The Little Known Rule That Was Just Passed
Monday Market Recap
Highlights
The strike on Maj. Gen. Qassem Soleimani pushes oil up 4% as Middle East tensions rise. Iraq and Iran are the fourth and fifth largest oil producers in the world.
Apple returns the largest gain for the Dow at 85% while Netflix becomes the stock of the decade delivering more than a 4000% return since 2010.
After consuming much of 2019 with multiple back and forth efforts, agreements for a Phase 1 of China Trade Deal to be signed on January 15, 2020.
A tightened labor market typically leads toward higher wages, which in turn leads to higher inflation. What happens to bond and equity markets once inflation rises and the growth runs out? Analysis showed both nominal U.S. Treasuries and their inflation-linked peers have generated positive returns when growth shocks triggered equity selloffs – albeit with nominal bonds beating TIPS. Why? Declines in both expected inflation and real rates help drive up nominal bond returns, while TIPS only benefit from falling real rates under such a scenario. TIPS’ relatively limited liquidity may also mute their rally during any market stress. But TIPS have outperformed in inflation shocks. See the chart below. The “double resilience” property of TIPS – their ability to cushion against adverse growth and inflation surprises – is why there may be a case for substituting some nominal government bond exposures for TIPS in strategic allocations.
The BlackRock Inflation GPS points to core (excluding food and energy) consumer price inflation rising to around 2.4% in six months’ time, slightly above consensus expectations and the November reading of 2.3%. Yet market-based inflation expectations remain depressed. The pricing of 10-year TIPS implies an expected average annual inflation rate of just 1.8% over the next decade – a persistent undershoot of the Federal Reserve’s inflation target. Meanwhile the U.S. labor market boasts the lowest unemployment level in nearly half a century and wage gains are near their strongest in a decade. The Fed has been pushing for increased inflation targets for some time now and will likely allow temporary inflation overshoots in order set a high bar for it to raise rates. This all points to upside risks to inflation – and an attractive entry point for TIPS given depressed market prices.
This graph compares the TIPS, U.S. Treasuries and U.S. Equities of inflation stocks vs. growth stocks
Source: Blackrock
What I'm Reading –
21 Lessons for the 21st Century- Yuval Noah Harari
What role will technology, politics, and data play in our societies of the future? What can we do about the epidemic of fake news or threat of terrorism? How will the rise of biohacking, AI, and blockchain technology alter the institutions of power and control we see today?
These are questions author Yuval Noah Harari seeks to answer in his latest project: 21 Lessons for the 21st Century. Named one of the best books of 2019, this is a must read to start the next decade and beyond.
What I’m Listening To-
Starting Greatness
Mike Maples Jr from venture capital firm FLOODGATE offers lessons from the startup super performers—BEFORE they were successful—featuring interviews with some of Silicon Valley’s most legendary entrepreneurs and thought leaders. This episode features Osman Rashid from the textbook rental company Chegg.
This is an episode on what do when Facebook comes knocking to take you out of business and how greatness comes through once your back is up against the wall.
Financial Update-
The little known rule nobody knows just got passed: The SECURE ACT.
The SECURE legislation — which stands for “Setting Every Community Up for Retirement Enhancement” — puts into place numerous provisions intended to strengthen retirement security across the country. It covers 401k plans, IRA’s, tax extensions and a variety of other provisions. Probably the most little known rule that has slipped through is the Required Minimum Distribution requirement (or RMD’s). Typically once an individual turns 70 ½ that person is obligated to begin withdrawing a small percentage of their IRA assets every year. Since the 1960’s this requirement has not been changed. This has big implications for those turning 70 this year.
According to MarketWatch, “People who are expected to turn 70.5 years old in 2020 will not be required to withdraw RMDs until they are 72.” The first withdrawal doesn’t need to be made until the following April 1, which means people who turned 70.5 in 2019 can wait to withdraw their RMD until April 1, 2020. They’ll then have to take another RMD by the following Dec. 31, and every Dec. 31 thereafter.
For a brief summary on the full provision changes see the chart below.
Source: Kitces.com
On This Day – January 6, 1942
Pan American Airlines becomes the first commercial airline to schedule a flight around the world ("Pacific Clipper").
12 Month Performance
As of December 31, 2019
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Sources: BlackRock Investment Institute, MSCI, Citigroup, with data from Refinitiv Datastream, December 2019. Notes: The chart shows quarterly returns for U.S. government bonds (Bloomberg Barclays U.S. Treasury Total Return), TIPS (Bloomberg Barclays U.S. Treasury inflation notes total return index) and equities (MSCI USA Total Return index) in U.S. dollar terms during upside inflation shocks and downside growth shocks. The periods for inflation and growth shocks are measured as those quarters during which Citi’s inflation and growth surprise indexes recorded a greater than 1 standard deviation relative to their history. Indexes are unmanaged and not subject to fees.
Chart Source: BlackRock Investment Institute, with data from Refinitiv Datastream. December 2019. Notes: Global stocks are represented by the MSCI ACWI index. Global bonds are represented by the Bloomberg Barclays Global Aggregate Bond Index. Total returns are shown in U.S. dollars. 2019 returns are through December 31 2019.
MarketWatch: https://www.marketwatch.com/story/with-president-trumps-signature-the-secure-act-is-passed-here-are-the-most-important-things-to-know-2019-12-21
Apple: https://www.barrons.com/articles/apple-was-2019s-best-dow-stock-what-history-says-will-happen-in-2020-51577795401
Netflix: https://www.cnbc.com/2019/12/23/netflix-was-the-top-stock-of-the-decade-delivering-over-4000percent-return.html