Dow closes within 1% of record high from CNBC. ...
Season 10 for the funniest show ever made coming up January 19th! Until then, here’s the trailer ...
Patrick: Mark, some 10,000 Americans turn 65 every day, yet the last baby boomer wonât turn 65 for another decade. What are the key challenges as they enter retirement and withdrawal mode?
Mark: Retirement investors face an unprecedented future where poor financial planning at the start of retirement can have catastrophic consequences later on. Unrealistic income targets, bad market timing and a lack of diversification are just some of the factors that can make or break a retireeâs financial longevity.
Patrick: Is this because weâre living longer?
Mark: In part, yes. We all need to plan for a longer unknown. Financial decisions at the beginning of retirement are crucial because they can become amplified over time. For example, retirees are taking more risk to achieve both income and growth, and this is a real concern going forward, especially if there is a market downturn.
Explore income investing tips.
Patrick: Ten years into a bull market and the longest economic expansion in history, the investing world is debating whether itâs ending, or merely âadjustingâ. What does this mean for investors preparing for retirement?
Mark: New retirees should be prepared for choppy conditions to continue and be aware of how this could impact the health of their portfolios. Even if a large downturn doesnât occur, retirement is a good time to get better prepared for one. Small swings in portfolio value can be bearable, but recovering from a larger decline while your portfolio is beginning to produce retirement income is challenging. Remember, your portfolioâs ability to recover from downturns diminishes when you start taking withdrawals. It will not behave the same way as someoneâs whoâs still in saving mode.
Patrick: You describe this problem as âdollar-cost ravaging.â Talk more about what that means.
Mark: Investors have probably heard the term âdollar-cost-averaging,â where you make regularly timed investments to smooth out the risk of âbuying high.â Retirees tend to do the opposite. Instead of putting money into their portfolio, they take it out with a regular cadence in the form of income. âDollar-cost-ravagingâ occurs when the market loses value while youâre taking withdrawals, especially in the early years of retirement. Because money is coming out rather than going in, itâs harder for the retiree to recover their losses when markets rebound. We even saw this during one of the most successful bull markets in our history over the past decade. The sequence of returns matters, and the biggest challenge is a bear market early in your retirement. If you must take withdrawals to meet expenses, then having a well-constructed, risk-managed portfolio is vital to limiting the damage than can be caused by ravaging market conditions.
Patrick: What should investors do now if they are concerned about dollar cost ravaging?
Mark: For anyone whoâs drawing income from their portfolio, now is a great time to take a closer look at your investments and recalibrate your portfolio to ensure you are protected against shifting market conditions. Bond yields are still low, but risk has picked up compared with the past decade. That increases the potential for losing portfolio value. Striking the right balance to limit your losses in a declining market is just as important as capturing growth when the market is strong. Your financial advisor can help walk through your income options and present potential outcomes under different market scenarios.
Patrick: Thanks, Mark.
Our friend Nina O’Neal came by the Compound and we talked about the challenge of being there for your family and focused on running a financial advisory practice. It’s not easy for anyone. Nina is an absolute killer. I’m so happy for all the success she’s had this year and grateful for our friendship. Check out her blog here. ...
Whatâs in stock for 2020 for the global economy and markets? We see a big shift in the macro environment â as the dovish monetary policy pivot of 2019 fades as a key driver. Our 2020 Global outlook lays out our outlook on global growth â and more. It also features a new tactical asset allocation framework â with high-level directional views across broad asset classes and detailed views within â all scaled by our conviction levels. Our modest pro-risk stance is little changed, but we have made meaningful changes under the hood.
We introduce three new investment themes for 2020. The first of these: Growth edges up over the course of the year, picking up the baton to support risk assets. The unusual late cycle, dovish pivot by central banks has led to a dramatic easing in financial conditions. The impact of such easing on the real economy typically comes with a lag but has been particularly delayed this time as it has been partially offset by the protectionist push. See the gap between our Growth GPS (yellow line) and where we would expect growth estimates to be purely implied by financial conditions (orange line) on the chart above. What would challenge this outlook? If U.S. China trade talks break down, or protectionist pressures broaden and ratchet higher, it could undermine business and market sentiment, cutting short the growth uptick we expect.
