Get Your (SECURE 2.0) Act Together

by Dan Acheson, CFP, EA

The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) was signed into law in December 2019 and brought with it greater attention to retirement savings via many provisions for employer-sponsored retirement plans and other retirement savings vehicles/allowances. Fast forward three years, almost to the day, and a new version of the act, aptly named the SECURE 2.0 Act of 2022, was signed into law as part of the Consolidated Appropriations Act (CAA) of 2023. 

The SECURE Act 2.0 uses its predecessor as a foundation and expands/improves upon the retirement savings elements. The 2.0 Act itself has over 90 new provisions to promote savings for individuals, incentives for businesses to offer retirement savings opportunities, and more flexibility when it comes to accessing funds from retirement accounts. Below will highlight some of the features of the SECURE 2.0 Act that will have the greatest impact on our clients at Munn Wealth Management.

Increasing the Required Minimum Distribution (RMD) Age, Decreasing the Penalties on Neglecting to Take RMDs 

Starting January 1st, 2023, the age to begin taking RMDs from tax-deferred retirement accounts has gone up to 73. This primarily affects individuals who are turning 72 this year as they will no longer be required to take a minimum distribution for 2023. This is an update to the SECURE Act of 2019 that raised the age from 70½ to 72.  SECURE Act 2.0 includes an additional provision that raises the age limit for the first RMD to 75 starting in 2033.

Version 2.0 of the legislation implements a reduction of the penalty taxpayers are forced to pay, should they neglect to take a RMD, from 50% to 25%. The penalty is further reduced to 10% if the failure is corrected in a “timely manner.” Timely manner, while explicitly defined in the annals of the act itself, leaves plenty of room for interpretation. The bottom line is if the failure is found and corrected as soon as possible, the penalty for negligence will be reduced to 10%.  

The measures of delaying the age of RMDs and reducing the penalties are an attempt to keep taxpayers’ retirement savings in a tax-deferred vehicle longer in order to further assist with covering their expenses. This delay in the RMD age brings a plethora of planning opportunities with it, which your advisor would love to speak with you about.

Qualified Charitable Distributions One-Time Gift Provision

Effective immediately, those who are 70½ and older may elect, as part of their Annual Qualified Charitable Distribution (QCD) limit, a one-time gift up to $50,000 to a Charitable Remainder Trust (CRT) or charitable gift annuity from an IRA. This provision expands the definition of a qualified charity to entities without a 501(c)3 designation; however, contributions to donor advised funds and private foundations still do not count for QCD treatment and benefits. The $50,000 limit will be indexed for inflation each year moving forward.

Other Important Anecdotes from the Secure Act 2.0 slated to begin in future years

Beginning in 2024

• Roth Accounts in employer retirement plans will be exempt from RMDs.

• The $1,000 catch-up contribution limit in IRAs for people age 50 and older will be indexed for inflation. 

• Employers will be able to “match” employee student loan payments with contributions to their retirement account, giving workers more incentive to save for retirement while paying off educational debt.

• After 15 years, 529 plan assets can be rolled into a Roth IRA. This will be subject to annual contribution limits and a lifetime limit of $35,000

• A $1,000 withdrawal from retirement savings for emergency expenses will be allowed without the 10% early withdrawal penalty, once per year

Beginning in 2025

• Individuals ages 60 through 63 will be able to make catch-up contributions up to $10,000 to an employer retirement plan. The $10,000 will be indexed for inflation. One item to keep in mind is for those earning over $145,000 in the prior calendar year – all catch-up contributions for those 50 and older will need to be made to a Roth account. 

• Most new 401(k) and 403(b) plans adopted after 12/29/2022 must automatically enroll participants in the employer retirement plan.

These few items are just a small assortment of what the SECURE 2.0 Act has to offer, but those that I feel could have the greatest impact on our clients as they continue their journeys to living lives of significance. 

Munn Wealth Management is registered as an investment adviser with the United States Securities and Exchange Commission. This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client.  All readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors. 1323 GPW

What does a recession mean for investors?

By David Munn, CFP

President

Munn Wealth Management

Coming into 2022, the US economy appeared to be on solid footing. Gross Domestic Product (GDP) increased 6.9% in the fourth quarter of 2021, more than double its long-term average rate.

Now just six months later, the word “recession” is in more and more economic forecasts,  analyses, and news coverage. 

So what does recession mean? And more importantly, what does recession mean for investors?

During the vast majority of modern American history the economy has been growing. Technological advances and population growth are two main drivers of the consistent increase in production and overall economic activity (buying and selling goods and services).

However, from time to time, the economy contracts, meaning that for a period of time, less is bought and sold than the previous year. When this contraction occurs over two consecutive quarters (GDP is measured quarterly), it is labeled a recession. Since 1945 there have been 13 recessions, which averages out to about one every 6 years.

