Will the Post-Election Stock Rally Last?

Stock indexes staged a broad, post-election rally, as investors pushed aside their concerns about a potential global trade war and a clampdown on immigration, and instead bet that President-elect Trump’s promise of infrastructure spending would propel profits at large industrial companies and his tax cuts would boost the economy. (Irony alert #1: Congressional Republicans have argued that the financial crisis stimulus (the $787B American Recovery and Reinvestment Act) did not work and fought against subsequent infrastructure spending plans as a way to boost economic growth.) While most believe that infrastructure spending would help the economy, the total impact would be largely determined by its size. At one point during the campaign, candidate Trump promised to spend about $550 billion over five years. If there is general agreement on the positive aspects of infrastructure spending, there is little consensus on Trump’s potential tax plan, which in its current form would disproportionately favor wealthier Americans.

According to the Tax Policy Center, by 2025, 51 percent of Trump’s tax reductions would go to the top one percent of earners (those earning more than about $700,000). Yes, the plan would raise the after tax income of middle class Americans by about 1.8 percent, but the top 0.1 percent would see a tax cut of more than 14 percent of after tax income. (Irony alert #2: The Trump tax plan would likely exacerbate income inequality that already exists and could be a surprise to those Trump voters who said that they felt left out of US economic progress.)

Economists caution that there are two other problems with the Trump tax plan: (1) rich people do not tend to spend their tax cuts; rather they redirect the savings into their investment accounts—that’s good for financial markets, but not so hot for the overall economy and (2) the tax cuts would cause a spike in federal debt levels – the plan would increase the federal debt by $5.3 trillion over ten years, according to the nonpartisan Committee for a Responsible Federal Budget. (Irony alert #3: Taken together, the spending and the tax cuts could balloon the national debt to more than 100 percent of GDP within a few years. How will fiscal conservatives make peace with that potential?)

Trump’s spending and tax cuts could help stimulate the economy in the short term, though the combination of those policies could also spur inflation and prompt the Federal Reserve to raise interest rates at a faster pace than currently expected. Under normal monetary policy, a faster rate hike cycle might snuff out a recovery. But some economists are more concerned that under President Trump, there would be a change in the composition of the Federal Reserve Board. (There will be a couple of vacancies next year and Fed Chair Janet Yellen’s term ends in February 2018.) A less disciplined Fed might accept more inflation, leading to higher long-term interest rates and a weak US dollar. A glimpse of how these policies could impact the bond was seen last week: more than $1 trillion was wiped off the value of bonds around the world.

Another area that could see big changes under President Trump is regulation. In addition to easing up on environmental rules, most expect to see a watering down of the Dodd Frank Wall Street reform, which had attempted to reign in the excesses, which contributed to the financial crisis. (Irony Alert #4: A populist President, put in office by an electorate that hates banks, would make life easier for the financial services industry. Financial sector stocks increased by 11 percent last week.)

Under Trump, the Consumer Financial Protection Bureau (CFPB), which was created out of the Dodd-Frank Act, will likely get diluted. In October, a federal appeals court ruled that the CFPB was “unconstitutionally structured” and as a result, the agency should be treated like others, where the president can supervise, direct and change the director at any time. Current CFPB chief Richard Cordray is unlikely to keep his job.

And finally, the big investment firms, which fought tooth and nail NOT to put clients’ interests first, are ready to resurrect their battle to water down the consumer-friendly Department of Labor Fiduciary Rule set to go into effect in April 2017.

MARKETS:

• DJIA: 18,847, up 5.4% on week, up 8.2% YTD (best week of 2016, biggest weekly gain since Dec 2011)
• S&P 500: 2164, up 3.8% on week, up 5.9% YTD
• NASDAQ: 5237, up 2.8% on week, up 4.6% YTD
• Russell 2000: 1282, up 10.2% on week, up 12.9% YTD
• 10-Year Treasury yield: 2.12% (from 1.77% week ago)
• British Pound/USD: 1.2593 (from 1.2518 week ago)
• December Crude: $43.41, down 1.5% on week, 3^rd consecutive weekly loss
• December Gold: $1,224.30, down 6.2% on week, lowest close since early June and worst weekly loss since June 2013
• AAA Nat'l avg. for gallon of reg. gas: $2.18 (from $2.22 wk ago, $2.20 a year ago)

THE WEEK AHEAD:

Mon 11/14:

Tues 11/15:

Home Depot

8:30 Retail Sales

8:30 Empire State Manufacturing

8:30 Import/Export Prices

Weds 11/16:

Cisco, Lowe’s, Target

8:30 PPI

9:15 Industrial Production

10:00 Housing Market Index

Thursday 11/17:

Wal-Mart, Staples

8:30 CPI

8:30 Housing Starts

8:30 Philly Fed Business Outlook

10:00 E-Commerce Retail Sales

Friday 11/18

10:00 Leading Indicators

Trump Wins: What Should Investors Do Now?

