News & Insights

Eleven years into this bull market, it’s déjà vu all over again. It is starting to feel like we are back in the bubble conditions of the 1990’s, or at least getting there. It is not so much the overall market that has me bothered. I am concerned about specific cases…a lot of specific cases. A slightly alarming number of stocks have come uncoupled from economic reality.

Let me start on a fairly positive note by saying that in the context of prevailing interest rates, overall stock valuations are not crazy—not in most cases anyway. In a world of ultra-low interest rates, it makes sense that stock valuations are levitating above historical averages. According to data from Finviz.com, for the 62 U.S. companies with market capitalizations over $100 billion, the median trailing P/E is 27. This equates to a median “earnings yield” of 3.7%, meaning $100 invested in large stocks is earning $3.70 in corporate profits. That is low by historical standards (valuations are high), but it looks okay compared to 10-year Treasuries yielding 1.4%. It is possible that the market continues to trade at roughly this same valuation for a long time, advancing at the rate that corporate earnings grow. The stock market is one of two places where things can go up without coming back down.

Last August I wrote about bipartisan legislation, the SECURE Act, that had passed the House in May but was stalled in the Senate as a few politicians pursued unpopular changes.  In early December, most of the Senate saw an opportunity to override this gridlock by attaching the bill to appropriation legislation that avoided a government shutdown.  This is how the SECURE Act became law after President Trump’s signature on December 20, 2019. For a summary of its major provisions, please see my August 2019 Viewpoint column under the “News & Insights” tab on www.investprovident.com.

Now that the SECURE Act has passed, I’d like to provide some additional information and comment on steps you might need to take as you think through tax and estate planning.  Before I do that, I’d like to correct one item in the August Viewpoint regarding Roth distributions.  My read of the legislation led me to think Roth distributions would avoid the 10-year accelerated distribution period for non-spouse and other specifically defined beneficiaries.  This is not the case as Roth distributions will be treated identically to traditional IRA distributions.

Americans are generally pleased with the quality of the healthcare they receive, but not its cost.  Healthcare inflation, while moderating during the previous decade, continues to outstrip overall inflation.  In response, employers are asking employees to bear more of their own healthcare costs, and government is increasing subsidies to help.

Health Savings Accounts (HSAs) were established as part of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 and evolved from other pretax healthcare programs.  An HSA is a personal savings account funded with pretax dollars that can be used to pay for qualified healthcare expenses.  While the Act is best known for providing a Medicare prescription drug benefit, the HSA has become increasingly popular with both employers and employees as the tax benefits have lowered both parties’ healthcare costs.

As 2019 draws to a close, it’s time to review your finances and look forward to the upcoming year.  The last few weeks of the year tend to be a mad rush to wrap up loose ends, usually in a frantic fashion.  Taking a few moments to calmly plan can help you take advantage of opportunities to grow your wealth and get you one step closer to reaching your goals.  Here are several brief topics of financial advice to consider in the coming weeks that could ultimately add to your long-term bottom line as well as give you peace of mind.

Emergency Fund

If you have not already done so, give yourself and your family the gift of an emergency fund.  Our recommendation is that you have six months worth of expenses saved and easily accessible in a low risk and liquid type of an account such as a money market account.  You can reduce the size of your emergency fund by any guaranteed income you receive, such as paychecks, pension, Social Security, or Municipal Bond income.

Old-fashioned stockbrokers called it May Day:  May 1st, 1975.  That’s the day the Securities and Exchange Commission allowed brokers to deviate from the old fixed-commission schedule.  Prior to that date, all brokerage firms charged the same price for processing a stock trade.  And with pricing under the control of a cartel (the New York Stock Exchange), of course it wasn’t exactly cheap!  On May Day, enterprising Charles Schwab began discounting commissions.  Now, 44 years later, commissions have fallen all the way to zero.  I’m sure that would have been utterly unimaginable in 1975, but then again so would much of what we take for granted today.

I looked back at our own trading records to remind me how far we’ve come.  When I joined Provident in the early 1990s, trading costs were 25-75 cents a share, subject to a minimum commission.  For example, trading 700 shares cost $196 or 28 cents a share.  Most of our trades were executed by a large brokerage firm that provided research and other information, mostly of dubious value.  Looking to do better for our clients, we took an educated gamble and moved to a new breed of execution-only institutional brokers that didn’t bundle research services with high-cost trading.  Within just a few years, client commissions had fallen to a nickel a share! Trading 700 shares cost $35, down 80% in just a few years, and we thought we were in heaven.

