Investment Commentary – February 18, 2020

Year to Date Market Indices as of Market Close February 18, 2020
• Dow 29,232(2.43%)
• S&P 3,370 (4.32%)
• NASDAQ 9,732 (8.47%)
• Gold $1,604 (5.56%)
• Oil $52.12 (-14.85%)
• Barclay Bond Aggregate (1.84%)
• All World Index (2.67%)
• Fed Funds Rate 1.75 (Three -0.25 rate cuts in 2019)
• US Real GDP Growth 2.1 Q4/2019

Nasdaq hits record despite Apple’s coronavirus sales warning

The Nasdaq scored a new record despite broader declines for the Dow Jones Industrial Average and the S&P 500 on Tuesday led lower by large-cap tech and financials.
Apple, was the worst performer in Dow, after warning production delays caused by the coronavirus outbreak would linger for longer than anticipated. Goldman Sachs was also a drag.

Shares of the iPhone maker fell after the company warned its second-quarter revenue would miss its guidance of $63 billion to $67 billion. Suppliers in Asia and Europe also fell on the news. Every 1 percent drop in Apple shares will result in the Dow Jones Industrial Average falling 22 points, according to Dow Jones Market Data.

The latest figures from China’s National Health Commission show the coronavirus has sickened at least 72,436 people in the country while killing 1,868.

Looking at earnings, Walmart reported earnings and sales that fell short of Wall Street estimates but hiked its annual dividend.

On the deal front, Franklin Resources reached a deal to buy rival Legg Mason for $4.5 billion, or $50 a share. Franklin will assume about $2 billion of outstanding debt.

Elsewhere, Kroger gained after a filing showed Warren Buffett’s Berkshire Hathaway bought shares in the company for the first time.

U.K.-based HSBC Holdings PLC said Tuesday it will cut 35,000 jobs over three years as it downsizes its investment bank, sells $100 billion of assets and revamps its U.S. and European businesses.
Pier 1 Imports filed for Chapter 11 bankruptcy on Monday, and said it intends to sell the company.

Commodities traded mixed, with West Texas Intermediate crude oil flat at $52.06 a barrel and gold up 1 percent to $1,600 an ounce, the highest level since April 2013.
U.S. Treasury’s rallied, pushing the yield on the 10-year note down by 3.2 basis points to 1.556 percent.

Lord Abbett: Baby Gift: SECURE Act Lets Parents Take Early Distribution without Penalty

A new provision allows parents to take a distribution from their retirement plan after a birth or adoption without getting hit with the 10% penalty tax.

The new provision, “Qualified Birth or Adoption Distribution,” allows up to $5,000 across all eligible retirement plans to be distributed penalty-free from an individual retirement account (IRA) or a 401(k) plan within one year from the date of birth, or the date on which the adoption of an individual under age 18 is finalized. The adoption of a child of any age who is physically or mentally incapable of self-support is also eligible in the new provision.

Important to note: While the SECURE Act adds a new exception to the 10% penalty tax for birth or adoption, the distribution is still subject to income tax. The new provision is effective for distributions that take place after December 31, 2019.

Tip: The new Qualified Birth or Adoption Distribution does not include defined benefit plans.

Notably, the rules stipulate the distribution must occur after a qualifying event (birth or adoption), so the account owner can’t take a distribution to pay for adoption expenses prior to the date the adoption is finalized. However, an eligible individual could take a distribution to pay down the expenses previously paid. Moreover, there isn’t a requirement that the distribution cover qualifying expenses. The distribution simply must occur after a qualifying event. In other words, the proceeds can be used for any expense!

Plus, the new provision indicates that it applies on an individual basis. Therefore, if both parents have available assets, each parent can separately make a Qualified Birth or Adoption Distribution of up to $5,000 for each child born or adoption for a total of $10,000. All indications are the $5,000 limit is a separate limit “with respect to any birth or adoption” and seems to “start fresh” with each new qualifying event (i.e. birth or adoption).

One more thing: The new Qualified Birth or Adoption Distribution is not a required (mandatory) qualified plan provision. Therefore, an individual will need to check see if this provision is offered in their qualified retirement plan. In reality, it’s highly unlikely this provision will be offered just yet. Why? Plan sponsors/IRA custodians will need to determine whether they want to offer a new distributable event. Assuming they do, they will need time to update forms, create processes, distribute notices and determine required documentation (qualifying the distribution), and communicate the new option to plan participants.

The rules also allow for a Qualified Birth or Adoption Distribution to be repaid at a later date (notwithstanding the plan/IRA contribution limit) from either the plan the distribution was made or an IRA. However, the law is silent on a repayment deadline. Therefore, we need to wait for the IRS to issue regulations explaining repayment timing.

Around the Web

Edging higher: In the wake of a big rally the previous week, the major U.S. stock indexes recorded modest gains to set new record highs, with the NASDAQ and S&P 500 outperforming the Dow by wide margins. The S&P 500 was up nearly 5% from a recent low on January 31.

Growth crushes value: Strong results from information technology stocks have helped growth stocks outperform their value counterparts by a big margin year to date, extending growth’s run of dominance in recent years. Through Friday, a growth stock index was up nearly 9% year to date, while its value counterpart was up 1%.

Earnings engine: With earnings season winding down, the information technology sector has emerged as the biggest driver of earnings growth. As of February 13, the sector had accounted for 63% of fourth-quarter earnings growth across the S&P 500, according to FactSet. The broad market’s overall earnings growth rate is expected to be modest, at about 0.7%.

Watchful Fed: In testimony before Congress, U.S. Federal Reserve Chairman Jerome Powell said it’s too soon to say whether the coronavirus outbreak could change the central bank’s views on its current interest-rate policies. Powell said the Fed will carefully watch the scope of the outbreak and its impact on the U.S. and global economies.

U.S.-China trade: Tensions escalated between the United States and China despite the phase one trade agreement that the countries recently signed. The latest rift occurred when U.S. prosecutors accused Chinese telecommunications company Huawei and two U.S. subsidiaries in an alleged conspiracy to steal trade secrets.

Stable inflation: A gauge of inflation was unchanged at an annual rate of 2.3% for the fourth month in a row, excluding volatile food and energy prices. The latest monthly Consumer Price Index figure is slightly above the U.S. Federal Reserve’s 2.0% target for inflation.

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The views presented are not intended to be relied on as a forecast, research or investment advice and are the opinions of the sources cited and are subject to change based on subsequent developments. They are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investments.