Read more in our Weekly commentary
Powerful structural trends are testing limits â and threaten to intersect with the near-term outlook and become market drivers. Rising inequality and a surge in populism have implications for taxes and regulation. Trade frictions and deglobalization are weighing on growth and boosting inflation. Interest rates are hitting lower bounds and crimping the effectiveness of monetary policy. And sustainability-related factors such as climate change are having real- world consequences, and affecting asset prices as investors start to pay attention.
This was the overarching backdrop for the discussions when some 100 BlackRock investment professionals gathered in November to debate 2020âs market outlook. Our outlook publication features key takeaways from these debates. Highlights include: how yields hitting lower bounds are prompting a rethink of the role of government bonds as portfolio ballast; the risk of supply shocks from deglobalization and climate change lifting inflation over time; the prospects for a pause in U.S.-China trade tensions; and the potential for divergent policy outcomes in the U.S. presidential election in 2020.
We also unveil a new framework for tactical asset allocation. The first step is understanding the current macro regime â and the likelihood of potential transitions between regimes. This is key, because different regimes have different implications for asset returns. We assess current valuations and incorporate the views of BlackRock experts. This results in a new set of views on broad asset classes for the next six to 12 months, as well as granular views within asset classes, including equity factors. We scale these views according to our conviction. Three overall takeaways: We are modestly positive on risk assets; neutral on global duration and cash; and see room for a cautious cyclical rotation. Under the hood, many of our calls on sub-assets have changed due to the shift in economic and market dynamics. For example, within equities we have downgraded the U.S. market to neutral, with concerns about rising political uncertainty around the 2020 elections. We have at the same time upgraded Japanese equities to moderately overweight, expecting Japanese companies to benefit from a global manufacturing recovery and domestic fiscal stimulus.
2019 has been a strong year for closed-end funds (“CEFs”), with double-digit net asset value (“NAV”) returns in many sectors (Exhibit 1). Additionally, discounts have narrowed over the course of the year, driving market price outperformance versus NAVs. Positive market price returns may lead to fewer opportunities for investors to employ tax loss selling strategies in 2019. However, given the income focus of many CEFs, and the large distributions they pay out, the current market value may be lower than an investor’s cost basis, resulting in a capital loss. Moreover, CEFs held for more than one year may be in a capital loss position. Although tax loss selling may be limited compared to 2018, the fourth quarter has historically exhibited discount widening prior to year-end as investors seek to harvest capital losses to help reduce current year tax liabilities. That being said, BlackRock believes the dearth of yield opportunities across the globe will keep demand for CEFs high and could lead to tighter discounts in the near future.
The January effect
Based on historical trends, investors that have purchased CEFs in the latter part of the fourth quarter have generally realized the benefits of tax loss selling through the short-term effect of discount narrowing (market price outperforms NAV) most prevalent in the month of January. Notably, CEF discounts have narrowed in January in 16 out of the last 20 years. This consistency may be attributed to the ‘January Effect’. According to this theory, pent up demand following tax loss selling may be the factor driving the outperformance as investors re-enter the market after selling positions in prior months to harvest taxes and rebalance their portfolios. Based on historical trends, BlackRock believes that tax loss selling may present an opportunity to reap the rewards of a temporary mispricing in the CEF market.
Potential long-term value amid short term headwinds
The Energy sector has experienced elevated volatility over the past year and demand for the asset class has waned, causing Energy CEF discounts to widen beyond their historical average (currently -9.8% versus -6.6% 10-year average). Notably, Energy CEFs have traded to premiums over the past 10 years when market sentiment was positive for the asset class.
Oil prices, which are an important driver of energy equity valuations, have been sensitive to global growth expectations and geopolitical risks in 2019, ranging from $46 to $66 per barrel (currently $54 per barrel). BlackRock believes that the marginal cost per barrel is currently between $60-$70 and expect oil prices to average within this range during 2020, barring a sharp economic slowdown. We believe that recent selling in Energy CEFs may be overdone and wide discounts may present an opportunity for long-term investors seeking growth. Also, with increasing geopolitical risk and instability, energy equities may offer a good hedge against potential tail risk events heading into 2020.
