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Monthly Insights | 2020.01

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Market Recap

The last month has been driven by the Fed’s repo market purchases as we expected. How big is the impact? Well, to put it one way, a military confrontation between the US & Iran couldn’t even prevent the market from continuing to set new highs.

We saw a continued decrease in transportation jobs in December, but otherwise the job market held steady in December. The best news might have been that the U-6 employment number (often called the “real” unemployment rate) continued its trend,dropping to 6.7%.

The Fed continued its repo operations, but there are signs that they are trying to reduce the amount in the market, despite broad agreement that they will continue with repo operations until April. That the Fed still has operations at the beginning and middle of a month & year is a sign that not all is well in the credit markets. One sign is that for every 1% expansion of the Fed’s balance sheet, the S&P 500 has gone up 1% as well.

Market Outlook

We still believe that the Fed will have the biggest impact on the market, and the market will continue to go higher as long as the Fed is adding funds to its balance sheet. Clearly the last few weeks have shown that Iran can have a big impact on it too, although that is less predictable in both timing and magnitude.

The Phase 1 trade deal is signed, but nobody is particularly excited about it, including the Chinese. We are focused on the actions that happen after the signing to see if there will be further progress or if the whole thing unravels instead.

The jobs market might see some volatility – first as the Boeing 737 delay impacts supply chains, and second, as the general global economy moves past the Christmas holiday season. Our best prediction is a hodgepodge of numbers, with no clear direction.

All of the above confirms a higher market, but also higher risk. Investors are right to be both exited and anxious. The Fed’s repo changes should hit the market around the March-April timeframe, with initial reductions of the operations to start in February, so expect the Spring to be stormy.

One wildcard (or black swan if you prefer): the recent outbreak of a coronavirus in China, if it spreads significantly, will likely drive the market down, particularly in travel and transportation segments of the market. The fear will cause the selling – more so than any actually casualties of the virus. Fear tends to strike hard and fast, especially when it is about our own mortality.

Quick Tip

401K plans usually allow employees to make regular or Roth-type contributions – the former being pre-tax and the latter being after-tax contributions.

While the difference may seem subtle, it pretty much comes down to this: a pre-tax contribution has the effect of reducing your taxable income for the year, and a Roth contribution does not reduce it.

If you are in a higher tax bracket, and you believe that your tax rate in retirement will be lower than it is now, then a regular 401K contribution is usually the right choice. However, if you think taxes are lower now, or you simply like the idea of not having to pay taxes on it in the future, then Roth contributions are a better choice.

One thing to be aware of – regardless of what form your contributions are, your company’s matching contributions are always pre-tax.

Words of Wisdom

“A common mistake that people make when trying to design something completely foolproof is to underestimate the ingenuity of complete fools.”

― Douglas Adams, Hitchhiker’s Guide to the Galaxy