A recession can be triggered by any number of factors: the 2001 recession was the popping of the tech bubble; the 2007-2009 “Great Recession” was the popping of the real estate bubble; the 2020 recession was COVID and subsequent global shutdowns.

So a recession is a normal part of an economic cycle and simply means the economy stops growing for a period of time.

As you would imagine, the stock market does not like recessions.  Stock prices are based on an expectation of future profit growth, and while some select companies may continue to grow profit during a recession, most do not. 

However, the stock market is forward looking and constantly pricing in available information.  Many times the market will price in a current or future recession, even before the GDP data indicating a recession is available.  Consequently, as the chart below shows, more often than not the stock market has actually produced positive returns during recessionary periods, though that has not been the case with the last three. 

Earlier this year it was announced that GDP in the first quarter of 2022 decreased at a rate of 1.5%. That means if Q2 data also shows contraction, we will have experienced–or be in the midst of–a recession. 

The data could also show growth in Q2, meaning we avoided a recession–for now.  In either case, the market will likely not react, as it doesn’t care what happened in the past, and is focused on future economic conditions (which humans are very poor at predicting). 

---

This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client.  These materials are not intended as any form of substitute for individualized investment advice.  The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own.  Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors.  Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment, investment strategy (including the investments and/or investment strategies recommended by the adviser), will be profitable or equal to past performance levels. The S&P 500 is an unmanaged index used as a general measure of market performance.  You cannot invest directly in an index. Accordingly, performance results for investment indexes do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results. Munn Wealth Management is registered as an investment adviser with the United States Securities and Exchange Commission. 1323GKC

Does A Bear Market Have Teeth?

Investors watching the financial markets or news reports recently have likely heard there-emergence of the term, “bear market”, in reference to recent stock market volatility. Naturally, this has prompted questions about what exactly the term means, and what the implications could be for investment portfolios.

A bear market is defined as a drop of 20% or more from an index’s most recent high. Conversely, a bull market is when an index rises 20% or more from an index’s recent low. So by those definitions– as there is some variance in the industry as to when the terms are used– a particular index is always in either a bear or bull market.

However, because the use of either bear or bull is based solely on past market activity, it is important to note that it indicates nothing about the future market direction. Granted, the emotional impact of a falling or rising market could generally lead investors to believe the current trend will continue, and the “talking heads” in the news will lean in to these emotions and reinforce the fear or greed investors are feeling at the time.

But the volatility the markets are currently experiencing is not unexpected, or even unusual. The third and fourth quarter of 2018 saw similar market activity, driven by concerns over actions of the Federal Reserve and geopolitical relations with China (sound familiar?). The first quarter of 2020 saw much more significant market drops as concerns mounted around a mysterious virus that was rapidly spreading around the globe.

In both cases, the volatility passed and the market had surpassed its previous highs in less than1 year. So should we expect the same outcome this time around?

Not necessarily. Stocks could keep falling . . . or the recovery may have already begun. The markets could take a while to recover . . . or the recovery could happen rapidly, as was the case in the previously mentioned scenarios. The reality is that no one knows what the market will do over the coming months and years, which is why attempting to time the market ups and downs generally proves counterproductive.

Our advice to clients is to always maintain a diversified allocation that supports your long-term objectives and allows you to stay the course and ride out the volatility, without panicking or losing sleep. For retirees, having at least 5-7 years of cash needs set aside in conservative investments is the preferred course of action, as this allows plenty of time for stocks to recover, and avoids the need to liquidate investments at an inopportune time.

We also believe volatility creates opportunities. For those with available cash, it is a much more favorable buying opportunity than we have seen in some time. For those with non-qualified investments, we will be evaluating opportunities for tax loss harvesting, selling investments that have lost value and dropped below their cost basis and deploying the proceeds into investments with similar or greater upside potential. And our investment team is diligently evaluating changes that may be merited in our clients’ portfolio in light of the rapidly changing market conditions.

We value the trust you have placed in our team and welcome your questions or concerns. Please do not hesitate to reach out.

Article written by:

David Munn, CFP®

President

Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment, investment strategy (including the investments and/or investment strategies recommended by the adviser), will be profitable or equal to past performance levels. This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client. These materials are not intended as any form of substitute for individualized investment advice. The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own. Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors. Munn Wealth Management can assist in determining a suitable investment approach for a given individual, which may or may not closely resemble the strategies outlined herein. 1323GLX

How the SECURE Act May Impact You

By: David Munn, CFP

In December 2019, Congress passed and the President subsequently signed into law the SECURE Act, arguably the most impactful legislation on retirement and estate planning that has happened in quite a while. While the law touched on quite a few different areas, including 401(k) and 529 plans, we believe the two most significant changes deal with Individual Retirement Accounts (IRAs). 

1. Increase in starting age for Required Minimum Distributions (RMD) from 70.5 to 72 

Prior to the Secure Act, individuals who reached the age of 70.5 were required to begin taking an annual minimum distribution from their Traditional IRA, an amount based on the age of the account owner as well as the account value. This is essentially the government’s way of forcing the taxation of the large amount of pre-tax money Americans have accumulated, primarily through company 401(k) plans. 

