Fourth Quarter 2019 Commentary

2019 was a great year for all asset classes. US stocks continue to be the best performer earning 31.02%. Global Real Estate was the second-best performer earning 23.12%. International Developed and Emerging Market stocks still had a great year earning 22.49% and 18.42% respectively. Interest rates increased slightly in the 4th quarter which kept bond performance flat during that time period. For the year though, interest rates decreased. This had a positive impact on bond performance with the US bond market earning 8.72% and international bonds earning 7.57%.

The U.S. economy grew at an annual rate of 2.1% in the 3rd quarter. Inflation increased by 2.1% for the 12 months ending November. The unemployment rate maintained at 3.5%.

Global Trade

There were breakthroughs with U.S. – China relations during the 4th quarter. A “Phase One” trade deal was agreed to. This deferred tariffs that were set to be applied and reduced the amount of some prior tariffs. These negotiations will most likely continue for some time but it’s nice to see progress. The United States-Mexico-Canada agreement (USMCA) was passed by the house in December and is expected to be signed into law in early 2020.

U.S. Monetary Policy

The Federal Reserve reduced interest rates once in the 4th quarter for a total of 3 cuts in 2019. This reversed almost all the interest rate increases in 2018. While the Federal Reserve controls short term interest rates, the 10-year treasury increased from 1.69% to 1.92% for the 4th quarter. This reduction in short term interest rates and an increase in long term rates caused the inverted yield curve to become normal again.

The SECURE Act

The SECURE Act, an acronym for the “Setting Every Community Up for Retirement Enhancement,” was signed into law on December 20, 2019. This law has many provisions but two of the most impactful for retirees are the changes to the Required Minimum Distribution (RMD) age and distribution rules for inherited retirement accounts.

Changes to the RMD age: RMDs typically began in the year someone reached 70½. The new law raises the RMD age to 72. This change only applies to people who turn 70½ after December 31, 2019. If a person turned 70½ in 2019, the new law does not apply. That person is still subject to the old rule of starting RMDs at age 70½.

Changes to distribution rules for inherited retirement accounts: Inherited retirement accounts (often referred to as “Stretch IRAs”) typically distributed those assets over the beneficiary’s lifetime. The new law requires those assets to be distributed from the account within 10 years of inheriting them. There are exceptions for spouses, minor children, individuals with disabilities and people less than 10 years younger than the decedent. The new law does not affect existing inherited accounts. It only applies to accounts that are inherited in 2020 and beyond. Given the reduced time period for distributions, this new change can have a significant impact on estate and income tax plans.

Conclusion

2019 was a great finish to an incredible decade. From 2010-2019, global stocks doubled on a total return basis. This performance occurred despite considerable uncertainty. The decade started during the early stages of recovery from one of the worst U.S. recessions in history. There was also the U.S. credit rating downgrade, Brexit, an inverted yield curve, 2016 election and trade wars to name a few. The next year and decade will be no different with plenty of uncertainty (Especially given another election year).

Instead of trying to predict what will happen in the next year or 10 years, we should do as Amazon founder, Jeff Bezos said and, “Focus on what will stay the same.” Regardless of what happens in the economy, election or interest rates, the fundamentals of investing continue to work. By keeping costs low, diversifying and focusing on what we can control, we should be able to navigate whatever the next decade holds for us.