Investment Commentary – February 5, 2019

Year to Date Market Indices as of Market Close February 5, 2019
Dow 25,411 (8.93%)
S&P 2,737 (9.21%)
NASDAQ 7,402 (11.56%)
Gold $1,284 (-0.02%)
OIL $52.77 (-15.19)
Barclay Bond Aggregate (-0.01%)
Fed Funds Rate 2.50% (last increase was 12/19/18)

Time for stock-market investors to shake off the 3rd ‘recession scare’ of the cycle, analyst says

The mighty bull market in equities is still standing after the third recession scare of the current cycle, says one market bull, who argued that its time for investors to become “aggressive buyers” once again.

“Investors suffered through the third ‘recession’ scare this cycle, and while all three major corrections have been larger than anticipated, absent an inversion of the yield curve that shuts down credit, the market pessimism following a non-recession crash should set the stage for new highs in 2019,” wrote Tony Dwyer, analyst at Canaccord Genuity, in a Tuesday note.

The previous frights came in 2011-12 and 2015-16. Meanwhile, the stock-market rally off the Christmas Eve lows “has been as extraordinary as the ‘whoosh’ that created that low,” Dwyer said. Stocks fell apart in the fourth quarter of last year, accelerating a decline into December that pushed the S&P 500 SPX, +0.47% and Dow Jones Industrial Average DJIA, +0.68% in to a correction and knocking the tech-heavy Nasdaq Composite COMP, +0.74% into a bear market.

The declines left major indexes negative for 2018, but the subsequent rebound saw the S&P 500 and Dow bounce nearly 16% from its December low through Monday, while the Nasdaq is up more than 18% over the same stretch.

Market bears remain unconvinced by the bounce, arguing that a dovish pivot by the Federal Reserve at its meeting last week will likely prove too late to halt a slowdown later this year. They argued that a decline in long-end Treasury yields signals unease over the economic outlook that will eventually come to haunt bullish investors.

Dwyer argued stocks can push to new highs in 2019. One of Wall Street’s most prominent bulls, he had targeted the S&P 500 to end 2018 at 3,200 before downgrading it to a range of 2,900 to 2,950 in October. The S&P ended last year at 2,506.85. Dwyer is targeting 2,950 in 2019, a rally of around 9% from Monday’s close.

The S&P 500 is trading at 16.1 times his 2019 estimate of $168 in earnings per share, or EPS, which he said is toward the low end of valuations when core inflation is running between 1% and 3%. Dwyer’s target is based on retesting the highs in a move similar to past “non-recession, postcrash environments,” representing a multiple expansion to 17.5 times Canaccord’s 2019 EPS estimate.

The market’s fourth-quarter “crash” suggested the Fed, which raised rates four times in 2018 and had maintained a bias toward tightening, had made a mistake, he said. The “reflex rally” indicates the Fed’s pivot last week to a “‘patient’ data-dependent stance fixed it for the time being,” he said. Moreover, the pivot suggests that an inversion of the 2-year Treasury yield TMUBMUSD02Y, -0.96% versus 10-year Treasury TMUBMUSD10Y, -0.79% is much less likely in coming months, he said.

In-service Distributions: Accessing Retirement Plans While Still Employed

Many employer-plan participants are unaware of rules that allow them to take a cash distribution and/or roll over their assets to an IRA while still on the job.

Many readers of this column know that distributions from qualified plans require a “triggering” event that allows participants to withdraw their funds. Such triggering events include separation from service or retirement. Further, it’s also well documented that cash distributions made prior to age 59½ are generally subject to federal and state (if applicable) income tax, plus an additional 10% early distribution penalty tax unless an exception applies.

However, what many investors may not realize is that rules allowing access to their retirement accounts over the decades have been liberalized. Now, they can access their employer plan retirement funds while employed via an “in-service” distribution, which is another way of saying plan participants can elect to take a cash distribution and/or roll over their assets to an IRA while employed.

In-service distributions are complex, so be sure to familiarize yourself with the rules and their nuances to avoid making costly errors. Of particular importance is being cognizant of when an in-service distribution option might be available.

In-service distributions provide flexibility by offering plan participants the option to withdraw from and/or roll over their account while employed. That said, retirement plans are intended for retirement. Consequently, the maze of rules governing distributions as such generally discourage participants from taking a distribution from their account prior to retirement; but there are exceptions, including separation from service, plan loan, and financial hardship.

This doesn’t mean an employer is required to offer in-service withdrawals. Instead, it is an optional plan provision. But according to a recent survey by the Profit Sharing Council of America, more than 70% of 401(k) plans do allow in-service withdrawals.1

Anyone considering such a move should refer to the plan document, which specifies whether an in-service distribution provision is available and the conditions under which a participant may take an in-service distribution. Moreover, the summary plan description (SPD) offers a simplified explanation of the company’s retirement plan rules and provisions in an easy-to-read Q&A format. While in-service distributions are available from a wide variety of qualified retirement plans, rules on the availability of such withdrawals may vary by the type of plan and the type of contribution (e.g., employee deferrals, rollovers, employer contributions, etc.). For example, in-service rules that apply to qualified plans do not apply to employer-sponsored IRA plans, such as SEP, SAR SEP, or SIMPLE IRAs. (IRA plan rules, on the other hand, are liberal, thus allowing a participant to take a distribution at any time and/or age, although taxes and or penalties may apply.)

Around the web:

January comeback: After the worst December since 1931, the S&P 500 started the new year off with a bang, posting its best January result since 1987 with a gain of 7.9%. The Dow added 7.2% in the opening month of 2019, which was that index’s best January result since 1989.

Earnings momentum: The ongoing earnings season continues to be a positive catalyst for the stock market. Among S&P 500 companies that have reported so far, fourth-quarter earnings have risen an average 12% compared with the same quarter a year ago, according to FactSet. However, that growth rate is expected to decline in coming quarters.

Fed on hold: The U.S. Federal Reserve Board left interest rates unchanged, as expected, but eased worries about the prospect of further rate hikes by suggesting that it’s shifted to a wait-and-see mode dependent on economic data. While he didn’t rule out further increases in coming months, Fed Chair Jerome Powell said, “The case for raising rates has weakened somewhat.”

Other Notable Indices (YTD)
Russell 2000 (small caps) 12.60
EAFE International 6.41
Emerging Markets 8.52
Shiller Annuity Index 3.79

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.