Defying the polls and odds, Donald J. Trump won the Presidential Election. As the results became clear on the evening of November 8th, financial markets around the world reacted swiftly: stocks plunged (at one point during the overnight session, US futures were down 5 percent, indicating a more than 800 point wipe out for the Dow Jones Industrial Average), the Mexican peso cratered by 13 percent, the US dollar tumbled and safe havens like gold, US Treasury bonds and the Japanese yen, jumped. Then a strange thing happened: as Mr. Trump spoke in the wee hours after capturing enough Electoral College votes to win, markets started to reverse course, as investors seemed to take some comfort in his conciliatory tone. By the time they rang the opening bell on the day after the election, stocks had steadied and actually closed higher on the session. So much for predictions of stock market crashes, at least in the short term!

So what happened over the course of 18 hours? It could be that investors may have learned a lesson from the UK Brexit vote. After that unexpected outcome in June, US stocks were down 5 percent in the subsequent two trading sessions, but then slowly marched back up, as investors concluded that it would take a long time to figure the impact of Great Britain’s departure from the European Union.

While investors had been concerned about some of candidate Trump’s campaign rhetoric on trade and immigration, in the immediate aftermath of the election, it was hard to measure the impact on the US and global economy as well as what future policies could mean for corporate earnings. Still, hours after the results came in, I was inundated with reader/listener/viewer questions that went something like this: “What should I do with my retirement account?” The answer for long-term investors is clear: ABSOLUTELY NOTHING!

Unexpected events can create market volatility—both to the upside and the downside, which can lure you into feeling like you should do something. Try to resist that urge by reminding yourself that you are not investing for the next four weeks, four months or even four years--you are trying to build your nest egg beyond those time frames. And even if you were planning on retiring at the end of this year, you aren’t likely to pull all of your money from your account at once – you need it to last for decades in the future. In other words, you are not investing to retirement; rather you are investing through retirement.

That’s why you have created a diversified portfolio, based on your goals, risk tolerance and time horizon - because over the long term, this strategy works. Yes, the unknown is scary and can lead to market volatility, but you have to refrain from being reactive to short-term market conditions. It’s not easy to do, but sometimes the best action is NO ACTION.

If you were freaked out when you saw big numbers on the downside, maybe your portfolio has too much risk. If that’s the case, you may need to readjust your allocation to better align with your risk tolerance. If you do make changes, be careful NOT to jump back into those riskier holdings after markets stabilize. Conversely, if you were kicking yourself for not being fully invested as stocks swung back to the upside, you might need to hold your nose and get back in. Battling emotions is something every investor encounters-one way to help you out is to establish auto-rebalancing for your accounts, which can help take fear and anxiety out of the investment process.

Here are some (early) potential financial/regulatory outcomes that could arise from the 2016 Election:

• Markets: Volatility will continue until there is greater clarity on the Trump Administration’s priorities
• Trade: The Trans Pacific Partnership is likely a dead deal, but how Trump “renegotiates” NAFTA or goes after China as a currency manipulator will be key in determining whether or not he could ignite a global trade war.
• Taxes: Trump’s plan will come under closer scrutiny, because his trillions of dollars worth of tax cuts could balloon the national debt to more than 100 percent of GDP within a few years. How will fiscal conservatives make peace with that potential?
• Federal Reserve: On course to raise interest rates at the December meeting, but some Governors might step down after that occurs. President Trump can make appointments to the FRB to fill vacancies, but he is stuck with Chair Janet Yellen until her term ends in February 2018.
• Consumer Financial Protection Bureau (CFPB): In October, a federal appeals court ruled that the CFPB was “unconstitutionally structured” and as a result, the agency should be treated like others, where the president can supervise, direct and change the director at any time. Current CFPB chief Richard Cordray is unlikely to keep his job.
• Dodd Frank: Would be one of the great ironies to have a populist President, put in office by an electorate that hates banks, lighten up the regulatory impact stemming from the financial crisis.
• Department of Labor’s Fiduciary Rule: The rule is set to go into effect in April 2017. Get ready for big investment firms, which fought tooth and nail NOT to put clients’ interests first, to resurrect the battle and to water down this consumer-friendly rule.

