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Coronavirus Still the Focus, Shrinking Populations & How to Fly Through Airport Security!

The fears surrounding the coronavirus that dominated investor's concerns at the end of January and in early February started to ease up a few days ago.  Reports started coming out that government actions in China had reduced new cases, meaning the virus could be peaking.  AP News  With that risk potentially diminishing and positive comments from the Fed, the markets reacted very positively, and stock indexes hit new record highs.  But by Thursday, China had reported a big uptick in cases and the markets reacted negatively.  So, for now, the virus is the big market mover and will be the focus.  Researchers are working on a vaccination for the virus, but it is in the early stages.  WSJ  Until the virus has peaked and is in the rear view mirror or until a vaccination is available, it will continue to affect the markets and earnings outlook.

  • Fed Speak 101:   The Federal Reserve Chair, Jerome Powell, testified before the Senate Banking Committee this week for the Semi-Annual Monetary Policy Support.  He commented on a wide range of topics and questions including climate change, inequality, and the coronavirus (which he said they are carefully watching).  Probably his most important comment was that the U.S. economy is in a very good place and that "There's no reason why the expansion can't continue.  There's nothing about this expansion that is unstable or unsustainable."  Yahoo Finance

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US Stock Market Inoculated Against Coronavirus?

The spread of the coronavirus beyond China is dominating the headlines, but US stocks are behaving as if the virus is not a material economic threat to the US. An Axios article theorizes that one reason is that there is no better alternative to US stocks. (Axios) The virus has made its way to the US with at least 11 confirmed cases, including 1 in Massachusetts. (New York Times) The Washington Post calls for a reality check, arguing that the flu is a bigger risk in the US than the coronavirus “for now”. (Washington Post)

  • US Economy Looks Solid: The latest data indicates that the US economy grew 2.3% in 2019. That is down from 2.9% in 2018 but is still a good number. Many observers believe that the trade conflicts have hurt business investment, perhaps offsetting some of the potential growth attributable to the tax cut. (Washington Post) Especially encouraging is the surprise private payroll jump this week, the best monthly gain in 5 years. (CNBC)  And Maine’s and New Hampshire’s jobless rates remain historically low. (Portland Press Herald)

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The Markets React to the Coronavirus

Imagine if the U.S. government ordered the states of Illinois, Indiana, Michigan, Ohio, Wisconsin and Minnesota to be quarantined.  No travel in or out of the area, people are discouraged from going outside, retail businesses have to close, and people can only work if they telecommute.  That is the current situation of Wuhan province in China, home to 50 million people in an area known for producing automobiles and agricultural products.  LA Times  It is an attempt to contain the outbreak for the new Coronavirus that researches know little about but are learning more about every day.  WSJ  The Economist

Stock markets around the world are watching for the economic effects.  U.S. stock markets dropped abruptly Monday on further news of the outbreak and quarantine.  Investors are reacting to how much the world's second-largest economy will be affected, which already was sluggish when in 2019 it had its slowest growth rate in 29 years.  South China Morning Post  Investors are also concerned about U.S. multinational businesses with big operations in China.  Starbucks closed over 2,000 stores and McDonalds, Pizza Hut and KFC were shutting down operations as well.  CNBC

By midweek, stock indexes were recovering.  But investors will be keeping an eye on any impact of the virus on the world economy and company earnings. 

  • Fed Meeting:   As expected, this week the Federal Reserve's Open Market Committee held rates steady.  The markets are focusing on the banks' balance sheet and the coronavirus.  Recently, the bank expanded its balance sheet by 400 billion dollars to provide liquidity to the short-term market.  In response to the coronavirus outbreak, Jerome Powell, the chair, stated that "if developments emerge that cause a material reassessment of our outlook, we would respond accordingly."   Yahoo Finance  WSJ

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Sustainability Investing Goes Mainstream...A Watershed Moment?