For an individual turning 70.5 in 2019, the initial RMD was 3.65% of the value of the account as of December 31, 2018. This percentage then increases every year, rising to 5.35% at age 80, 6.45% at age 85, 8.77% at age 90, and so on. The subsequent impact (and intent of the RMD law) was the depletion of the retirement account, leaving less funds for a potential beneficiary to then stretch over their lifetime upon the death of the original account holder. 

However, as life expectancies have continued to rise, the RMD increased the probability the retirement account would be depleted during the lifetime of the original account holder, a problem Congress was seeking to mitigate by raising the starting age to 72, though the percentages remain the same and an individual turning 72 will need to withdrawal 3.9% of the account value in their first RMD year. 

This age change applies to those born on July 1, 1949 or later. Those born prior to this date still fall under the previous law and should have already commenced their RMDs. 

Despite the change to RMD rules, individuals who are age 70.5 or older are still eligible to take advantage of Qualified Charitable Distributions (QCDs) up to $100,000/year, where funds are gifted directly from an IRA to a charitable organization, without incurring any taxable income or impact on the taxation of Social Security benefits or Medicare premiums. This is by far the most tax-effective way to conduct charitable giving for those who have reached age 70.5. 

2. Removal of the “stretch” IRA option 

Prior to the SECURE Act, a non-spouse beneficiary inheriting an IRA or 401(k) would be required to either distribute the entire balance of the Inherited IRA within 5 years, or stretch the distributions over their lifetime by fulfilling an annual Required Minimum Distribution (RMD), much like the RMD described above for those who are 70.5 or older, but utilizing a separate distribution schedule. 

With the new legislation, beneficiaries inheriting an IRA from a decedent who dies on January 1, 2020 or later must distribute the entire Inherited IRA by the end of the 10th calendar year following the original account holder’s death. 

There are multiple implications from this new law, but with limited space, I will solely address the tax impact. Consider the following scenario that we expect will play out many times moving forward. 

Bruce, age 50 inherits a $250,000 from his mother. Not needing any additional income while still working, he waits to take any funds from the account and allows it to grow to $500,000 over the subsequent 10 years. However, in the 10th year, he is then forced to withdraw the entire balance, and must pay approximately $200,000 in income taxes (an estimate based on current tax rates and assumptions about Bruce’s personal income). 

This scenario shows the significant impact even a moderate-sized IRA could have without any planning or mitigation efforts. Bruce may have been better off to stretch the distributions out over the 10 year period, but not necessarily depending on his income over that period. 

The only definitive way to effectively mitigate the tax impact is for steps to be taken prior to the death of the account holder. While the options are more limited than they were prior to the SECURE Act, there are still avenues that can be considered, including, but not limited to: 

● Roth Conversions or taxable distributions (assuming the account holder is in a lower tax bracket than the beneficiary) to remove the funds from the IRA and provide more flexibility to the beneficiary. 

● Qualified Charitable Distributions (QCD) - If the intent of the account holder and/or the beneficiary is to give a portion or all of the money to charity, it should be done prior to the death of the account holder, as the beneficiary does not have the option of a QCD. Additionally, one or more charities could be made the direct beneficiary of a portion of the IRA. 

● Charitable Remainder Trust (CRT) - A CRT allows for distributions to occur over the course of a beneficiary’s lifetime, with the remaining funds being donated to a charity. Even if there is not an intent to donate the IRA funds, a CRT may actually increase the after-tax proceeds that are distributed to the beneficiary as it maintains the ability to stretch distributions over the beneficiary’s lifetime. 

So what should you do as a result of this law? First and foremost, you should assume that you are impacted by the law and, at a minimum, a conversation with your financial advisor and attorney is in order. Those with larger IRAs/401(k)s and/or revocable trusts named as beneficiary of an IRA are likely to be the most impacted. Even beneficiaries who anticipate inheriting an IRA in the future should consider encouraging appropriate planning conversations to take place as I have yet to meet a single person who does not value reducing payments to the IRS. 

Discussing these changes will be a focus of our meetings with clients as we go through 2020, but we invite you to reach out with questions in the meantime.

Estate Planning Just Got Real

Estate Planning Just Got Real

by Grant Sims, CFP®

This last year has brought many changes in my life. My wife and I had our first child, we purchased our first house, my role has introduced me to many new clients, and my wife transitioned to staying at home with our baby. These changes have been extremely exciting and have required a lot of adjusting and although these changes have been challenging, they have certainly made life better.

