Bob’s Journal for 1/30

There’s evidence that volatile markets make people unstable and even dangerous.

Some European academics have looked at the relationship between fluctuations in U.S. stock prices and fatal car accidents. They found that a sharp daily drop in stock prices, which they defined as a move of one standard deviation or more, was associated with a 0.6% increase in fatal car accidents during the day after the stock market opened.

The researchers said they conducted a number of tests to try to prove the relationship was false. However, they concluded that many investors react emotionally immediately after a sharp market decline. One result is higher traffic fatalities.

Perhaps before getting into a car, we should know what the stock market is doing and drive more defensively when prices have fallen sharply.

Which Retirement Breaks Will Go Next?

Congress eliminated the Stretch IRA in the recently enacted Setting Every Community Up for Retirement Enhancement (SECURE) Act, as I’ve been reporting in Retirement Watch.

The legislation went through Congress quickly and without much opposition. The key sponsors of the SECURE Act recently told Investment News that they plan to push additional retirement legislation through Congress soon.

The planned legislation has a lot of benefits and, like the SECURE Act, is intended to expand access to retirement plans and retirement saving. However, those benefits will reduce our tax dollars and have to be made up in some way. That’s why the Stretch IRA was eliminated in the SECURE Act.

What other valuable retirement and estate planning strategies might be eliminated to pay for the next round of retirement plan legislation (or even to pay for the cost of other legislation)?

Here’s a list I’ve developed from several sources.

• Required minimum distributions might be imposed on Roth IRAs.
• The back-door Roth IRA might be eliminated.
• The strategy to add up to $37,000 to a Roth IRA each year that I described in the November 2019 issue of Retirement Watch could be a target.
• Congress might decide to put a limit on the amount that can be accumulated in an IRA or 401(k) in order to stop contributions after an individual accrues “too much” in the retirement accounts.
• The maximum contributions, deductions or deferrals for IRAs and 401(k)s could be reduced so that high-income taxpayers receive less of a benefit.

One thing we learned from the Stretch IRA experience is that these changes don’t happen overnight. The ideas are proposed over several years in talks and the drafting of legislation. When Congress needs to raise some tax revenue, it grabs one or more of these ideas and puts them in the latest bill. Each of the ideas listed above fits that pattern and thus might be in an upcoming law. Make use of them while you can.

Earnings and Profit Margins

We’re in the early stage of earnings reports for the fourth quarter of 2019.

Most of the reporting in the media has focused on whether earnings and revenue met expectations or fell short. That can be a misleading metric, because expectations change throughout the quarter. By the end of the quarter, many companies have issued statements or talked to analysts, so the analysts have a good idea what the final numbers will be. Meeting or beating the latest expectations shouldn’t mean much.

What should matter is the change in the company’s earnings and profit margins over time. For this earnings season, we’re likely to see declines in the key data from last year.

S&P 500 companies are expected to report earnings that are 2.1% lower than a year ago, and profit margins are expected to be lower at 10.7%.

If profit margins fall to 10.7%, this will be the first time since the 2008-2009 period that margins declined for four consecutive quarters. It will be a meaningful drop from the recent peak profit margin of 12% in the third quarter of 2018.

According to FactSet, of the 11 sectors in the S&P 500, eight are expected to report a decline in net profit margins over the last 12 months.

The Data

Consumer Confidence, as measured by the Conference Board, rose to 131.6 in January, up from 126.5 in December. The number of consumers saying jobs are plentiful increased and positive sentiment about the stock market jumped more than 14%.

New home sales declined 0.4% in December. That is the third consecutive month of lower sales. However, sales increased 10.3% in 2019 and were at the highest calendar year level since 2007. Home builders say that the primary reason sales aren’t higher is the lack of new homes available that are priced at $200,000 and below.

In addition, Pending Home Sales declined 4.9% in December. That follows a slight increase in November. Over 12 months, pending home sales increased 4.6%. The December result is below expectations and reverses the steady improvement in housing that we’ve seen in the last half of 2019.

Home prices increased in November, according to the S&P CoreLogic Case-Shiller Home Price Index. Prices increased 0.5% in November, compared to a 0.4% rise in October. Over the last 12 months, home prices have climbed 2.6%. The hottest markets for the month were Phoenix, Charlotte and Tampa.

Durable Goods Orders finished 2019 on a down note. Total orders increased 2.4%, following a 3.1% decline in November. But most of those orders were for aircraft. Core capital goods, a key measure of business investment, declined 0.9% in December — the largest dip since April. In the last 12 months, core capital goods increased only 0.8%.

But the latest surveys for January convey the fact that manufacturing is turning around.

The Dallas Fed Manufacturing Survey for January found the general activity index declined only 0.2%, compared to a 3.2% drop in December. The Production Index was 10.5, compared to 3.6 in December.

The Richmond Fed Manufacturing Index jumped to 20 in January compared to -5 in December. This is the highest increase since March 2016 and the highest level since September 2018. Both sales and orders increased.

The Kansas City Fed Manufacturing Index, on the other hand, reported activity in its region was essentially flat. The index declined to -4 in January, compared to -3 in December. Yet, the outlook for the future among survey respondents has improved.

The first estimate of gross domestic product (GDP) for the fourth quarter of 2019 estimated growth at a 2.1% annual rate. That makes 2019’s full-year growth 2.3%, which is the lowest rate since 2016. In the fourth quarter, business investment decreased for the third consecutive quarter. Consumer spending also fell, but exports increased.

New unemployment claims declined another 7,000 to 216,000. But last week’s increase was revised higher to 18,000 from the 6,000 initially reported.

The Markets

The S&P 500 declined 1.42% for the week ended with Wednesday’s close. The Dow Jones Industrial Average lost 1.55%. The Russell 2000 fell 2.17%. The All-Country World Index (excluding U.S. stocks) gave up 2.32%. Emerging market equities tumbled 3.96%.

Long-term treasuries rose 3.29% for the week. Investment-grade bonds rose 0.76%. Treasury Inflation-Protected Securities (TIPS) added 0.87%, while high-yield bonds declined 0.60%.

On the currency front, the U.S. dollar increased 0.72%.

Energy-based commodities lost 4.81%. Broader-based commodities fell 4.02%, but gold rose 1.07%.

Bob’s News & Updates

Join me for the Orlando MoneyShow, February 6-8, 2020, at the Omni Orlando Resort at ChampionsGate. I will be speaking Thursday, Feb. 6, 9:30 a.m. about Important Changes in IRAs and Other Retirement Planning Strategies You Must Know. On Feb. 7, I will talk at 11:30 a.m. about 10 Questions You Must Answer Before and During Retirement. Other investment experts who will be speaking include Hilary Kramer, Bryan Perry and Mark Skousen. Register by clicking here or call 1-800-970-4355 and mention my priority code of 049320.

The number of regular viewers for my Retirement Watch Spotlight Series continues to increase. You should sign up because I make in-depth presentations of key retirement finance topics. You can watch these online seminars from the comfort of your home or office at times you choose. To learn more about my new Spotlight Series, click here.

A recent five-star review of my book on Amazon.com said, “A complete retirement guide! One of the best books on this topic!” Click for more details about the revised edition of “The New Rules of Retirement.”

I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.