Tag Archives: Personal investing

401(k)s hit records as workers sock away more, stocks jump

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Fidelity Investments says the average 401(k) balance rose to a record $112,300 last year

By

STAN CHOE AP Business Writer

February 13, 2020, 11:28 AM

3 min read

NEW YORK —
How’s your 401(k) doing?

President Donald Trump likes to ask that question around the country, sometimes throwing out big gains like 90% or 95%. The average 401(k) did indeed hit a record last year, although its growth was considerably less than that.

The average 401(k) balance rose 17% last year to $112,300 from the end of 2018, according to a review of 17.3 million accounts by Fidelity Investments. The average individual retirement account, or IRA, balance rose the same percentage to $115,400.

Surging markets around the world were a big reason for the growth: The S&P 500 index had one of its best years in decades with a 31.5% return. Investments of all types logged gains, from junk bonds to stocks from developing economies.

But workers’ better savings habits also played a big role.

Fidelity said the average worker set aside 8.9% of their pay in their 401(k) in the fourth quarter, a record. Combined with employer matches, the average total savings rate was 13.5% in the quarter, tying its record last reached in the spring of 2019.

“Nobody can control the market, so the behaviors of people contributing to their 401(k)s are what get us the most excited,” said Katie Taylor, vice president of thought leadership at Fidelity. “We have people saving 13.5%, which is really close to the 15% that we recommend. That’s a great story.”

In many cases, workers may not even realize they’re saving more. Most employers give the option for workers to automatically increase their contributions each year, without having to do anything. Some employers even automatically sign up their employees for these auto-escalation programs, requiring them to opt out if they don’t want their contribution levels to steadily rise.

Such features are on top of programs where employers automatically enroll new hires in the 401(k) plan. They all lean on the power of inertia to help workers build up bigger nest eggs. It’s a sharp turnaround from earlier years when workers had to take an extra step to join the 401(k) plan and fill out paperwork whenever they wanted their contribution levels to change.

“There’s always a way, if you don’t want to do it, where you can unenroll, but these automatic programs have been a game changer,” Taylor said.

Consistent contributions — and giving them time to grow — are keys to building bigger portfolios. Among workers who have been in their 401(k) plan for 10 straight years, the average balance rose to a record $328,200, according to Fidelity.

Such figures, though, count only people who have a 401(k). Many lower-income workers, particularly at smaller employers, could not save in a 401(k) even if they wanted to because their companies don’t offer access to one. Legislation passed late last year aims to make it easier for smaller employers to band together and offer plans.

Nearly half of all U.S. households aged 55 and over, 48%, had no retirement savings at all as of 2016, according to estimates from the Government Accountability Office.

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Strong stock and bond markets at odds over global growth

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NEW YORK (Reuters) – It looks like something has to give in global markets.

Traders work on the floor at the New York Stock Exchange (NYSE) in New York, U.S., April 18, 2019. REUTERS/Brendan McDermid

Stocks and bonds around the world have rallied atypically together since the start of the year, rewarding investors both bullish and bearish on the direction of global growth.

The main catalyst for the gains was the Federal Reserve’s surprise decision in early January to pause its tightening policy, after four interest rate increases in 2018 raised fears it was being too aggressive as the economy cooled and inflation remained minimal. Those fears helped send global markets into a tailspin in December.

Yet with the U.S. benchmark S&P 500 near a record level and corporate junk bonds notching new highs, the question stock and bond investors are asking is whether the Fed’s next move will be a rate cut that further propels risk assets or a rate hike that cuts into the stock market’s momentum.

A move by the Fed on interest rates or a communication misstep by the central bank would likely end either the rally in the stock market or in investment-grade bonds by the end of the year, restoring the traditional give-and-take between risk and safety, investors say.

“The Fed is between a rock and a hard place,” said Kathleen Gaffney, a portfolio manager at Eaton Vance Management in Boston. “They can’t go lower because there are signs that inflation is rising and they can’t go higher because of global political uncertainty. It leaves the market on pause.”

The U.S. central bank has said it will soon stop letting bonds bought during its “quantitative easing” period following the financial crisis roll off its balance sheet, which also helped push yields on safe havens like Treasuries lower and acted as a tailwind for riskier assets.

Gaffney said the Fed will likely have to raise rates again because of rising wages and other forms of inflation by the end of the year, adding that such a move will “pierce” the high valuations in both the stocks and bond markets.

TWIN RALLY

The rolling four-month percentage change in the price of the S&P 500 and the 10-Year Treasury note have both been positive for three straight months, according to a Reuters analysis. That is the longest such streak since a five-month run that ended in August 2017, it showed.

In that same 2017 period, the S&P 500 gained and 10-year Treasury yields fell as the market digested conflicting economic reports during the first year of the Trump administration, before the Federal Reserve in September began quantitative tightening that resulted in bond yields rising as the S&P 500 continued to rally.

Since January equity markets around the world have made up much of the ground they lost during a wrenching fourth quarter of 2018 that sent the U.S. stock market to the brink of a bear market.

The S&P 500 and Europe’s STOXX 600 are up almost 16% year to date, while stock indexes in China are up nearly 30%.

The ICE Merrill Lynch U.S. high yield index is up 8.6% year to date while the Merrill Lynch World sovereign bond index is up almost 1.5%.

World stocks vs bonds – tmsnrt.rs/2IrqXeF

A rally in benchmark 10-year Treasury notes, usually seen as a safe haven, undercuts the picture of a “risk on” market. Their yields have slid from 2.69% at the start of the year to as low as 2.34% in late March.

“At this point in the cycle, equity investors are trying to take any incremental news positively while fixed income investors are not,” said Jen Robertson, a portfolio manager at Wells Fargo Asset Management in London. “It’s quite delicate at the moment and any negative news out of first quarter earnings could impact this sharp bounce.”