Since adding to my family and owning my own home, my perspective about life has been somewhat altered.  I have asked myself, “If something terrible happened to me, how would that affect my wife and child?”, “What if my wife and I weren’t here, who would raise our baby?” My first response to those questions may be like yours:

1. These questions feel awfully gloomy and I wish I didn’t have to think about them.

     AND

1. What are the odds of any of those things really happening to me?  

These recent changes in my own life have made the importance of estate planning way more personal than ever before. I am also blessed to hear the experiences of my clients and advise them through their estate planning issues, which has helped me see firsthand the future impact that good planning can have on my own loved ones.

Whether you added a family member, moved to a new state, received an inheritance, or are facing health issues, major changes in life are a great prompt to meet with an estate planning attorney. Its highly beneficial to review your circumstances and determine if you need to create or update your estate plan. Some clients explain that when they created their plan years ago, their circumstances were the same. Whether or not things have changed, it is still a good idea to have your plan reviewed every five to seven years, as state or federal laws can change. Also, some documents can become less effective, if they get too old, or you may have forgotten details of your plan that no longer apply to your situation.

Estate planning is not just for when you die, many don’t realize that it can protect you and your assets in the event you are incapacitated or can’t make decisions yourself. If this happens to you, who will take care of paying your bills or managing your healthcare? Designating financial and health care POA’s (Power of Attorney) can save your family a lot of time and money and make sure everything is handled according to your wishes. Having a living will, your clearly stated desires for end of life care, can also save your family from the burden of heart-breaking decisions that no one should have to face.

Another primary goal of estate planning is reducing taxes and fees. The price you pay for a good estate planning attorney to draft your plan and review it over the years could save your family tens of thousands of dollars. Working with your financial advisor to coordinate your assets, according to your plan, is equally important – a plan without proper execution can be costly.  Recently, a client unfortunately had to pay $50,000 in taxes she could have otherwise kept if her parent’s plan had simply been updated. Proper planning can also help your estate avoid probate or legal issues where court and legal fees can eat away at your family’s inheritance.

With the start of my own family, planning for their provision and protection is the greatest motivation to have an estate plan in order. This can take shape in so many ways, starting with young families that can protect their children by assigning guardians and caretakers that will best raise their children in their absence.  Others have adult children and grandchildren that may have different needs regarding money or asset protection (due to their profession or family circumstances). Still more, an heir may require a professional trustee to help guide or administer their inheritance in the event they cannot be trusted or properly care for themselves. I encourage my clients to recognize that providing for their children equally doesn’t mean they provide for them the exact same. 

Finally, your estate plan can help you support your favorite causes. Yes, you can leave a generous donation to your favorite charities when you pass away, but you can also have a huge impact, while you are still alive. Exploring options like charitable gift annuities or remainder trusts can provide tax benefits while living. Additionally, it can be hugely beneficial to plan for which assets would be best to designate to charities – i.e. appreciated assets or retirement accounts. Some clients have even started their own charitable fund through a community foundation.

I always like to remind clients that an estate plan is more about others than about yourself. If you haven’t completed your estate plan or need to review it, don’t wait. There are too many benefits that come with being prepared.

Reviewing the Major Macro Variables

Reviewing the Major Macro Variables

By Paul Hoffmeister, Chief Economist

·      Here, in our latest monthly letter, we discuss US-China Trade, Fed and ECB policy, Brexit, the Hong Kong protests, and the 2020 elections. Given the increasingly weak global economy, the possibility grows that each could make or break the next year.

·      We believe President Trump’s negotiating strategy is becoming increasingly clear, and there are more levers he can pull to pressure China to concede to US demands. Given how much further Trump can go as well as the weak Chinese economy today, the odds are rising in our view that Chinese officials will compromise on at least some major demands in the coming year. A comprehensive deal, however, is a long shot – as that arguably would entail a wholesale reformation of the Chinese economic system.

·      Furthermore, we expect the Federal Reserve and European Central Bank to continue moving dovishly, and if conditions deteriorate further, they will need to do so in a big way – such as a 50 basis point cut at an upcoming FOMC meeting.

·      Prime Minister Boris Johnson shocked the world with his political maneuverings recently, and the probability of Brexit by the end of October has jumped significantly.

·      Hong Kong protests are a serious danger to the legitimacy of the Chinese government and the confidence in Hong Kong as an international financial center – if not during the near-term, then during the long-term.

·      Elizabeth Warren is arguably the front-runner for the Democratic nomination. Managed health care stocks have been notably weak during the last month.

 US-China Trade: In our view, negative news on the US-China trade front has sparked the two meaningful sell-offs of 2019. Of course, on Sunday May 5, President Trump accused Chinese officials over Twitter of renegotiating the terms of what appeared to be a tentative agreement, and so he promised tariff increases by the end of that week.[i] Then on August 1, Trump announced, again via Twitter, additional 10% tariffs on $300 billion of Chinese imports.[ii] In each instance, the new information seemed to indicate that US-China trade negotiations were devolving substantially.

