October 2019

November 15, 2019

We would like to lead off this 3rd quarter summary letter by thanking everyone who attended our Client Appreciation evenings at the Bosari Gallery. The primary goal of Pearson Financial Services has always been our clients’ well-being, so please let us know if you feel there is anything more we can specifically offer to help all of you navigate the future and your financial affairs.

As the summer ended, the news flow around the world certainly did not:

Tensions with Iran seem to be growing by the day.
Talk of impeachment proceedings against Donald Trump continues to escalate.
The ongoing trade dispute with China entered its 452nd day on September 30th.
Our Federal Reserve has gone from a tightening policy (increasing rates), to a neutral policy, all the way to an easing policy (cutting rates) in that same time frame.
I could go on and on about the flow of events but with all this said, the stock market, represented by the S&P 500, is up over 18%, year to date. Talk of an “inversion of the yield curve” was sparked when the 2-year Treasury note yield topped that of the 10-year Treasury, on August 13, 2019. The U.S. curve has inverted before each recession during the last 50 years (although one time it was a false signal). With growth here and around the world slowing, it makes sense that we could in fact be facing a recession in the near future. However, note that research points out, bailing out of stocks after the recessionary signal of an inverted 10 & 2-year note, meant missing out on double digit gains. Data from Credit Suisse going back to 1978 shows:

The last five 2-10 inversions eventually led to a recession.
A recession occurs on average 22 months following a 2-10 inversion.
The S&P 500 index is up, on average 12 percent, one year after a 2-10 inversion. (NOTE: the 2-10 inversion occurred in August 2019)
It’s not until about 18 months after the inversion when the stock market usually turns and posts negative returns.
Now, does this mean you set the timer and get out of stocks 18 months from August 2019? Absolutely not! History is a great guide to how things may play out in the future but no two events are exactly the same. Last time the yield curve inverted, did we have so much negative yielding debt around the globe forcing investors into U.S. Treasury bonds that paid a comparatively decent yield? Were we in the middle of a trade war? Or did we have a Federal Reserve that may have increased rates a few times too many? How far along was the Federal Reserve in easing interest rates in past situations? Again, no two situations are exactly the same and this one may play out differently.

I can only tell you, with certainty, we are closer to a recession than we were when the last quarterly letter came out. But you may say with that I’m not offering up much wisdom and you would be completely right! The fact is, no one knows if and when the next recession will be upon us!

Yet with that said, I do recommend you continue to reduce equity allocations a bit and re-balance your portfolio over the coming months. By protecting some gains that have built up over the last decade, you may feel far better when that inevitable recession is underway. Our Investment Committee continues to monitor the equity and bond markets and we will provide updates to you as warranted.

In the last quarterly letter I mentioned the “Secure Act” which had passed the House of Representatives with unanimous support, back in May. According to the 401k SPECIALIST MAGAZINE, the Secure Act has stalled in the Senate as a few senators have disagreed on a provision eliminating Stretch IRAs. The new rule would require an inherited IRA to be closed out within 10 years of the owner’s death for most non-spouse beneficiaries, not over their lifetime. It is our hope that Stretch IRA’s would continue for beneficiaries. But it’s understandable that with delaying minimum required IRA distributions to age 72 and allowing contributions to IRA’s to continue for people over 70½ (if they continue to work), that the Treasury would have to find ways to offset some of the loss of tax dollars. We will continue to keep you updated on the “Secure Act” and if it makes its way into law.

Another item of importance that has come to our attention is the issue around cybercriminals. A recent article in Investment Advisor magazine explained how a person who had used a mobile charging station in an airport lounge, had their phone infected with malware, which recorded the keystrokes when they later logged onto their bank account. The cybercriminal then subsequently used their password to deplete their bank account.

I mention this for two reasons: even though all of us do everything we can to protect our information, cybersecurity is an ongoing problem. However, cyber coverage can now be added to a Homeowner’s Insurance policy, which for a modest increase in premiums would provide coverage in cyber financial loss. If it’s something that may make sense for you, please give your insurance company a call to see what it might cost to add this protection onto your policy.

Also, please be aware that as an added security measure, U.S. mail from TD Ameritrade will not be “forwarded” by the Postal Service, either seasonally or permanently. In order to continue to receive your mail from TD at a different address than they have on file, you need to either contact us for an address change form or call them at 1-800-431-3500, option 2.

As always, please do not hesitate to call us with any questions. We look forward to hearing from you with any concerns or suggestions as to how we can be of even more service to you.


Bryan Bastoni, CFP