Something of significance is afoot in the investment world. Sustainability investing, which includes an evaluation of a company’s environmental and climate change impact, is going mainstream. There has been a paradigm shift from viewing sustainability as a personal or policy value to viewing it as an important consideration in assessing investment risk. Putting it in the positive, companies with strong sustainability policies will be better positioned to thrive in the future, as environmental and climate change considerations become increasingly important. Exhibit #1 is the recent announcement by BlackRock, the largest global asset manager, on a fundamental shift in its investment policies toward sustainability (see below).

  • BlackRock Getting Greener? Larry Fink, BlackRock’s C.E.O., recently announced that BlackRock would begin unwinding investments in companies that posed significant sustainability risks and would introduce new funds that avoid fossil fuels. In Fink’s own words, “The evidence on climate risk is compelling investors to reassess core assumptions about modern finance.” How all this plays out for BlackRock and whether it will make a significant difference will be closely watched, but it is unquestionably a watershed time in the financial world. (New York Times) (CNBC) (Wall Street Journal)  

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Trade Deal Signed (Finally!), Women are the Majority of Workers, & How to Make Your Heart Younger!

The Dow, S&P 500 and NASDAQ stock indexes all hit new highs this week.  Lessening trade tensions, tepid inflation, an accommodative Federal Reserve on hold, and positive company earnings expectations are driving stock prices higher.  And investors have tuned out the noise coming out of DC and will continue to do so unless it affects the economic news.  All that and more in this week's The Friday Buzz! 

  • The Long-Awaited Phase One Trade Deal Signed:  The U.S. and China signed their first trade agreement since the start of the trade war.  In the deal, tariffs on Chinese goods will be reduced and previously announced additional tariffs will not go into effect.  China also agreed to purchase more U.S. products.  U.S. companies will have additional protections regarding intellectual properties and more access to the Chinese financial services market.  Both sides will be monitoring the success of this deal as future deals are discussed.  CNBC  WSJ

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Iran Military Conflict and the Financial Markets-A Missile Dodged?

The possibility that US-Iranian hostilities could erupt into a Middle East war has been high on our list of geopolitical risks that might spill over into the financial markets. The recent US assassination of a top Iranian military leader turned up the heat dramatically, dominating the headlines and causing the price of oil to move upward. The reaction of the financial markets has been surprisingly muted. Notwithstanding the escalating rhetoric, the Iranian response has also been surprisingly muted. Iran did launch an attack on US bases in Iraq that resulted in no US service personnel casualties but then appeared to signal that it considered itself duly avenged. We expect strategic fallout with Iraq forcing US troops out of its country, but this alone will not impact financial markets.

Not that we needed the reminder but understand that financial markets care about earnings, interest rates, inflation and economic developments. Unless and until political and policy events occur with significance for those core financial concerns, financial markets will continue to be coldly indifferent to external events that may nevertheless be truly important to the US or geopolitically.

  • Iran’s Measured Response: Unless there is more to come, Iran has responded to the General Soleimani assassination modestly by any measure. Perhaps Iran enjoys poking the bear but doesn’t want the bear to attack? (Axios)

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2019 Wrap Up, 2020 Predictions, & How to Be a Better You in the New Year!

2019 was a year of tumultuous news headlines of trade wars, the slowing global economy, and political investigations and impeachment.  Yet, with that scary backdrop the markets had a fabulous year.  The Russell 3000, a broad stock index, rose a stunning 31.20%.  International developed stocks as measured by the MSCI EAFE Index were up 18.44%, lower, but still outstanding.  Stocks worldwide rebounded from a sharp correction at the end of 2018 and eventually pushed to record highs at the close of the year.

The U.S. bond market also did well as the Bloomberg Barclays Aggregate Bond Index was up 8.72%.  Municipal bonds as measured by the Bloomberg Barclays Municipal Bond Index were up 7.54%.  These are also excellent returns and reflect the rally in bonds from the mid-year growth scare as any inflation worries abated and yields plummeted.  As yields dropped, the prices of bonds went up as they are inversely connected.  So higher prices, coupled with interest, led to great returns for bonds.