This is reportedly supported by recent comments from top officials in both camps. In an interview on CNN last weekend, National Economic Council Director Larry Kudlow said he couldn’t promise a finalized trade deal with China by the November 2020 election.[iii] And according to Bloomberg this week, Chinese officials have said only a few negotiators see a deal as actually possible before then, “in part because it’s dangerous for any official to advise President Xi Jinping to sign a deal that Trump may eventually break”.[iv]

In sum, the outlook for a resolution to the US-China trade dispute is very cloudy, and a slew of tit-for-tat tariffs have already been applied by both countries, and there are many more scheduled by year-end.

President Trump continues down two parallel paths, as we see it. The first path is the effort to reach a comprehensive agreement that addresses American grievances related to forced technology transfers, IP theft, fair market access, and Chinese state subsidies to domestic businesses. Assumedly, a partial deal would be met with the removal of some, but not all tariffs. The second path is the formation of a US trading sphere so as to create two international trading spheres with the US and China at the center of each.

Today, the prospects for a comprehensive trade deal with China are poor, while two distinct international trading spheres appear to be forming.

The Trump Administration has agreed to a revised US-Korea free trade agreement (September 2018) and the new US-Mexico-Canada Agreement or “USMCA” (June 2019), which replaced NAFTA. Furthermore, the White House is working on new trade agreements with Japan, the European Union, and the United Kingdom.

It appears that a deal with Japan is getting closer to being sealed as President Trump and Prime Minister Shinzo Abe agreed to “core principles” at the recent G7 meeting. It’s possible that the deal will be finalized within the next 1-2 months. At the same time, Trump and Prime Minister Boris Johnson have spoken positively about a major US-UK deal if Brexit happens. As for a US-EU deal, Trump struck an upbeat tone at the G7 meeting, saying “We’re very close to maybe making a deal with the EU because they don’t want tariffs.”[v] With this new US-centric trading sphere taking shape, it may explain why Trump seemed so upbeat about the G7 meeting.

Given the current circumstance, we expect President Trump to keep up the significant pressure on China to force into a more reciprocal trading relationship, and the path is unlikely to be smooth.

First, Trump could still apply more economic pressure possibly by raising tariffs even higher, utilizing the Emergency Economic Powers Act of 1977 to force US companies to divest from China, or even sanctioning Chinese companies or officials suspected of human rights violations.

Secondly, as the complex negotiations continue, it’s likely we’ll hear more mixed signals from President Trump. Asked by reporters at the G7 summit about his seemingly back-and-forth and changing statements on subjects such as President Xi and Iran, the President said, “Sorry, it’s the way I negotiate… It’s done very well for me over the years, and it’s doing even better for the country.”[vi]

Bottom Line: We believe President Trump’s negotiating strategy is becoming increasingly clear, and there are more levers he can pull to pressure China to concede to US demands. Given how much further Trump can go as well as the weak Chinese economy today, the odds are rising in our view that Chinese officials will compromise on at least some major demands in the coming year. A comprehensive deal, however, is still a long shot – as that arguably would entail a wholesale reformation of the Chinese economic system.

 Fed Policy: There are three more FOMC meetings before year-end, with the next one scheduled for September 17-18. At that meeting, federal funds futures are currently implying a nearly 96% probability of a 25 basis point rate cut, and 4% probability of a 50 basis point cut -- according to the CME Fedwatch Tool.

Arguably, the Fed must cut interest rates aggressively, and soon. The Fed is hostage to the market, trade negotiations, and other major macro uncertainties in the world today that are inhibiting risk-taking and production and thus slowing global economic activity. The inverted Treasury curve is another indication of the significant pressure on the Fed to cut interest rates. For example, the 3-month/2-year Treasury spread is approximately -47 basis points today, according to the St. Louis Federal Reserve. From our perspective, this implies that the market believes the funds rate is at least 50 basis points too high at the moment.

Is the inverted yield curve a signal of a looming recession? We believe that it’s an ominous signal, given its track record for preceding many recessions, and an indication of central bank error. But recession isn’t guaranteed. It’s still possible that aggressive rate cuts by the Fed and more clarity and resolution to many other macro uncertainty could re-ignite animal spirits and keep the United States from recession.

Notably, former New York Federal Reserve President William Dudley penned a highly controversial Bloomberg oped on August 27, in which he expressed a desire for the Fed to withhold interest rate reductions in order to not “bail out an administration that keeps making bad choices on trade policy”.[vii] It also appeared that Dudley went even further to suggest that the Fed pursue monetary policy into the November 2020 elections in a manner that prevented President Trump’s reelection.

But Dudley’s oped may backfire. It seems that the popular response to his oped has been critical, and ironically, may in fact turn the tables and force the Fed to prove that it isn’t acting in an “anti-Trump” manner by withholding rate cuts, but is purely economically motivated and therefore will reduce interest rates aggressively during the coming months. 

ECB Policy: At its next monetary policy meeting on September 12, it looks like the ECB will be meaningfully dovish, at least according to Olli Rehn, a member of the ECB’s rate-setting committee and governor of Finland’s central bank.