#268 Father of 401k Wants a Simpler Retirement Plan

When Ted Benna, aka The Father of the 401(k), examined Section 401(k) of the tax code after it became effective in 1980, he realized that there could be a way for workers to save more money for retirement on a tax-deferred basis. The extra benefit that he saw was that employers could add a match, which would be a perfect way to incentivize all employees to forego some of their weekly pay and divert it towards retirement. The largest companies started the trend, but soon smaller companies, which previously had not offered any retirement savings vehicles, also got into the act. You know what happened after that--deferred savings plans replaced most pension plans and retirement savings became just one more thing that Americans had to do on their own.

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The first iteration of the 401(k) was pretty simple--just a couple of investment choices. Benna said that as plans introduced lots of investment choices, they became more confusing. Unfortunately, that opened the door for the financial services industry to pile on fees and also to make itself indispensable in the process. Benna believes that with the DOL's new fiduciary rule, participants should hopefully see a return to simpler plans with far more reasonable fees.

Thanks to everyone who participated this week, especially Mark, the Best Producer/Music Curator in the World, except when he picks Rod Stewart (#NeverAgain). Here's how to contact us:

• Call 855-411-JILL and we'll schedule time to get you on the show LIVE 

• Send an email: askjill@jillonmoney.com 

• Tweet us: @jillonmoney and @MTalercio

DOL Fiduciary: Fin Services Fights Customer-First

Just in time for National Retirement Planning Week, the Department of Labor released its final rule about the fiduciary standard for professionals who service retirement savers. The rule change is likely to accelerate the current disruption to the industry, as fintech companies may become the beneficiaries of a mature industry’s reluctance to embrace a customer-focused approach to doing business. Let’s take a step back: “Fiduciary” is a fancy way of saying that a financial professional must put your needs first and must pledge to disclose and manage any conflicts of interest that exist. For example, if an investment consultant, broker or insurance salesman recommends that you roll over your old retirement account into a new one, where you will pay higher costs than your old plan, she must document why it is in your best interest to do so and must tell you if she receives any compensation for the proposed investments within the new portfolio. Prior to the pending rule, many investment professionals were held to a lesser standard, called “suitability,” which means what they sold you had to be appropriate, though not necessarily in your best interest.

Maybe you’re thinking, “Who would argue that putting my interests first is a bad thing?” Well, over the past year, big financial firms have fought back against the DOL fiduciary standard, arguing that the new rules would make it prohibitively expensive to service smaller accounts. In fact, they spent millions of dollars lobbying lawmakers on this very point and were partially successful – the new rule went easier on the industry than the original iteration.

The final version allows big firms to continue to sell proprietary products, as well as variable and fixed rate annuities, as long as they let investors know what commissions they're charging. Of course that means that the customer is responsible for parsing through the disclosure documents and understanding that the broker may or may not have hosed him with the recommendation. Score one for the industry.

Another concession was that the government pushed back the effective date. But instead of being effective by year-end, some provisions are effective as of April 2017, and the rest will be set in stone as of Jan. 1, 2018. Ostensibly, that gives firms the time to prepare new documents, but it also gives the industry time to challenge the whole thing in court or to lobby a new political party to trash the whole thing.

Why has the industry push back so much on a concept that would put customers first? Because there is a ton of money at stake: according to the Investment Company Institute, as of the end of 2015, IRAs totaled $7.3 trillion and defined contribution plan assets, which are ripe for future rollovers, totaled $6.7 trillion. Under the old rules, the industry made a fortune from these accounts. Joshua Brown of Ritholtz Wealth Management notes, the industry has had “a long and profitable tradition of selling high-cost products of dubious quality to the investing public.”

Still, those companies that take the position that working in their clients’ best interest is not good business, may chose to push out smaller retirement account owners, but that’s good news for investors—if they don’t want to put you first, why work with them? Given the great strides in financial services technology, you may be better off with a financial service disrupter (aka “robo-advisor”) like Betterment, Wealthfront or Rebalance-IRA (all have embraced the fiduciary standard), than a conflicted salesman who is pushing a more expensive retirement product than you need.

One last note: when the industry whines about fiduciary, what they are really saying is that the new rules will hurt their profitability. As Vanguard founder Jack Bogle told the Financial Times, “if the wealth management industry loses $2.4 billion, investors are $2.4 billion better off. This is not complicated.”

