The Week in Review
Trump and Xi Will Meet, But Progress Is Uncertain
Bull Market Still Has Legs
U.S. Consumers Are in Good Shape
FPF: Roth 401(k) Contributions vs. Traditional 401(k) Contributions
The action on Wall Street last week reflected the year in microcosm: Lingering domestic and geopolitical uncertainties were led by the unresolved trade tensions between the U.S. and China. Traders moved to the sidelines, with U.S. stocks falling about 1.0% from last week’s peaks.
Federal Reserve Chair Jay Powell noted in a speech this week that some signs of economic slowing remain concerning enough to discuss easing monetary policy (by cutting the fed funds rate), but the signs don’t yet justify such action.
For the year through Thursday, the Dow Jones Industrial Average has gained 15.1%, while the broader S&P 500 has returned 17.9%. The MSCI EAFE index, a measure of developed international stock markets, is up 13.5%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has dipped to 2.50% from 3.28% at 2018’s end. On a total return basis, the U.S. bond market has gained 6.1% for the year.
Presidents Xi and Trump to Talk Trade
Leaders from 19 countries as well as the E.U.—which together represent almost 90% of world economic output—have gathered in Osaka, Japan for the annual G-20 conference. The main event, however, will be Saturday’s 90-minute meeting between President Trump and China’s President Xi. As noted, conjecturing about tariffs, trade wars and the state of U.S.-China talks has driven sentiment and stock prices all year long—and this past week has been no different.
Early indications are that China wants a halt to tariffs and a lifting of sanctions on Huawei Technologies. Beyond that, details on what the leaders hope to accomplish are lacking. As long as Presidents Trump and Xi part ways with promises to work toward a deal—which is a low bar to clear—we expect traders and investors will be pleased with the outcome.
Bull Market Still Has Legs
As July starts , our economic expansion will reach its 10th anniversary—matching the longest for the U.S. on record. (The data goes back to the 1850s.) Many pundits have already decided that this will be a turning point; that its end is near or already here. We are closer to a recession now than we were a quarter or year ago, but the fact that it has been 120 months since the end of the last recession doesn’t tell us anything about when the next recession will occur.
While it has been a long economic expansion, the pace of growth has been modest. Since the end of June 2009, the U.S. economy has grown 25% (after inflation) from $15 trillion to $19 trillion in size. That translates into a 2.3% real growth rate—the slowest pace of the last 10 economic expansions. Recessions have often begun as an overheating economy has ignited inflation fears and policymakers have lifted interest rates to curb growth. None of those conditions exist today. If economic growth continues through July (we expect it will), we will be marking the longest U.S. expansion ever—a milestone but hardly a touchstone for recession.
U.S. Consumers Are in Good Shape
One way to take the pulse of the health of our economy is to measure the U.S. consumer’s heartbeat. New data from the Bureau of Economic Analysis shows consumer spending increased 0.4% last month, and spending estimates for April were revised upward, doubling to 0.6% from 0.3%. Consumer incomes advanced 0.5% for the second month in a row, supporting the higher spending.
On the other hand, consumer confidence fell from May’s 131.1 reading to 121.5 in June, a still-elevated level. We pay attention to confidence and sentiment indicators, but we lend more credence to measures of what consumers are doing than we do to how they say they are feeling. Today they are spending, saving and earning more. Taken together, the data points to a healthy consumer that can continue to carry the economy down the slow-growth-not-no-growth path.
Financial Planning Friday - Comparing Roth 401(k) and Traditional 401(k) Contributions
Everybody knows that you should save for retirement—how you should save is where it gets confusing. We can clear up one common puzzler right now: The difference between a Roth 401(k) and a traditional 401(k).
Both are designed to help you save for your retirement. What distinguishes them is how they’re taxed.
Traditional 401(k): Contributions are made pre-tax—which means you’re sidestepping the tax man (for now), thus lowering your taxable income each year you add to your account. Your earnings grow tax-free, but withdrawals (after age 59½) are taxed as ordinary income.
Roth 401(k): You contribute money that has already been taxed as income. But once invested, your earnings compound tax-free, and there is no tax on qualified withdrawals taken after age 59½.
Therefore, when choosing between a Roth and a traditional 401(k), it’s a case of deciding whether you want to be taxed now (Roth) or later (traditional).
The question of which type of 401(k) is best for you follows the same path as the decision to use a traditional IRA versus a Roth IRA. One thing to consider is whether you’ll be in a lower tax bracket once retired. Remember, even in retirement you will most likely still have income in the form of Social Security and required distributions from savings accounts like traditional IRAs or a 401(k) (both traditional and Roth 401(k)s require you to make withdrawals after age 70½).
If you’re well-established in your career and currently entering your peak earning years, your current income (and thus your tax bracket) is likely to be higher than your income will be in retirement. In that case, investing via a traditional 401(k) may mean you’ll ultimately pay less in taxes when you begin making withdrawals.
For younger professionals still climbing the ladder, their income in retirement may be higher than their present take-home pay. It’s still wise to max out your 401(k) contributions if you can, but for younger savers a Roth 401(k) may make more sense.
Other factors could be more important than your future tax bracket, though. High-earning couples or individuals may be ineligible to contribute to a Roth IRA due to income restrictions. In such cases, a Roth 401(k) might be a useful substitute since it provides similar tax benefits.
Of course, correctly predicting the amount of taxes you’ll face in the future can be a difficult business. Career paths can take sudden turns or Congress can change tax law. Building some flexibility into your retirement planning can help you deal with such risks.
Splitting retirement plan contributions evenly between Roth and traditional accounts if your plan allows you to do so is one good option. This takes advantage of the unique tax benefits of both types of accounts, allowing for a tax deduction now as well as tax-free withdrawals in the future. (In 2019, you can contribute up to $19,000 in your 401(k), or up to $25,000 if you are over the age of 50.)
This week, markets (and the Braver Capital Management offices) close at 1 p.m. on Wednesday in observance of Independence Day. We will be back at our desks and ready to assist you on Friday.
In the trade-shortened week to come, we will still be receiving a bevy of data, with reports on manufacturing and service sector activity, construction spending, car sales, factory orders, unemployment and wages.
If you’d like to learn more about our tactical or fundamental strategies, please contact Steve Johnson at 844-587-7393 or email@example.com.
Please note: This updated was prepared on Friday, June 28, 2019, prior to the market’s close.
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