On Thursday, August 15, Rehn said, “When you’re working with financial markets, it’s often better to overshoot than undershoot, and better to have a very strong package of policy measures than to tinker.”[viii]

We believe the ECB will lower its benchmark overnight rate by 10-20 basis points from negative 0.40% currently; announce new bond purchases (“quantitative easing”); and favorably adjust loan terms for EU banks.

As we indicated last month, the sharpest slowdown in growth globally may be occurring in Europe. It looks like the ECB is preparing to pull out the figurative monetary bazooka in a few weeks.

Bottom Line: We expect the Federal Reserve and European Central Bank to continue moving dovishly, and if conditions deteriorate further, they will need to do so in a big way – such as a 50 basis point cut at an upcoming FOMC meeting.

 Brexit: Prime Minister Boris Johnson has famously said that he’ll achieve Brexit by the October 31 deadline “do or die”. To that end, he shocked the world on August 28 by announcing that his Parliament will be suspended sometime between September 9-12, thanks to Queen Elizabeth II’s approval. Parliament will recommence after the Queen’s speech on October 14.[ix] This will give anti-Brexiters in the legislature little time to stop a no-deal Brexit by its lawfully mandated deadline.

Interestingly, the EU Council Meeting is scheduled to take place October 17-18. It appears that there are two possible scenarios emerging here: 1) if Johnson returns with a new Brexit deal, then he’ll hope to ram it through Parliament with less than two weeks to the deadline; or 2) if Johnson does not return with a new deal, then a no-deal Brexit may automatically occur by the deadline.

In sum, the probability of Brexit has increased substantially thanks to Johnson’s crafty political maneuvering. On August 28, the Predicit market for Brexit occurring by November 1 was 58 cents on the dollar; whereas the day before, the contract traded at 48 cents.[x]

Importantly, to mitigate market volatility and economic uncertainty that could erupt with the UK’s exit from the European Union, Johnson should figure out how to quickly pass pro-growth policies, including business-friendly tax cuts and a new trade deal with the United States – both of which he has previously endorsed.

According to the Financial Times, Finance Minister Sajid Javid said two weeks ago, in his first interview since assuming his new role[xi], that he wanted to see lower taxes, but he did not commit to delivering the Johnson government’s budget proposal before Brexit day (October 31). Arguably, the Johnson government should be more aggressive here. One idea that’s been floated is lowering the UK’s corporate tax rate to as low as Ireland’s. This could be highly beneficial for the economy and markets. But, unfortunately, we haven’t heard much about it during the last month.

As for a US-UK trade agreement, at the recent G7 meeting, President Trump reiterated his desire and plan for a deal, saying “We’re going to do a very big trade deal – bigger than we’ve ever had with the UK.”[xii]

Bottom Line: Brexit by the end of October 31 is now our base case scenario, given Boris Johnson’s latest parliamentary maneuverings. We want to see a pro-growth plan, such as tax cuts and big trade agreements, implemented at the same time as Brexit transpires.

 Hong Kong Protests: The protests in Hong Kong since early June continue. And, in the latest turn of events, the Xinhua news agency reported yesterday that the People’s Liberation Army (PLA) had sent a new batch of troops and equipment -- including personnel carriers, trucks and a small naval vessel – into Hong Kong.[xiii] Although this rotation of troops has been reported to be routine, the potential of a government crackdown is seemingly growing, raising the risks of unintended consequences for the Asian financial hub and the region at large.

Bottom Line: The unrest in Hong Kong is a major risk to the Communist Party’s grip on power and the region’s economies – if not during the near-term, then during the long-term.

 2020 Elections: Elizabeth Warren’s prospects for becoming the Democratic presidential nominee seem to be growing. In fact, she could be considered the front-runner today.

On Predictit, the contract for her to be the nominee has risen to 34 cents on the dollar, compared to 22 cents on July 30. Bernie Sanders has risen to 16 cents from 13 during that time; while Kamala Harris has fallen to 10 from 24. The contract for former Vice President Joe Biden is trading roughly flat, around 26-27 cents.[xiv]

Given these betting market indications, it seems that with Warren and Sanders, the progressive wing of the Democratic Party is ascendant. And notably, with Medicare for All being a hot topic in the Democratic primaries, managed health care stocks have been especially weak during the last month. According to CNBC, the S&P 500 Managed Health Care Index fell 11.1% between July 31 and its low on August 27.

This sector may be a clear way to play bets on whether a Republican or Democrat wins the White House in 2020. We still believe, as we explained in April, that changes in American health care policy are likely in coming years, but a lot more needs to happen politically before a wholesale restructuring of the system occurs.

Bottom Line: Elizabeth Warren is arguably the front-runner to compete against President Trump for the White House in 2020. Her recent strength, as well as Bernie Sanders’s, may have spooked managed health care stocks in August.

