January 28, 2020
Charlotte Woodhams, Investment Strategy Analyst
Luis Alvarado, Investment Strategy Analyst
Gary Schlossberg, Global Strategist
Updates and analysis from Wells Fargo Investment Institute on what federal budget, regulatory, and trade decisions could mean for investors.
January 28, 2020
Charlotte Woodhams, Investment Strategy Analyst
Luis Alvarado, Investment Strategy Analyst
Gary Schlossberg, Global Strategist
The SECURE Act1 was signed by President Trump on December 20, 2019. It is the most significant retirement legislation enacted into federal law in more than a decade.
The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) was signed into law by President Trump on December 20, 2019 as part of a larger, year-end appropriations bill. The SECURE Act is the broadest federal retirement legislation passed into law since the Pension Protection Act of 2006. Many of the provisions in the SECURE Act took effect on January 1, 2020. The bill’s enactment, and its breadth, prompted a flurry of questions from retirees and savers nearing retirement—as they wondered what the immediate impacts of the legislation might be on their retirement plans. This legislation was intended to piece together various, small legal changes that would help to improve retirement security for Americans, create better access to work-based retirement plans, and help more workers save.
While the SECURE Act includes many different provisions, there are a few key sections that may impact investors planning or saving for retirement. Below are several of the most notable changes:
We believe that many changes from the SECURE Act will have a ripple effect on retirement account holders and their savings—and on employers, employees, service plan providers, and the broader retirement planning industry. Due to the short amount of time between the Act’s introduction as federal law and its date of effect, many of these specific provisions will require further study before all of the possible impacts can be pinpointed and defined. Likewise, the average American is working and living longer. Therefore, encouraging more saving and allowing longer periods of time to amass tax-free retirement savings through the SECURE Act legislation is important to help Americans avoid outliving their retirement savings.
Former Federal Reserve (Fed) Chair Paul Volcker passed away last December, but his legacy will remain—as he significantly influenced U.S. markets and the economy, while reflecting commitment to civil service and nonprofit work.
Global finance lost a giant of a man last December, literally and figuratively, with the passing of Paul Volcker. Although he was mostly known for serving as Chair of the Federal Reserve Board (Fed) from 1979 until 1987, Paul Volcker had an impressive civil service record—serving in several government posts for three decades and under five U.S. presidents. After retiring from the Fed, he was actively engaged in the financial world. He served as chairman of an investment bank, worked to restore faith in accounting rules and principles after the Arthur Andersen scandal, and recovered billions in lost savings of Holocaust victims from Swiss banks. He was a man whose unyielding principles had a profound influence on the financial markets and economies in the U.S. and abroad—while unintentionally shaping the nature of financial assets globally.
Paul Volcker was Under Secretary at the U.S. Department of the Treasury for international monetary affairs from 1969 to 1974, where he (reluctantly) presided over the U.S. dollar’s uncoupling from gold, effectively ending the Bretton Woods system of fixed exchange rates. He also developed several of our nation's federal debt management and credit policies, including the transition to the more flexible system of floating exchange rates and the worldwide practice of auctioning Treasury securities.
America was a different place in 1979 when Paul Volcker became Fed chair. High inflation was the most significant U.S. economic problem, and it had been eroding wealth for years. The “secret sauce” behind Fed Chair Volcker’s eventual success in restoring price stability (and dollar strength) was a willingness to raise interest rates well above inflation. He designed a plan in which Fed members would establish money supply targets for the U.S. economy—and that amount of supply would determine the interest-rate level. Paul Volcker is recognized worldwide for breaking the back of inflation. Yet, recession followed, and millions of Americans lost their jobs. Fed Chair Volcker suffered tremendous pressure to backpedal on his monetary tightening and rate-hike decisions. He is remembered by many as a courageous man who stood by his principles, despite tremendous political pressure.
The economic response to high inflation’s “break” extended beyond a severe recession in 1981-1982 and the strong, subsequent recovery. As market interest rates fell, stocks, bonds, and other financial assets rallied, resulting in impressive returns for decades—thanks, in part, to the disinflationary5 environment that we now have experienced over much of the past 30 years.
