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Passed Pawn Advisors December 2019
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Passed Pawn Advisors

A next generation digital investment advice firm utilizing the latest methodology and technology to create sensible and affordable financial solutions for our clients

Quote Of The Month

We look for 2020 to be the year of the Great Rotation II, in a repeat of 2013 — we expect a rotation by retail investors away from bond funds and into equity funds.”

-- Nikolaos Panigirtzoglou, Global Markets Strategist, J.P. Morgan

Economic Highlights

  • The Fed left interest rates on hold, and they’re expected to hold for 2020

  • The China trade deal (Phase 1) is signed, and USMCA is finally ratified

  • US trade deficit shrank for the third straight month to the lowest since October 2016

  • Q3 US GDP rose 2.1%

  • The latest monthly consumer spending, housing activity and payrolls all showed gradual improvement

Market Highlights

  • US Equities added another 3.0% to S&P 500 Index, closing the year up 31.5%

  • Emerging Markets Equities soared 7.5%, while Foreign Developed Markets Equities were also up 3.3%

  • Domestic and foreign high yield and Emerging Markets led bonds higher, 1.9%, 2.8%, and 2.7%, respectively

  • Commodities also gained 5.0%, with oil up 10.2%, and gold up 3.7%, while the Dollar fell -1.9%

  • US REITs retreated -0.7%

Observations and Expectations

What a difference a year makes. The markets at the end of 2018 behaved as if a recession is imminent. At the end of 2019, they seem to be asking, What Recession? Of course, markets had quite a bit to cheer for. Global and domestic economies kept growing, even though at slower pace. Consumers kept spending, employers kept hiring, and businesses kept earning profits. The trade cold war has finally started thawing. The Fed backed down and eased again. The global geopolitics continued to produce only short-term headline risks.

And so the bull market lived on, producing the best year for US equities since 2013. Technology sector led the rally because that’s where the growth is most evident. The next best-performing sectors, however, were the defensive group: Communication Services, Utilities, Consumer Staples and Real Estate. This should really give investors some food for thought. The lower volatility and higher income of these sectors lured a huge chunk of capital in 2019 that will probably continue into 2020. Healthcare and Materials under-performed, but for different reasons: political headwinds and global trade issues, respectively. Energy sector was outright in the negative on the year, as the long-term sentiment has turned decidedly against fossil fuels, possibly for good. Global equity markets have sizzled as well, but are lagging US stocks and may represent a better relative opportunity going forward. Even bonds had better-than-average returns especially in the high yield area.

But markets do tend to overreact in both directions, and what happened in 2019 should serve as a notice to investors in 2020. Markets don’t move up or down continuously, and reversions to the mean should be expected. That said, we still expect a solid year for the equities ahead. This is a late bull cycle, the longest in US market history, and caution is warranted. Pundits have been at it for years predicating crash and recession, and many professional money managers have taken money off the table way too early. There’s no lack of bear predictions again, with most analysts calling for “mid-to-high single digits gains” on average. We think that’s overly pessimistic. Unless one of the major market risks comes to fruition.

The top risk in 2020 is the US election. Well, technically, it should be the impeachment hearings in the Senate, but the current chances of Trump’s removal from office remain minuscule. Based on the proposals and rhetoric of many top Democratic candidates, large portions or the equity universe could react very negatively if those candidates start climbing in polls, let alone get elected. Then again, the night President Trump was elected the US futures indicated a crash in the morning, which never materialized. The other major risk remains to be the trade war, which has been mitigated, but it’s not complete without a meaningful Part Deux. The geopolitics is always a potential danger at the next turn in the road. Notwithstanding a recent scare with Iran and ongoing Brexit drama, no game-changing events are on the horizon. The Fed is not expected to be much of a factor either.

Going into January, the tone was set by the Consumer Electronics Show in Las Vegas, where electric cars and drones were again center stage. The JPMorgan Healthcare conference is setting the tone for biotech – another industry we’re very bullish on. The Economic Forum in Davos will set the global expectations in a few weeks. Speaking of trends, a recent investment conference has also declared that impact investing has arrived and, despite the ongoing debate, is now a permanent fixture in many portfolios. In the meantime, US corporate earnings reports and 2020 outlook from the CEOs will be the most important data points for investors.

Sector Update

Energy sector should once again be highlighted as an area that should generally be avoided. Even with oil prices rising significantly recently, the traditional oil & gas stocks have stalled or worse. Many analysts expect a short-term rebound after the tax sell-off at the end of the year, but we feel that such a rebound could be short-lived. With the exception of refiners, for now, the investing focus seems to be permanently shifting to what was previously referred to as the alternative energy.