Further uncertainty due to the economic impact of the UK leaving the European Union, which has now been pushed back to Oct. 31, or a deterioration in U.S.-China trade talks could be a “shock to the system” and derail both stocks and bonds, she said.

The spread between U.S. three-month bills and 10-year notes turned negative for the first time since 2007 in March, a bearish sign as a yield curve inversion has signaled an upcoming economic recession in the past.

The move initially boosted stock prices as investors predicted it would hem the Fed in from future interest rate hikes. But equities could fall soon if recession fears continue to grow, said Hiroaki Hayashi, managing director of Fukoku Capital Management in Tokyo.

“If you look at the past experiences, share prices have often rallied six to nine months after the yield curve initially inverted before entering a major correction. I believe we are exactly at such a phase now.”

Despite outsized gains this year, financial markets have not indicated investors have faith that the global economy can grow without historically low interest rates a decade after the end of the Great Recession, said Anwiti Bahuguna, head of multi-asset strategy at Columbia Threadneedle Investments.

“The bull market we’ve had for the past 10 years is essentially because of really low interest rates,” Bahuguna said.

“I don’t think that equilibrium will last much longer,” she added, saying rising inflation and low unemployment could soon test global markets’ ability to cope with tighter monetary policy.

Additional reporting by Hideyuki Sano in Tokyo and Terence Gabriel in New York.; Editing by Alden Bentley and Tom Brown

Our Standards:The Thomson Reuters Trust Principles.

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1Q Market Review: Great returns, but with a twist at the end

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It’s been a fabulous start to the year for investors — as long as you ignore all those simmering worries about a possible recession.

The S&P 500 on Friday closed out its best quarter in nearly a decade, having jumped 13.1 percent through the first three months of 2019, and many other investments from junk bonds to foreign stocks have also bounced back from their dismal end to 2018. But the returns would have been even better if not for concerns that slowing growth around the world may drag down the U.S. economy.

The quarter’s twists are just the latest for the markets, which have yo-yoed from record heights to fear-induced sell-offs for more than a year.

The big swings have left stock and bonds looking fairly valued, said Frances Donald, head of macroeconomics strategy at Manulife Asset Management. She’s optimistic markets can keep climbing this year, but she anticipates more swings along the way. When she talks with big institutional investors, the mood is usually one of nervousness, she says.

“The 2020 recession calls, whether they’re right or wrong, have permeated all individual investor mentalities,” she said.

The Fed was again one of the market’s main drivers, and it flipped to hero from antagonist in the eyes of many investors.

As last year was closing, investors were worried that the Federal Reserve would raise interest rates too quickly and choke off the economy. The central bank raised short-term rates in December for the seventh time in two years, and the S&P 500 fell more than 19 percent from late September through Dec. 24, nearly taking down the longest bull market for U.S. stocks on record.

But on Jan. 4, Fed Chairman Jerome Powell told a conference for economists that the central bank would be flexible in deciding when to raise rates. It was an immediate balm for investors, and the S&P 500 leaped 3.4 percent that day. It kept climbing until hitting a peak on March 21, the day after the Fed said that it may not raise rates at all this year.

All the while, companies were turning in yet another round of blockbuster profit reports aided by lower taxes. Earnings per share for S&P 500 companies surged 13 percent during the last three months of 2018 from a year earlier, led by big gains for energy and communications companies.

But the momentum for stocks stalled last week when a surprisingly weak report on the European economy and other worries triggered concerns about the global economy. Investors sought the safety of bonds, and that in turn triggered the alarm on one of the market’s more reliable recession indicators.

Investors drove the yield for the 10-year Treasury lower than for the three-month Treasury bill for the first time since a little before the Great Recession. Such an “inverted yield curve” does not have a perfect track record as a recession predictor, but it has preceded each of the last seven by a year or two.

Here’s a look at some of the moves that shaped the last quarter for investments:

— STOCK FUNDS SOARED

During the fourth-quarter swoon the S&P 500 fell as much as 19.8 percent from its all-time high set Sept. 20. The Fed’s pledge for patience helped the index rally back to within 2.6 percent of the peak this quarter.

Technology stocks again did much of the work, but the gains were widespread. Funds specializing in small stocks or large, energy companies or real estate, all logged gains. The SPDR S&P 500 ETF retuned 13.6 percent for the quarter, including dividends, for its best return since the third quarter of 2009, when the economy was first crawling out of the Great Recession.

Stock funds that focus on high-growth companies, such as tech, again easily bested their counterparts that look for low-priced stocks, called value funds. Value stock funds trailed partly because they often have lots of banks and other financial stocks, which lagged during the quarter on worries that lower interest rates and slower economy will hurt their profits.

— BOND FUNDS CLIMBED AS YIELDS FELL

Inflation is still low, the Fed is holding the line on interest rates and worries are rising about the strength of the economy. All those help push up prices for bonds, and pull yields down, and bond funds of all types powered to gains during the quarter.

The iShares Core U.S. Aggregate Bond ETF returned 2.9 percent for its best performance in three years. It tracks an index of investment-grade bonds, and it benefited from a drop in the yield on the 10-year Treasury to 2.41 percent from 2.68 percent at the end of the last quarter.

— WHAT’S AHEAD?

Like the global economy, growth is also slowing for U.S. corporate earnings. Analysts say first-quarter profits likely fell nearly 4 percent from a year earlier, according to FactSet. If they’re right, it would be the first decline in nearly three years. That’s setting the stage for some potentially disappointing reports when the next quarter opens on April 1.

So, investors may want to ready themselves for even more turbulence in the coming quarter. Besides earnings reports, they’ll also be getting more clues about the strength of the global economy and whether the United States and China can make progress on their trade dispute to help the global outlook.

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