With this legacy of disinflation, new financial issues arose decades later. The so-called Volcker Rule,6 in effect since April 2014 (but since modified by regulators), was viewed by some as an effort to deal with the symptoms of the 2008-2009 financial crisis, rather than with its root causes. The Volcker Rule limits banks’ ability to act, or trade, for their own accounts—ranging from market-making and underwriting activities to certain transactions with hedge funds and private-equity funds. These activities were viewed as speculative and as contributing to the financial-market upheaval more than a decade ago. Yet, these changes (limiting banks’ market-making activities) seemed to have reduced “market liquidity” in key bond markets—a change that has added some risk to financial markets.
Additionally, some market participants believe that Paul Volcker’s influence extends to the low growth, low inflation (and low-rate) environment that we face in 2020 (which has, in turn, affected investment portfolios). An added impact of the Volcker-induced decline in inflation has been the ample availability of financing and low interest rates, which has, in turn, supported lower-rated credit issuers. Credit spreads (over Treasury security yields) have compressed across the investment- and non-investment-grade sectors of the bond market. We caution investors to resist the urge to reduce quality in a search for yield; rather, we favor raising average credit quality in fixed-income portfolios. On the other hand, we believe that “risk” assets, such as equities, can offer compelling dividend yields at a time when historically low bond-market yields have been pushed below dividend yields in high-payout sectors of the equity markets.
As a late entrant to the Democratic presidential field, former New York City Mayor Michael Bloomberg is running on his record of mayoral accomplishment, climate change activism, and moderate policy proposals. This campaign spotlight is part of our series on the 2020 presidential campaign.
Michael Bloomberg entered the crowded Democratic field in early December—hoping to strike an unconventional path to the party’s presidential nomination. Since joining the race, former Mayor Bloomberg has spent a large sum of money on his 2020 nomination bid, as he rolls out digital and television ads across the country. Yet, former Mayor Bloomberg sits behind Democratic race leaders in the polls, posting an average of 7.7% in recent national surveys.7 As a candidate that has published more moderate policy proposals than candidates such as Senator Warren and Senator Sanders, many believe former Mayor Bloomberg likely will look to compete for the same Democratic voters as former Vice President Joe Biden and Mayor Pete Buttigieg.
In mid-December, former Mayor Bloomberg released a health-care policy proposal8 that included the creation of a government-run health insurance plan—but not the provision of universal guaranteed health-care coverage, such as “Medicare for All.” His plan would give Americans the ability to purchase a public insurance policy, rather than moving the country to a single-payer system. In our view, it aligns former Mayor Bloomberg’s policy position with those outlined by other moderate Democratic presidential candidates. Former Mayor Bloomberg has long supported the introduction of a public option in health care. When he was mayor of New York City, Mr. Bloomberg was a prominent supporter of health-care reform as Congress debated the Affordable Care Act legislation in 2009.9 Former Mayor Bloomberg’s health-care policy proposal includes the provision of capping premiums at 8.5% of household income and limiting out-of-network charges to twice the cost of the contracted Medicare program fees.10 This is similar to a previously proposed out-of-network cap outlined by South Bend, Indiana Mayor Pete Buttigieg. According to former Mayor Bloomberg’s campaign, an additional $1 trillion in tax revenue would be required over the next decade to finance his health-care plan.
