Market to Trade Higher Despite Coronavirus


By Dale Gillham | Published 25 February 2020


According to news reports, the Dow Jones Index fell last week based on fears that the coronavirus was effecting Apple’s profits in the first quarter because all of their products are produced in China. While I agree the coronavirus is raising concerns among investors, I don’t think there is anything to be worried about in the case of Apple over the medium to long term.

Expectations for the first quarter earnings in 2020 are currently being halved, so instead of coming in around 6 percent, they are more than likely to be around 3 percent. During this reporting season, nearly half of the S&P 500 companies have cited coronavirus as a possible cause for earnings to fall, which is understandable given the nature of the import/export relationship that the US has with China.

According to Refiniti, fourth-quarter profit growth for the S&P 500 companies has come in at 3.1 percent, although if the energy sector was excluded, the growth rate would be 6 percent. Given this, moving forward it appears earnings will be stable rather than growing strongly, at least in the short term.

On another note, the average citizen in the US is struggling to retire given that the average 401(k) account balance was around $112,300 at the end of the fourth quarter. This represents a 7 percent gain on the previous quarter’s balance of $105,200. Given that the stock market rose over 20 percent last year, I would have expected more growth in their retirement benefits.

A factor that is helping Americans boost their retirement savings is the contributions from employers who are auto-enrolling new workers into their company's 401(k) plan. Only a few years ago less than 10 percent of companies were doing this, however, in the fourth quarter of last year a record level of employers (35%) were doing so. Even better, more employers are auto-enrolling new employees at higher contribution rates.

Whilst this is good news, it is still not enough as more than 30 percent of the plans enrol new workers at a rate of 5 percent or higher, compared with only 11.8 percent enrolled at that level in the fourth quarter of 2009.

In my opinion, Americans should aim to invest 15 percent of their wages into their 401(k) while working. That said, the more contributions made earlier in their working life the better as the law of compounding ensures their fund will achieve more. I recommend every employee do two things: firstly add to their 401 (k) and secondly invest directly in the stock market and other worthwhile investments, as this means you can retire earlier or retire with more money.

The Trump administration is helping the cause as it is considering ways to motivate American households to invest in the stock market, with the move being part of an upcoming package of proposed tax cuts. The proposal allows a portion of household income to be treated as tax-free for the purposes of investing outside a traditional 401(k). If the proposal is accepted as it stands, households earning up to $200,000 could invest $10,000 on a tax-free basis.

In my mind anything that encourages individuals to take control and invest directly is fantastic.


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