Fluent Financial Market Update as of January 5, 2020
The new “Setting Every Community Up for Retirement Enhancement” or “SECURE” Act will have the greatest impact on those nearing or in retirement. This law is focused on modifying your required minimum distribution (RMD) rules and expanding retirement plan access. Several key points include:
For additional details, please see “ 6 Ways The Secure Act May Impact Your Retirement ” from Forbes magazine
S&P 500 in 2019
It was another exciting year for investors in 2019 amid a stock market rally that saw the S&P 500 surge 28%, for the biggest gain since 2013. Easing trade tensions with China, a shift in monetary policy at the Fed, and improving economic outlook all renewed investors’ faith, while safer assets like gold and bonds also soared.
As the stock market closes 2019 with a bang, attention turns to the election year of 2020 with investors wondering if the stock market can continue the streak that has made this bull market the longest in history. It is easy to identify the headwinds at the beginning of each year; the difficult part is accurately determining if those headwinds will pose an actual threat to the rising stock market or not.
Our portfolios trailed their associated benchmarks in 2019 but this can be attributed to the fact that Fluent Financial was hedging against uncertainties throughout the year. Our number one priority is protecting client assets, followed by the priority of making those assets grow. Hedging will always be a double-edged sword that limits upside potential while at the same time protecting clients from large downward swings. The lack of any significant downward swings in 2019 means that the precautionary measures taken to protect our portfolios ended up being a drag on our performance as markets continued to reach record highs.
Defensive measures taken in 2019 included several Fluent Financial portfolios increasing their Put protection, increased cash levels, or in some cases, both. Several hurdles were overcome this year and any time unknowns become knowns, markets tend to react positively. These hurdles included:
Recently rebalanced ETF portfolios reflected a slight policy shift from Domestic Large-Cap holdings into Developed International ETFs as we move into 2020. The major shift in our Equity portfolios was a reduction in Health Care and Materials in favor of Consumer Staples, Information Technology and Industrial names.
Careful analysis of the Market Summary risks posed, and even those not mentioned: Russia, North Korea, Iran, Repo’s, etc. suggests that while these cannot be ignored, they are unlikely to derail the bull market. The most compelling reason why is the global liquidity being provided by the Central Banks. We entered 2019 with almost no Central Bank easing and enter 2020 with the most synchronized level of easing since the Great Recession in 2008; higher than the level of easing after the recession of 2000-2002. Liquidity should win this tug-o-war, allowing markets to add to gains in 2020 even if the environment becomes more volatile.
On the fixed income front, long-term returns for bonds tend to match up well with their yield to maturity. With the Federal Reserve hinting at no action, and coming off outsized returns in 2019, there are plenty of indicators that support bonds reverting to a return driven more by the income than price appreciation at historically low interest rate levels.
On the equity side, concerns of valuations creeping up are being offset by pockets of positive economic signals. That said, the story of the day tends to be outweighing stock fundamentals as the primary driver of near-term returns. This is a challenge to traditional data-driven decision making and will likely be a driver of continued bouts of short-term volatility ahead.
In a potential low return environment with no clear asset class looking particularly enticing, investors will need to take advantage of opportunities to get more out of their existing investments rather than abandoning their fortified asset allocation base. Adding more capital efficiency to a portfolio through an options strategy can provide the potential to achieve attractive returns in this environment without stretching the portfolio’s risk.
The introduction of our new STOCK INCOME portfolio in late 2019 achieves this capital efficiency described above and has been well received thus far, generating monthly cash off existing portfolio holdings. Several other portfolios continue to use an options strategy, generating additional free cash flow for our clients and differentiating ourselves from the traditional 60/40 Stock/Bond models.
Mitch Kramer and the Fluent Financial Team