Paul Hoffmeister is chief economist and portfolio manager at Camelot Portfolios, managing partner of Camelot Event-Driven Advisors, and co-portfolio manager of Camelot Event-Driven Fund (tickers: EVDIX, EVDAX).

 *******

Disclosures:

•       Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment, investment strategy (including the investments and/or investment strategies recommended by the adviser), will be profitable or equal to past performance levels.

•       This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client.  These materials are not intended as any form of substitute for individualized investment advice.  The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own.  Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors.  Camelot Portfolios LLC can assist in determining a suitable investment approach for a given individual, which may or may not closely resemble the strategies outlined herein.

•       Any charts, graphs, or visual aids presented herein are intended to demonstrate concepts more fully discussed in the text of this brochure, and which cannot be fully explained without the assistance of a professional from Camelot Portfolios LLC.  Readers should not in any way interpret these visual aids as a device with which to ascertain investment decisions or an investment approach.  Only your professional adviser should interpret this information.

•       Some information in this presentation is gleaned from third party sources, and while believed to be reliable, is not independently verified.

A901

[i] “Trump Says He Will Increase Tariffs on Chinese Goods on Friday as He Complains about Pace of Trade Talks”, by David Lynch, Damian Paletta and Robert Costa, May 5, 2019, Washington Post.

[ii][ii] “Trump Says US Will Impose Additional 10% Tariffs on Another $300 Billion of Chinese Goods Starting Sept. 1”, by Yun Li, August 1, 2019, CNBC.

[iii] “Kudlow Can’t Promise China Trade Deal by November 2020, But Says Big Announcement Coming”, by Nick Givas, August 25, 2019, Fox News.

[iv] “China Prepares for the Worst on Trade War After Trump’s Flip-Flops”, by Peter Martin, Kevin Hamlin, Miao Han, Dandan Li, Steven Yang and Ying Tian, August 27, 2019, Bloomberg News.

[v] “Trump Sees Possible US-EU Trade Deal That Would Avert Car Tariffs”, by Jeff Masonl and Paul Carrel, August 26, 2019, Reuters.

[vi] “’Sorry, it’s the way I negotiate’: Trump Confounds the World at Wild G-7”, by Gabby Orr, August 26, 2019, Politico.

[vii] “The Fed Shouldn’t Enable Donald Trump”, by William Dudley, August 27, 2019, Bloomberg.

[viii] “ECB Has Big Bazooka Primed for September, Top Official Says”, by Tom Fairless, August 15, 2019, Wall Street Journal.

[ix] “Boris Johnson Just Took a Huge Step to Ensure Brexit Happens on October 31”, by Matt Wells, August 28, 2019, CNN.

[x] Source: Predictit.org

[xi] Sajid Javid Promises a Simpler Tax Regime”, by Sebastian Payne, August 17, 2019, Financial Times.

[xii] “After Brexit, a U.S. Trade Deal”, Wall Street Journal Editorial, August 28, 2019, Wall Street Journal.

[xiii] “China Sends Fresh Troops into Hong Kong as Military Pledges to Protect ‘National Sovereignty’”, Weizhen Tan, August 29, 2019, CNBC.

[xiv] Source: Predictit.org

Market Commentary

June: A Confluence of Positives

By Paul Hoffmeister, Chief Economist

During the last month, we’ve seen a confluence of positives in some of the major macro variables: Fed policy, trade and Brexit.

To us, the latest macro developments are very encouraging. But the equity market outlook remains tricky, and we do not believe it’s a one-way ticket up in equities for the third and fourth quarters.

My biggest concern at the moment is the slowing global economy, which is permeating into the United States.

During the last month, we’ve seen a confluence of positives in some of the major macro variables. Most notably, Chairman Powell said on June 4th that the FOMC was prepared to act in response to the economic outlook, including the trade disputes with China and Mexico.[i] His comments suggested that interest rate cuts were on the horizon, sparking a 2.1% rally in the S&P 500 for the day.[ii] The rally marked the beginning of the recent turnaround in equities after the weakness we saw in May. 

Arguably, the Fed outlook has been the most important macro variable of the last year. From our perspective, Powell’s comments on October 3rd that the fed funds rate was a long way from neutral catalyzed the beginning of the multi-month selloff in equities, and his pledge on January 4th that the Fed would be patient with any further rate increases laid the foundation for this year’s rally. [iii][iv] And now more recently, we have Powell seemingly coming to the stock market’s rescue.

During the last month, we’ve also seen positive developments on trade and Brexit.

