First Quarter 2020 Newsletter

INVESTMENT QUARTERLY

PRICED TO PERFECTION

The term “priced to perfection” refers to an investment or market that is at a price level that will sustain itself only if the investment or market performs to high expectations in the future with no missteps or disappointments. This is likely the condition of the current stock market after the Fed driven rally of 2019. Now that we have breached 29,000 on the Dow, and appear to be on our way to 30,000, it is reasonable to examine whether any future disappointments could upset the perfection and accompanying complacency of the market.

Recent studies by Charles Schwab and Goldman Sachs highlighted the conditions of 6 valuation models for the market versus historical averages. The results were three very expensive valuations, one expensive valuation, one fairly-valued case and one inexpensive valuation. The very expensive valuations were Market Cap to Gross Domestic Product at 203%; the S&P 500 Forward Price/Earnings Ratio at 19 times; and the ratio of Enterprise Value to Sales at 2.6 times. The S&P 500 Price to its Book Value Ratio is considered merely expensive at 3.7 times. These valuations are market facts, based on current conditions, and not forecasts or hopes.

The old Rule of 20 results in a fairly-valued calculation. This rule says that if the total of the S&P 500 forward P/E and the inflation rate equals 20 the market is fairly-valued. Historically this rule reflected low price earnings ratios when inflation was high and led to expectations of stock gains as inflation ebbed. With current expectations for rising inflation rates in the future it would imply that future price earnings ratios could decline. Unless earnings pick up enough to offset a potential drop in the P/E ratio, this could result in a lower market. The one inexpensive valuation model is the yield gap versus the 10-year Treasury. At 3.4% this spread is favorable for stocks but could change if, and when, the Fed begins to raise short term interest rates. Although the Fed is currently on hold regarding interest rates, conditions could change rapidly.

Liz Ann Sonders, Schwab’s investment strategist, pointed out that the 31% performance of the market in 2019 was due almost entirely to expansion of the market’s price earnings ratio. This reflects the “risk on” approach of investors last year. Risk on leads to a momentum market as investors succumb to the fear of missing out. A prime example of this P/E expansion is a stock that shall remain nameless as we are not recommending stocks in this letter. The stock was up 90% in 2019 with a small sales decline and a real earnings decline of 3%. But, because of the company’s share buy-back program, they were able to report an increase in earnings per share. Despite this mediocre earnings performance the price earnings ratio went from 13 (near its historical average for the last 10 years) to 24, resulting in a new high for the company’s stock. In a nutshell this picture explains the 2019 market.

The background for this market environment is sponsored by the Fed and company stock buy-backs and mergers. The Fed has exploded the money supply since 2009 and, after a little bit of tightening, went back to an annualized rate of increase over 30% in the latter part of 2019. So, we have again pumped extra money into the economy which still has not led to increased investment in plant and equipment. These funds have found their way into the stock market for lack of better investment opportunity. At the same time, stock buy-backs and mergers have reduced the shares of stock in the US market by close to 50 percent. So we have more money coming into the market and fewer stocks available for purchase. It sure looks like the Fed has helped create an inflationary environment for stock prices.

The problem with a priced to perfection environment is that it requires continually perfect events to sustain itself. This can lead to complacency, greed, and fear of missing out. The shock of an unexpected event can bring a sudden change of the market psyche and lead to a nerve-wracking decline. The potential for shocks in this election year are more significant than in the recent past. The threat of impeachment is one of the largest challenges this market will face. A second, but no less significant, issue is the struggle between capitalism and socialism taking place in the Democrat primaries. Lest we assume our economic system is safe, be aware that a recent survey among millennials showed that they favored a socialist economic system over capitalism by 51% to 49%. We also must face the unexpected threat of the coronavirus which is projected to have a negative impact on the Chinese economy. At this stage it is impossible to project whether the threat will spread to pandemic proportions and leapfrog to other countries. In addition to these front-page threats we also face the issues of Iran and the middle east, a consensus that world-wide economic growth is slowing, and continuing forecasts by some that interest rates will increase. There are plenty of black swan opportunities in 2020. Hopefully they will not find a place to land and shock our markets. At this point a two-handed economist might say that, on the other hand, a failure to impeach and a continuing ease in the trade and tariff wars could send the markets even higher. These differing opinions are not what one would expect to see as the background for a priced to perfection market.