Technology remains hot. The area with the most momentum is software, especially SaaS, big data analytics, artificial intelligence and cyber security. The other area we focus on is Semiconductors with 2020 being finally the year of 5G and all the Smart City and Smart Home themes getting a big boost.

Market Data

Want to see a market snapshot and all your favorite stocks in one place? Try our market data pages.

Question of the Month


This is where we answer the best investment question we’ve heard all month. If you’d like your question to be considered, please send it to us.

Question

What is SECURE legislation and how it may affect me?

Answer

The "Setting Every Community Up for Retirement Enhancement Act of 2019", aka the “SECURE Act” was signed into law as part of a larger appropriation bill late in 2019, a day after the impeachment hearings concluded in the Congress, and may have been missed by many investors. It offers several important changes, especially to retirement savings rules.

  1. Required minimum distributions (RMDs) from 401(k) plans and traditional IRAs have been pushed to 72 years of age from the current 70 ½, reflecting the increasing longevity of Americans

  2. Age Restrictions on IRA Contributions have been removed

  3. Starting in 2021, the new retirement law guarantees 401(k) plan eligibility for part-time employees who have worked at least 500 hours per year for at least three consecutive years

  4. If you're married, each spouse can now withdraw $5,000 from his or her own 401(k) or IRA account for birth or adoption of a child, penalty-free. (You'll still owe income tax on the distribution, though, unless you repay the funds)

  5. 401(k) plan sponsors will be required to provide information on annuities and make it easier to offer them to plan participants

  6. Small businesses will now find it easier to offer 401(k) plans or SIMPLE IRA, thanks to the increase of the limit to the 50% credit for start-up costs for such a plan that went from $500 to $5,000.  There’s also a brand new $500 tax credit for automatic enrollment.

  7. Amounts paid for graduate or post-doctoral study or research (such as a fellowship, stipend or similar amount) will now be treated as compensation for purposes of making IRA contributions

  8. "Stretch" IRAs are eliminated – they used to allow non-spouse IRA beneficiaries to "stretch" required minimum distributions (RMDs) from an inherited account over their own lifetime (and potentially allow the funds to grow tax-free for decades). Instead, all funds from an inherited IRA generally must now be distributed to non-spouse beneficiaries within 10 years of the IRA owner's death, with some exceptions.

  9. You can now use a 529 plan to repay student loans

ETF Education

We have recently added a new section to our website designed to provide educational, reference, and news resources to investors in the growing world of ETFs. Product knowledge, understanding cost and tax structure and how ETF trade works can help investors of all stripes find better opportunities for their portfolios and improve its risk management. Knowing the mechanics of volatility ETFs, for example, could have helped $XIV ETF holders avoid huge losses last week.

Featured Motifs

Motif Investing is an innovative broker that allows you to treat a portfolio of equities as a single unit.  We utilize their platform to offer our clients affordable solutions in thematic investing.

Each month we highlight 3 of our motifs that play on current market themes.


Motif Laser Mission
Risk Profile Moderately Aggressive
Time Horizon Mid/Long-Term

Lasers have been around for over 50 years, and this technology continues its advance to influence more and more spheres of human activity including electronics, computers, telecommunications, defense, and healthcare.


Motif Walking On Sunshine
Risk Profile Moderately Aggressive
Time Horizon Mid/Long-Term

This motif focuses on solar power, but with a twist. Chinese solar producers are excluded due to their volatility, lack of transparency, and possible US tariffs. Instead, only North American solars and related are included.


Motif Smart City
Risk Profile Moderately Aggressive
Time Horizon Mid/Long-Term

Smart City is the modern day city-state, fully self-contained with renewable energy, technology-driven and interconnected transportation, infrastructure, communications, and public services. This motif has it all.

Investing Hot Reads

Model Portfolio

See how our proprietary algorithm creates a customized portfolio just for you

Our Papers


These thematic investing papers provide insights into specific investment topics.  If you follow the subject, you can easily subscribe to them and receive a daily email update.  It's absolutely FREE.

In The News

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The materials presented above serve informational purpose only and do not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. The author, Passed Pawn Advisors, LLC, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment assets mentioned above. Motif Investing portfolios that may be presented are created by Passed Pawn Advisors, LLC, and are available for purchase through their site.
 
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