This Newsletter was sent to subscribers in December. If you would like to get these when published, subscribe for free here.
Market Recap
The past month saw the market creep up in fits and starts to an all-time high. Market direction and volatility has been mainly driven by 3 words: jobs, trade & impeachment. Corporate profits are actually down 2.8% year-over-year on a per share basis according to JPMorgan’s numbers, making this a more risky market when viewed from a long-term perspective.
Clearly optimism is high, probably supported the most by robust jobs numbers. Behind the scenes, the Fed moved boldly to address the Repo issues for the near future with a massive repo operation over the next few weeks. How much is “massive? $490,000,000,000 according to the Financial Time’s numbers.
The “Phase 1” trade deal that was announce looks more like a Phase 1/2 rather than a real phase 1, but the markets clearly liked the idea of better trade relations with China. Or maybe they just want to go home for Christmas.
Market Outlook
We shift to bullish (but paranoid about it), as the Fed’s go-big-or-go-home mentality has put the Repo issue to bed for a while. The issue doesn’t go away as the resulting liquidity injections by the Fed means the Fed is juicing the market again. Skeptical observers will note that the Fed is starting QE4 but under a different name. It will take legislation to fix the repo issue, so the old adage of “don’t bet against the Fed” is clearly in play until then.
Now that “Phase 1” of the China deal is set to be signed in January, it is our belief that there won’t be too many waves with China to derail the election (but after the election may be another story). Given the President’s penchant for publicity, the fact that an underling will be signing the agreement instead of Trump and Xi gives us hints about future negotiations.
Of course, freeing up focus from China means the President can focus on Europe, and we expect tariffs to jump across the board as he presses his negotiating leverage. Combined with Brexit now a near-certainty, Europe will have an interesting year ahead.
As it stands now, impeachment looks dead (at least no chance of a conviction), and the jobs market is strong enough to carry the economy into the new year. CNBC seems to think layoffs are coming, though we think this is overstated. Boeing may have some layoffs due to the continuing 737 Max issues, but that is more of a one-off issue.
Our key driver for the month ahead is simply “jobs”. Bad news would weigh heavily on the markets if it hits, but clouds have cleared somewhat on the horizon. Again, don’t bet against the Fed – as long as they are adding liquidity, the markets will continue to go up. The reverse should also be true if they remove liquidity.
Quick Tip
Retirement Plan contribution limits will rise for 2020 (see the IRS page here). For 401K plans, the limits are increased to $19,500, but you can save yourself the annual headache of changing your payroll deduction by doing one of two things:
- Choose the “Max” setting. Companies that offer this choice will automatically adjust the amount every year, so you don’t have any work to do. Some plans don’t have a “max” choice, instead forcing you to put a specific number in, hence the second option.
- Calculate the deduction on a per paycheck basis so that you have the last payroll deduction taken out in November. ( For example, if you have 24 pay periods per year, take the full amount out of the first 22 pay periods. You can round this out to $900 per pay period.) This not only allows you to minimize annual updates to every few years, but also puts extra cash in your paycheck right before Christmas.
We’ve noticed that all the best savers choose one of these options.
Words of Wisdom
“An optimist stays up until midnight to see the New Year in. A pessimist stays up to make sure the old year leaves.”
― William E. Vaughn