We certainly can't expect returns like this every year but are delighted when they occur.  Here's hoping the headlines this year are a little more sanguine and markets continue marching on.  To start the year off right, I have included a lot of positive news and fun articles to get everyone in a positive frame of mind.  Wishing you a productive, prosperous and happy 2020! 

  • 2020 Predictions:  I keep using the word solid to describe the economy.  Sturdy, stable, and sound also come to mind.  But basically I am trying to describe a scenario that is not weak and not spectacular.  Most pundits seem to agree as estimates for next year's GDP growth tend to come in at about 2.0% and companies earnings growth estimates are in the high single digits.  As I said, solid. Greg Valliere   Yardeni Research  Forbes

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With 2019 Ending, Congress Wants You to Feel More “SECURE”

As 2019 glides to a quiet finish, our wish is that each of you will experience a generous measure of peace and happiness during the last few days of this year and into 2020. It has been a tumultuous year, but certainly an outstanding investment year by any measure. The financial markets continue to shrug off the impeachment process, which stumbles forward. Congress has nevertheless cooperated to pass significant retirement related legislation called the SECURE Act, which has been signed into law.

  • The SECURE Act: This legislation has numerous provisions, necessitating further analysis. Three changes clearly have retirement planning significance. For those who turn 70.5 after 2019, the Act raises the age when individuals must begin taking minimum distributions from their retirement plans from 70.5 to 72. In other words, if you are already subject to the required minimum distribution rules, the new law does not apply. There is a major change to the rules for required minimum distributions from inherited IRAs. This rule also only applies to IRAs inherited after 2019. With a few exceptions, including for spouses and minor children, inherited IRAs will have to be distributed within 10 years and may not be “stretched” over the beneficiary’s lifetime. A third notable change is that individuals will now be able to contribute to IRAs after 70.5, provided they have earned income. Expect to hear more from us on the SECURE Act and how it may impact individual clients. (Schwab)

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More Good Trade News, Retirement Bill in Congress, & the Medical Magic of Saunas!

Some of the big economic and headline risks of the last few years are slowly easing.  Last week there was a significant breakthrough for the trade deal between the U.S. and its neighbors and this week brought a Phase-One agreement between the U.S. and China.  Also, the U.K. elections seemed to create clarity for a roadmap for Brexit.  This is not to say that the trade and Brexit issues are now behind us, as we are a long way away from them being firmly in our rearview mirror.  But these are positive developments on two very thorny issues and any progress is good for the economy and markets.  And if indeed they do pose less risks going forward, it is even more reason for the Federal Reserve to stand pat and keep rates on hold.

To our friends celebrating the Festival of Lights, have a very Happy Hannukah!  Have a very enjoyable weekend and thank you for reading The Friday Buzz!

  • Government Spending Bill Passes the House:  This week the House of Representatives passed a $1.4T spending bill.  It is expected to pass the Senate by late Friday and most think the President will sign the bill (most).  If it passes, it will fund the government through September 30, 2020 and avert a government shutdown.  Lawmakers were quick to laud the compromises that made the bill a reality, but those watching Federal spending lamented the $50B in additional annual costs.  Where are the fiscal hawks?   WSJ  Committee for a Responsible Federal Budget

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Strong US November Jobs Report Boosts Confidence

The November jobs report strengthens our conviction that the US economy continues to grow at a slow but steady pace. The US added 266,000 non-farm jobs in November, exceeding a consensus expectation of a 180,000 jobs gain. Sectors across the economy, including the manufacturing sector, added jobs. The unemployment rate is now 3.5%, and average hourly earnings have increased 3.1%, year over year. People who feel secure in their employment will spend more. Strong consumer spending and low unemployment signal that the economy remains on solid footing.

The excellent November jobs report makes it less likely that the Fed will lower rates again soon, setting up more confrontation with the current administration which wants rates as low as possible. (CNBC)

  • Where Are the Jobs? Not all US geographical regions and economic sectors are benefiting equally from the growth in jobs. So called innovation jobs are highly focused in a few coastal areas. Boston is one growth area. (New York Times)

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