Recently Congress passed, and the President signed, a bill called The Secure Act. Among its provisions is a change in the ability to stretch an inherited IRA over the beneficiary’s life. After January 1, 2020, any new inherited IRA can only be stretched for 10 years. This means the tax shelter that was available until last year no longer exists. A 10-year limit to the inherited distribution life means that the IRA will result in potentially larger income tax payments.

For the year the DJIA returned 25.34%; the S&P 500 31.49% and the Russell 3000 31.01%. The Bloomberg 1-5 -year Corp/Govt index returned 5.01%. Please keep the standard industry disclosure in mind, “Past performance is not a guarantee of future returns.”

Robert B. Needham, CFA

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8 Financial Steps to Finish 2024 Strong with Needham Advisory

September 16, 2024

As we enter the final 100 days of 2024, there's still plenty of time to make this year count. At Needham Advisory, we've compiled a list of eight essential steps to help you finish strong and set yourself up for success in the new year. These actions can provide a financial cushion, streamline your investments, and give you a head start on your 2025 financial goals. 1. Save $1,000 with Daily Contributions By setting aside just $10 every day for the rest of the year, you can save $1,000. This simple strategy creates a financial cushion or helps you reach a specific savings goal with minimal daily effort. 2. Max Out Your Retirement Accounts Make the most of your retirement accounts by contributing the maximum allowable amounts. In 2024, the contribution limit for a 401(k) is $23,000 (or $30,500 if you're 50 or older). For Roth IRAs, the limit is $7,000 (or $8,000 if you're 50 or older). Maximizing these contributions not only boosts your retirement savings but also takes advantage of potential tax benefits. 3. Roll Over Old 401(k)s If you have any old 401(k) accounts from previous employers, now is the perfect time to track them down and consider rolling them over into a current retirement account. This can streamline your investments and potentially reduce fees. However, keep in mind that rolling a 401(k) into a post-tax account like a Roth IRA means you will have to pay taxes on the 401(k) balance. 4. Research High-Yield Savings Accounts Consider moving some cash from your checking or savings account into a high-yield savings account (HYSA). HYSAs typically offer higher interest rates, which can help your savings grow faster, maximizing the returns on your emergency fund or other cash reserves. 5. Take Advantage of Gift Exclusions This year, you can give up to $18,000 per person without incurring any gift tax. Consider giving financial gifts to family members as a way to help them financially while also reducing your taxable estate. 6. Review Your Budget Take a fresh look at your budget to identify areas where you can cut back or reallocate funds. Even small adjustments can lead to significant improvements in your financial health. If you anticipate receiving end-of-the-year bonuses, plan now for how you will use those funds wisely. 7. Start Preparing for the Holiday Season Early Set aside a little money each week for holiday expenses. Consider affordable gift options, such as homemade gifts or experiences, and start organizing any travel plans to secure better deals and ensure a smoother season. 8. Check in with a Financial Advisor Schedule a quick call or meeting with a financial advisor to enter 2025 with a clear, up-to-date plan and some financial planning momentum. Whether it’s refining your budget or optimizing your investment strategy, getting expert advice now can set the tone for a successful new year. These steps can significantly impact your financial stability and preparedness as we approach the end of the year. If you need help with any of these strategies, we at Needham Advisory are here to assist you. Let’s make the most of the remaining days of 2024 together!