MARKETS:

• DJIA: 17,577 down 1.2% on week, up 0.9% YTD
• S&P 500: 2047 down 1.2% on week, up 0.2% YTD
• NASDAQ: 4850 down 1.3% on week, down 3.1% YTD
• Russell 2000: 1097, down 1.8% on week, down 3.4% YTD
• 10-Year Treasury yield: 1.72% (from 1.88% a week ago)
• May Crude: $39.72, up 8% on week
• June Gold: $1,243.80, up 1.7% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.04 (from $2.06 wk ago, $2.40 a year ago)

THE WEEK AHEAD: First quarter earnings season begins and according to Fact Set, the estimated year over year earnings decline for the S&P 500 is -9.1%. If so, it would mark the first time that there would have been four consecutive quarters of earnings declines since Q4 2008 through Q3 2009.

Mon 4/11:

Alcoa, Bids due for Yahoo’s core Internet and Asian businesses

Tues 4/12:

6:00 NFIB Small Bus Optimism

8:30 Import/Export Prices

Weds 4/13:

8:30 PPI

8:30 Retail Sales

10:00 Business Inventories

2:00 Fed Beige Book

Thursday 4/14:

Bank of America, BlackRock, Delta Air Lines, PNC Financial Services Group, Wells Fargo

8:30 CPI

Friday 4/15:

Citigroup, Charles Schwab

8:30 Empire State Manufacturing Index

10:00 ISM Manufacturing Index

9:15 Industrial Production

10:00 Consumer Sentiment

DOL Fiduciary: Putting Retirement Investors First

Tensions are rising in the financial services industry, as the Department of Labor gets ready to release its final rule about the fiduciary standard for professionals who service retirement savers. The rule change is intended to crack down on “backdoor payments and hidden fees,” which cost retirement savers up to $17 billion a year in excess fees and adverse performance, according the President’s Council of Economic Advisers. “Fiduciary” is a fancy way of saying that a financial professional must put your needs first and must pledge to disclose and manage any conflicts of interest that exist. For example, if an investment consultant, broker or insurance salesman recommends that you roll over your old retirement account into a new one, where you will pay higher costs than your old plan, she must document why it is in your best interest to do so and must tell you if she receives any compensation for the investments within the new portfolio. Prior to the pending rule, many investment professionals were held to a lesser standard, called “suitability,” which means what they sold you had to be appropriate, though not necessarily in your best interest.

Maybe you’re thinking, “Who would argue that putting my interests first is a bad thing?” Well, over the past year, big financial firms have fought back against the DOL fiduciary standard, arguing that the new rules would make it prohibitively expensive to service smaller accounts. In fact, they have spent millions of dollars lobbying lawmakers on this very point and have been partially successful - that’s why Speaker of the House Paul Ryan came out against the rule.

Why are they pushing back so much? Because there is a ton of money at stake: according to the Investment Company Institute, as of the end of 2015, IRAs totaled $7.3 trillion and defined contribution plan assets, which are ripe for future rollovers, totaled $6.7 trillion. Under the old rules, the industry made a fortune from these accounts. Joshua Brown of Ritholtz Wealth Management notes, the industry has had “a long and profitable tradition of selling high-cost products of dubious quality to the investing public…Insurance companies, broker-dealers, mutual fund companies, and other backers of the status quo will not go down without a fight.”

And fight they have...the Securities Industry and Financial Markets Association, the lobbying arm of the financial world, said “This proposal would lead to a number of negative consequences for individual investors.” But Ray Ferrara, the CEO of ProVise Management and former chair of the CFP Board, said in his testimony before DOL, “the argument that this rule will diminish the availability of services to middle class Americans is simply not credible.” Adding to Ray’s argument: LPL Financial Holdings recently announced that it would lower, not raise fees for smaller accounts.

Still, those companies that take the position that working in their clients’ best interest is not good business, may chose to push out smaller retirement account owners, but that’s good news for investors—if they don’t want to put you first, why work with them? Given the great strides in financial services technology, you are probably better off with robo-advisors like Betterment, Wealthfront or Rebalance-IRA (all have embraced the fiduciary standard), than a conflicted salesman who is pushing a more expensive retirement product than you need.

When the industry whines about fiduciary, what they are really saying is that the new rules will hurt their profitability. As Vanguard founder Jack Bogle told the Financial Times, “if the wealth management industry loses $2.4 billion, investors are $2.4 billion better off. This is not complicated.”