic skepticism and or pessimism acts to help to temper irrational exuberance and could help to avoid harmful market bubbles from developing.
While the Federal Reserve is supposed to remain insulated from short-term political pressures, Fed Chairman Jay Powell does appear to be reacting to a slowing economy and ongoing trade war, lowering interest rates by 0.25% again this past quarter. It is likely we will see one more interest rate cut in October to round out 2019 as inflation holds at just 1.8%. Central banks around the world are following suit, initiating more rate cuts than hikes thus far. Interest rate cuts generally help stocks and the economy as businesses are able to borrow inexpensively for investment, but hurt retirees looking to rely on stable fixed-income.
The overarching question for investors will be whether the United States and China can reach a trade agreement before the 2020 presidential election. One country who would especially like to see this is Germany, whose economy is nearing a recession. China’s own economic slowdown has weakened demand for foreign goods, such as the luxury cars it would usually purchase from Germany. With exports making up 47% of Germany’s GDP (for comparison, U.S. exports make up 8% of its GDP), there are short and long term concerns for Germany and the Eurozone’s evolving economies, Brexit notwithstanding.
Given these factors, we currently see cases for both limited upside and downside and would encourage our clients to maintain an even keel to end the year.
Schwab Eliminates Some Trading Fees
Recently, Charles Schwab announced they were eliminating transaction fees for electronic trades of stocks, exchange traded funds (ETF’s) and options effective October 7th. Previously, these transaction fees were $4.95 per trade, although many of the ETF’s we traded for clients were already not subject to transaction fees. These fee reductions will apply to electronic trades we submit on behalf of our clients whose portfolios are custodied at Schwab. There is some fine print associated with the announcement in that some international stocks would still be subject to minimal fees. And while many mutual funds trade for no cost with Schwab, some low cost funds like Vanguard and institutional share class funds will still cost a flat $20 per trade. But in general, clients should be thrilled by the benefit of lower trading costs in their accounts.
We don’t have similar news for clients whose assets are custodied at Fidelity—yet. Fidelity thus far has failed to price match with Schwab and the other brokerage firms who have eliminated transaction fees, but they may be forced to in due time. Most electronic trades of stocks and ETF’s at Fidelity remain at $4.95 for our clients, however, we look to use no-transaction fee ETF’s (and mutual funds) where we can for Fidelity clients as we do with Schwab clients. Like Schwab, many mutual funds trade for no cost with Fidelity while institutional share class mutual funds cost a flat $20 per trade.
Should you change custodians from Fidelity to Schwab to take advantage of the lower pricing? For the vast majority of our clients, the answer for now is “no” largely because 1) the number of transactions in the types of securities covered under the new pricing structure is pretty low, 2) Fidelity does offer very slightly higher money market rates as compared to Schwab (as we’re sure you’ve seen advertised recently) and 3) we expect Fidelity to follow suit at some point. However in the absence of a price reduction by Fidelity in the near future, we may reach out to clients where we do trade more actively in stocks and transaction fee ETF’s to see if they would like to make a change of custodian.
Rest assured that with either Schwab or Fidelity as your custodian, we have tremendous trading and operational support to continue to meet our Fiduciary obligations to our clients and to help meet your objectives. If you have any questions, concerns or would like more information, please do not hesitate to contact us.
What Do Clients Expect from a Financial Advisor?
In our efforts to continuously provide excellent service to our clients, we periodically review industry surveys and research with feedback that comes straight from consumers, to ensure that we are serving your needs appropriately. We found the results of the following Vanguard study particularly interesting as they asked “what is relatively most important about your financial advisor and how much does each statement contribute to you assigning the highest value rating of your advisor?” Here are the results, with the top 3 statements in each category:
Relationship with a trusted advisor (55%)
I need to completely trust that my financial advisor will put my needs first and foremost.
I need to know my financial plan is continuously monitored and updated.
I need to feel a personal connection with my financial advisor.
Protection and assurance (28%)
I need to feel that I am on track to meet my goals.
I need the assurance of guaranteed income in retirement and I am willing to exchange a portion of my portfolio return for it.
I need a financial plan that offers me financial freedom.
Planning (7%)
I need a customized financial plan that covers more than just my investments.
I need help balancing my spending and saving.
I need to expand my knowledge of investments and personal finance.
We hope we are meeting or exceeding your expectations in each category. If you would like further consultation on any of these categories, please reach out to us or make sure we discuss it at our next review meeting.
Year End Tax Maneuvers
With three months to go until 2020, we want to ensure you are doing everything within your financial plan to mitigate income taxes. Here are a few quick reminders to consider as you close out the year.
Max out your 401(k) or 403(b) at $19,000 ($25,000 if you are over the age of 50). If you are not sure what that requires, ask for a recent paystub and work backwards to contribute the correct amount each pay period to max out the plan.
Open an individual 401(k) if you are self-employed. Deferrals are due by 12/31, while profit sharing contributions can be made prior to filing your taxes.
Max out your Health Savings Account (HSA) if you have a high deductible health insurance plan. Spend down your Flexible Spending Account (FSA).
Offset investment gains with losses. We will be doing this for you within the taxable accounts we manage, but do make us aware if there are other gains or losses to consider outside of our view.
Perform Roth conversions by 12/31 if you are in a low income tax bracket due to job loss or early retirement.
Take required minimum distributions from retirement accounts and/or consider qualified charitable distributions if you are over age 70 1/2. Donor advised funds may also still be used to bunch up charitable contributions for a tax deduction in 2019.
Please do not hesitate to reach out and discuss any of these strategies along with any other financial planning considerations.