Bank loan funds:
Market sentiment for floating rate assets has been negative in 2019 with the Fed reversing course and cutting interest rates to stabilize the U.S. economy. With investors less concerned about rising interest rates, demand for Bank Loan funds has declined as illustrated by widening CEF discounts and mutual fund outflows ($28bn in net outflows in bank loan mutual funds year to date as of 9/30/19). Currently, Bank Loan CEFs trade at an average discount of -8.3% according to Lipper. For context, Bank Loan CEF’s have historically traded at an average discount of -4.3% over the last 10 years and have moved to premiums when the asset class is in demand. BlackRock believes that current discount levels may present an opportunity for long-term investors seeking income. While rates have fallen (bank loan yields generally increase with rising interest rates), overall, loan fundamentals remain firm. BlackRock believes bank loans continue to provide attractive risk-adjusted income at this point in the cycle, especially in the context of strong active management.
Tax loss selling into year-end may continue to pressure CEF discounts in the short term, however, these wide discounts may offer long term investors the potential to benefit from price appreciation in addition to attractive levels of income.This material is for informational purposes only and is not intended to be relied upon as research or investment or tax advice, and is not a recommendation, offer or solicitation to purchase or sell any securities or to adopt any investment strategy, nor shall any securities be offered or sold to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. There is no assurance that a Fund will achieve its investment objective. Investing in a Fund involves numerous risks, including investment risks and the possible loss of principal amount invested. The Funds are not complete investment programs and you may lose money investing in a Fund. An investment in a Fund may not be appropriate for all investors. Performance results reflect past performance and are no guarantee of future results. Current performance may be lower or higher than the performance data quoted. All returns assume reinvestment of all dividends and/or distributions at the price of the Fund on the ex-dividend date. The dividend yield, market value and net asset value of a Fund's shares will fluctuate with market conditions. Closed-end funds may trade at a premium to NAV but often trade at a discount. The amounts and sources of Fund distributions reported in any notices to shareholders are only estimates and are not being provided for tax reporting purposes. The actual amounts and sources of the amounts for tax reporting purposes will depend upon a Fund's investment experience during the remainder of its fiscal year and may be subject to change based on tax regulations. A Fund will send a Form 1099-DIV for the calendar year that will tell shareholders how to report these distributions for federal income tax purposes. Some Funds make distributions of ordinary income and capital gains at calendar year end. Those distributions temporarily cause extraordinarily high yields. There is no assurance that a Fund will repeat that yield in the future. Subsequent monthly distributions that do not include ordinary income or capital gains in the form of dividends will likely be lower. Some investors may be subject to the alternative minimum tax (AMT). The Funds are actively managed and their characteristics will vary. Stock and bond values fluctuate in price so the value of your investment can go down depending on market conditions. International investing involves special risks including, but not limited to political risks, currency fluctuations, illiquidity and volatility. These risks may be heightened for investments in emerging markets. Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments. Principal of mortgage- or asset-backed securities normally may be prepaid at any time, reducing the yield and market value of those securities. Obligations of U.S. government agencies are supported by varying degrees of credit but generally are not backed by the full faith and credit of the US government. Non-investment-grade debt securities (high-yield/junk bonds) may be subject to greater market fluctuations, risk of default or loss of income and principal than higher rated securities. Investments in emerging markets may be considered speculative and are more likely to experience hyperinflation and currency devaluations, which adversely affect returns. In addition, many emerging securities markets have lower trading volumes and less liquidity. A Fund may use derivatives to hedge its investments or to seek to enhance returns. Derivatives entail risks relating to liquidity, leverage and credit that may reduce returns and increase volatility. Refer to a Fund’s prospectus for more information. © 2019 BlackRock, Inc. All Rights reserved. BLACKROCK is a registered trademark of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.
This week the Compound channel on YouTube broke above 20,000 subs and over 1 million total video views. We wanted to say thanks to all of you for watching, sharing and commenting on our stuff. Means a lot! It snowed! Here’s the view from our office window of Bryant Park in Midtown Manhattan. It’s a legit Winter Wonderland! Our friend Nina O’Neal of Archer Investment Management came by. Nina is an ...
Final Trades: Electronic Arts, Alphabet, JPMorgan & more from CNBC. ...
Michael and I and everyone at RWM who works on the Compound video channel with us want to say thanks to all of you for subscribing, liking, commenting and sharing. When we began the video project last spring, we weren’t sure if our content was going to be able to translate into a new medium. We’ve had a lot of success building a blog audience, a podcast audience and a social media following, but video was unc...
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US oil production repositioning country’s role in Middle East: Croft from CNBC. ...