Our neighbors recently engaged in a longtime summer tradition, the lemonade stand!  It was well done with homemade signs and cheerful service.  The price these girls asked for a cup of lemonade was in line with the current lemonade market, though when I think back to my youth a quick calculation would indicate we should all be glad the Fed uses the PCE Index instead of the Neighborhood Lemonade Index in gauging inflation.  Otherwise, we might be looking for a return of the hawkish Paul Volcker as Fed Chairman.

 The stand reminded me of my own occasional foray into the business as a child.  I would guess my experience mirrored your typical lemonade stand—tremendous excitement when you get a customer, but painfully long intervals between transactions.  Usually after a couple of hours I’d lose patience and close up shop.  One day I had an idea to drive more traffic.  I would sell a better-known product at a heavily discounted price!  There was a fresh case of Coca-Cola in the garage that my parents had recently purchased, so the timing could not have been better.  With a superior branded, packaged product, I set up shop and got to work selling cans of Coca-Cola below cost.  This actually worked great for me—it was pure profit.  However, it was obviously not so great for my parents, who served as my unwitting venture backers supporting a highly flawed business model.

In my March Viewpoint I asked readers to please share ideas and anecdotes about how money has affected their families.  My goal is to turn that feedback into a short book.  I think I have reasonable ambitions for the project.  This won’t be the next Harry Potter, and probably not even another The Millionaire Next Door, but I think there could be a gap in the market for a financial wisdom book specifically targeting an affluent audience.  With your help my project is moving forward, and this month I’m circling back with a progress report.

 I received some terrific feedback.  Thank you.  It’s not too late to contribute, by the way!  Just under 20 responses came by phone and email, slightly beating my minimum goal of 15.  Of course, quality matters more than quantity, and many responses were extremely—pardon the pun—rich in insight.  If I count the most thoughtful responses double or triple, then the volume of feedback looks a lot more impressive.  I still owe a few of you follow-up emails or phone calls, which should contribute more to my volume of notes as well.

In last month’s Viewpoint, Dan Krstevski outlined Individual Retirement Account (IRA) distribution rules and alluded to legislation making its way through congress called the SECURE Act.  SECURE stands for “Setting Every Community Up for Retirement Enhancement.”

 We don’t usually like to talk about pending legislation in Washington, but almost all the changes to 401(k) and IRA retirement saving plans contemplated within the legislation enjoy strong bipartisan support.  The House passed the SECURE Act on May 23rd by vote of 417-3.  While not yet taken up in the Senate, support for the legislation is nearly universal.  President Trump has also expressed his desire for these retirement changes.  The late Steve Jobs used to say, “It’s not done until it ships,” which is quite true in this day of divided government.  However, we feel the changes contemplated by the SECURE Act are significant enough that they may impact your retirement and estate planning decisions.

With an effort to increase the American retirement savings rate, Congress established Individual Retirement Accounts (IRAs) through the Employee Retirement Income Security Act of 1974.  IRAs have greatly advanced since their creation, allowing for tax-deferred, and in some cases tax-free, growth of retirement assets.  Also, they allow greater contribution limits and catch-up contribution provisions for older participants.

 It is easy to find advice on the contribution rules for IRAs, with little emphasis on the withdrawals.  That is why we will spend our time focused on the distribution rules of assets from your retirement account. Whether you’re taking early withdrawals, normal withdrawals, borrowing or gifting from your accounts or have a required minimum distribution due, you need to be aware of the rules and requirements in order to avoid costly penalties.

My five-year-old recently started t-ball and the games have been even more fun to watch than I imagined.  The kids are young enough that they don’t bother to keep score and the concept is just to introduce the game and help teach the rules.  Despite the best efforts of parents and coaches, there is a delightful regularity with which things tend to go awry.  Seeing a baserunner chase a ball his teammate hit into the outfield is something that never gets old.  Also, if you’ve never seen an entire team in the field swarm to a ground ball, I would recommend you catch a local t-ball game.  It’s great to see the kids enjoy themselves and full of entertainment for the spectators. 

 Baseball and investing have long been linked.  Nobody has done more to highlight the ties between the two than Warren Buffett, who hardly can conduct a single interview without making a baseball analogy.  He often talks about “no called strikes” in investing and waiting for the “fat pitch.”  My favorite baseball quote of his refers to focusing on underlying business performance instead of on stock price, “in investing, just as in baseball, to put runs on the scoreboard one must watch the playing field, not the scoreboard.”