Of course, Presidents Trump and Xi agreed to restart trade talks during the G20 meeting at the end of June. Trump promised to hold off on putting a 25% tariff on nearly $300 billion of Chinese imports, and he lifted some restrictions on Huawei. Meanwhile, Xi reportedly promised to start large scale purchases of American food and agricultural products.[v]

In addition to renewed hopes for a US-China trade deal, American and Mexican negotiators reached a deal on June 7th in which the Mexican government agreed to take new measures to curb the influx of Central American migrants into the United States. This averted new tariffs on Mexican imports.[vi]

There was also some good news on the Brexit issue. While Brexit still appears to be on track to occur by October 31st, Boris Johnson -- the frontrunner to become the UK’s next prime minister – has promised to cut personal income and corporate taxes. This follows Jeremy Hunt, another contender for Prime Minster May’s job, who wants to reduce the UK’s corporate tax rate from 19% to 12.5%.[vii]

As we’ve stated in the past, news during the last year of a Brexit divorce not occurring seems to have been received positively by financial markets. Nonetheless, we’ve believed that Brexit could happen without being disruptive to markets if it was combined with new, pro-growth policy measures. Major tax cuts (such as lowering the UK’s corporate tax in line with Ireland’s 12.5% rate) and new trade deals (Trump keeps dangling a major post-Brexit, US-UK trade deal) could be exactly the pro-growth package that turns Brexit from a market negative into a market positive.

The confluence of positives related to interest rates, trade and Brexit appear to have been the predominant catalysts behind the strong equity market performance in June. This begs the question, do we have clear skies for the remainder of the year? After all, it appears that we have a Fed that won’t be raising rates, the US and China will continue to negotiate their differences, and Brexit could go through more smoothly than expected.

To us, the latest macro developments are very encouraging. But the equity market outlook remains tricky, and we do not believe it’s a one-way ticket up in equities for the third and fourth quarters.

My biggest concern at the moment is the slowing global economy, which is permeating into the United States.

As we’ve shown in recent months, GDP for the major foreign economies (China, Japan, Germany and UK) has been slowing, while US GDP has been accelerating. But economic data at the margin suggests that the strength in the US could fade.

According to the Institute for Supply Management, the US Manufacturing PMI Index peaked at 60.9 last August, and June’s reading was 51.7 – down from 52.1 in May and 52.8 in April. [ix] Note, readings below 50 signal contraction in the manufacturing sector. We have warned that should this reading fall to 50 or less, the US economy will be at a heightened risk of entering recession.

It’s economic deterioration such as this that likely underpins the Fed’s motivation to reduce interest rates, despite the fact that the S&P 500 is trading near all-time highs. 

As we see it, the good news is that June brought positive macro event catalysts, and holding all variables constant, one or two quarter-point rate cuts by the Fed could get the Treasury curve out of inversion. But the current inversion in the Treasury curve should be respected, and it will be important to see global economic growth stabilize after almost a year of deceleration.

Paul Hoffmeister is chief economist and portfolio manager at Camelot Portfolios, managing partner of Camelot Event-Driven Advisors, and co-portfolio manager of  Camelot Event-Driven Fund  (tickers: EVDIX, EVDAX).

*******

Disclosures:

•       Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment, investment strategy (including the investments and/or investment strategies recommended by the adviser), will be profitable or equal to past performance levels.

•       This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client.  These materials are not intended as any form of substitute for individualized investment advice.  The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own.  Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors.  Camelot Portfolios LLC can assist in determining a suitable investment approach for a given individual, which may or may not closely resemble the strategies outlined herein.

•       Any charts, graphs, or visual aids presented herein are intended to demonstrate concepts more fully discussed in the text of this brochure, and which cannot be fully explained without the assistance of a professional from Camelot Portfolios LLC.  Readers should not in any way interpret these visual aids as a device with which to ascertain investment decisions or an investment approach.  Only your professional adviser should interpret this information.

•       Some information in this presentation is gleaned from third party sources, and while believed to be reliable, is not independently verified.

[i] “Stocks Jump as Fed’s Powell Suggests Rates Could Come Down”, by Jeanna Smialek and Matt Phillips, June 4, 2019, New York Times.

[ii] Ibid.

[iii] “Powell Says We’re a Long Way from Neutral on Interest Rates, Indicating More Hikes Are Coming”, by Jeff Cox, October 3, 2018, CNBC.

[iv] “Powell Says Fed ‘Will be Patient’ with Monetary Policy as It Watches How Economy Performs”, by Jeff Cox, January 4, 2019, CNBC.

[v] “Trump and Xi Agree to Restart Trade Talks, Avoiding Escalation in Tariff War”, by Peter Baker and Keith Bradsher, June 29, 2019, New York Times.

[vi] “Trump Announces Migration Deal with Mexico, Averting Threatened Tariffs”, by David Nakamura, John Wagner and Nick Miroff, June 7, 2019, Washington Post.

[vii] “Boris Johnson Promises Tax Cut for 3m Higher Earners”, by Rowena Mason, The Guardian, June 10, 2019.

[viii] Squawk Box, June 27, 2019, CNBC.

[ix] “US Factory Gauge Drops Less Than Forecast But Orders Stall”, by Katia Dmitrieva, July 1, 2019, Bloomberg.

[x] “US Services Gauge Drops to Lowest Since 2017”, by Jeff Kearns, July 3, 2019, Bloomberg.