Former Mayor Bloomberg has raised taxes in the past—as New York City mayor, he increased taxes to help pay for municipal services.11 On the campaign trail in late November, former Mayor Bloomberg noted that he supported taxing the wealthy more progressively.13 Yet, he declared his opposition to a “wealth tax,” which is supported by candidates such as Senator Bernie Sanders and Senator Elizabeth Warren—suggesting that it would be unconstitutional.14 Former Mayor Bloomberg has yet to release a full tax plan, although his campaign has stated that one would be released in the future.15
Former Mayor Bloomberg announced that he also would reform and raise the Earned Income Tax Credit (EITC) and Child Tax Credit (although not by how much), if elected. He would seek to have these credits paid on a monthly basis, rather than annually, and he would give more guidance to taxpayers on how to apply for such benefits. In his “All-In Economy Plan,” former Mayor Bloomberg also noted that he would increase the federal minimum wage (indexed to inflation) to $15 an hour.16
As a large supporter of action against climate change, former Mayor Bloomberg was appointed as the UN Secretary-General’s Special Envoy for Climate Action in 2018. According to his campaign, climate initiatives that former Mayor Bloomberg would focus on if elected include immediately rejoining the Paris Agreement—and placing climate change as a top U.S. foreign policy priority for his administration. Further, former Mayor Bloomberg would establish an Office of Climate Security within the White House and create an interagency council to tackle research and development challenges that impact those displaced by climate change.17 In his recently released “Plan for 100% Clean Power,” former Mayor Bloomberg outlined an action plan to completely phase out emissions within the U.S. electricity sector—while also rolling back various Environmental Protection Agency (EPA) rules implemented by President Trump. Targets stated in his plan include reducing emissions by 50% in the next decade and moving the country’s economy to net-zero emissions by 2050.18 We view former Mayor Bloomberg’s stated emissions reduction goals as similar to those proposed by other Democratic presidential candidates, emphasizing the importance of climate change action for Democratic voters and the party as a whole.
1 Setting Every Community Up for Retirement Enhancement Act of 2019.
2 This change impacts IRA and Qualified Retirement Plan account holders turning 70 ½ after December 31, 2019.
3 Employers that offer safe harbor 401(k) plans must satisfy certain nondiscrimination requirements mandated by the IRS. The SECURE Act removes the safe harbor notice period requirement by allowing employers to switch from offering a traditional 401(k) to a safe harbor 401(k) plan in the middle of a plan year, among other expanded deadlines.
4 When selecting insurers, safe harbor provisions allow plan fiduciaries to be shielded from penalty or liability of investment losses that may be caused by the selected insurance provider.
5 Disinflation is a slowing in the pace of inflation.
6 The Volcker Rule refers to a specific section of the Dodd-Frank Wall Street Reform and Consumer Protection Act passed in the middle of the last decade. The official name of the rule is: Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds.
7 According to RealClearPolitics national averages, as of January 23, 2020. Polling data between January 13, 2020 and January 21, 2020.
8 MikeBloomberg.com, “Health Coverage Plan,” as of January 9, 2020.
9 Michael Bloomberg, “A public insurance plan will help heal a broken health care system,” New York Daily News, July 1, 2009.
10 MikeBloomberg.com, “Health Coverage Plan,” as of January 9, 2020.
11 Mark Niquette, “Bloomberg Says He Should Pay More Taxes But Opposes Wealth Levy,” Bloomberg, November 26, 2019.
12 For more information on Medicare for All, please see the September 24, 2019, and October 29, 2019, Policy, Politics, & Portfolios reports published by Wells Fargo Investment Institute.
13 Mark Niquette, “Bloomberg Says He Should Pay More Taxes But Opposes Wealth Levy,” Bloomberg, November 26, 2019.
16 MikeBloomberg.com, “The All-In Economy,” as of January 10, 2020.
17 MikeBloomberg.com, “International Climate Priorities,” as of January 9, 2020.
18 MikeBloomberg.com, “Plan for 100% Clean Power,” as of January 9, 2020.
Wells Fargo and its affiliates are not legal or tax advisors. Be sure to consult your own legal or tax advisor before taking any action that may involve tax consequences. Tax laws or regulations are subject to change at any time and can have a substantial impact on individual situations.
Investments in fixed-income securities are subject to interest rate, credit/default, liquidity, inflation and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond’s price. Credit risk is the risk that an issuer will default on payments of interest and principal. This risk is higher when investing in high yield bonds, also known as junk bonds, which have lower ratings and are subject to greater volatility. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity. Although Treasuries are considered free from credit risk they are subject to other types of risks. These risks include interest rate risk, which may cause the underlying value of the bond to fluctuate.
Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.
The information in this report was prepared by Global Investment Strategy. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.
The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon.
Wells Fargo Advisors is registered with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority, but is not licensed or registered with any financial services regulatory authority outside of the U.S. Non-U.S. residents who maintain U.S.-based financial services account(s) with Wells Fargo Advisors may not be afforded certain protections conferred by legislation and regulations in their country of residence in respect of any investments, investment transactions or communications made with Wells Fargo Advisors.
Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company.