Understanding the Massachusetts Wage Act: Protecting Workers' Rights

By duda • August 17, 2023

In the realm of labor laws, ensuring fair compensation for employees is a cornerstone of workers' rights. The Massachusetts Wage Act, consisting of Massachusetts General Laws Chapter 149, sections 148, 149, and 150, stands as a crucial piece of legislation that safeguards the rights of workers in the Commonwealth. Enacted to address wage-related issues and promote fair employment practices, the Massachusetts Wage Act plays a pivotal role in creating a just and equitable work environment for employees across various industries. The Basics of the Massachusetts Wage Act The Massachusetts Wage Act encompasses three key sections: 148, 149, and 150. Each section addresses specific aspects of wages, penalties, and legal recourse for employees facing wage-related violations. Section 148: This section focuses on timely payment of wages. It mandates that employers must pay their employees all earned wages within a certain timeframe, often weekly or bi-weekly. In the case of involuntary separation, employers are required to pay all wages due to the employee on the day of termination. If an employer fails to meet these requirements, they may be held liable for treble damages, which could amount to three times the unpaid wages. Section 149: Section 149 pertains to minimum wage regulations. It establishes the minimum hourly wage that employers must pay to their employees. This provision ensures that workers receive a fair wage that aligns with the cost of living and prevailing economic conditions. Employers are obliged to adhere to the minimum wage requirement, and failure to do so can result in penalties. Section 150: Section 150 deals with legal actions and remedies available to employees in cases of wage violations. If an employer unlawfully withholds wages, an employee has the right to file a complaint or bring a civil action to recover the unpaid wages. Moreover, employees who prevail in their legal claims under this section can recover not only the unpaid wages but also reasonable attorneys' fees and costs. Significance and Impact The Massachusetts Wage Act serves as a powerful deterrent against wage-related abuses and unfair labor practices. By establishing strict guidelines for payment of wages, minimum wage standards, and legal remedies, the Act empowers workers to seek recourse when their rights are violated. This legislation not only supports individual employees but also contributes to a more equitable labor market and promotes a healthier employer-employee relationship. Challenges and Controversies While the Massachusetts Wage Act is a commendable effort to protect workers' rights, challenges and controversies have emerged. One area of contention is the determination of what constitutes "wages." Some employers might argue that certain forms of compensation, such as bonuses or certain benefits, are not covered by the Act, leading to disputes over what is legally owed to employees. Additionally, enforcement and compliance can pose challenges, especially for small businesses with limited resources for administrative tasks. The Massachusetts Wage Act stands as a testament to the Commonwealth's commitment to ensuring fair and just compensation for its workforce. By outlining clear guidelines for payment of wages, setting minimum wage standards, and providing legal remedies for violations, this legislation bolsters employee rights and contributes to a more equitable workplace. As workers continue to play a pivotal role in the state's economic growth, the Massachusetts Wage Act remains a cornerstone of labor law, championing the rights of employees and fostering a more balanced employer-employee relationship.

Understanding the Massachusetts Independent Contractor Statute

By duda • August 17, 2023

In the modern gig economy, the classification of workers as either employees or independent contractors has become a significant legal and economic concern. In Massachusetts, the issue is addressed through the Massachusetts Independent Contractor Statute, found under Mass. Gen. L. c. 149, s 148B. This statute plays a pivotal role in determining a worker's classification, affecting their rights, benefits, and the obligations of employers. In this blog post, we will delve into the key aspects of the Massachusetts Independent Contractor Statute, exploring its implications for both businesses and workers. Understanding the Massachusetts Independent Contractor Statute The Massachusetts Independent Contractor Statute, often referred to simply as Section 148B, was enacted to prevent worker misclassification and protect individuals by ensuring proper classification and fair treatment. Under this statute, individuals are presumed to be employees unless all three prongs of the "ABC Test" are met: A: The worker is free from control and direction in performing the service, both under the contract for the performance of service and in fact. B: The worker performs services that are outside the usual course of the business of the employer. C: The worker is customarily engaged in an independently established trade, occupation, profession, or business of the same nature as that involved in the service performed. Implications for Businesses For businesses operating in Massachusetts, correctly classifying workers as employees or independent contractors is essential. Misclassification can lead to legal consequences, including back payment of wages, taxes, and potential fines. By adhering to the requirements outlined in the ABC Test, businesses can ensure compliance with the law and avoid potential liabilities. Additionally, businesses must be cautious about reclassifying employees as independent contractors without substantial changes in the working relationship, as this may be seen as an attempt to evade employment-related responsibilities. Implications for Workers Workers in Massachusetts who are classified as employees enjoy various legal protections and benefits, including minimum wage guarantees, overtime pay, workers' compensation coverage, and access to unemployment benefits. On the other hand, independent contractors may not be entitled to these benefits, but they have the advantage of greater flexibility and control over their work. It's crucial for workers to understand their classification accurately, as misclassification can lead to them being denied their rightful benefits and protections. Challenges and Controversies The Massachusetts Independent Contractor Statute has been the subject of debates and challenges, particularly regarding its potential impact on businesses and the gig economy. Critics argue that the ABC Test can be too restrictive, making it difficult for some businesses to classify workers as independent contractors even if the working relationship genuinely aligns with such a classification. Proponents, however, emphasize the importance of protecting workers' rights and preventing exploitation through misclassification. The Massachusetts Independent Contractor Statute, Mass. Gen. L. c. 149, s 148B, plays a vital role in defining the working relationship between businesses and workers in the state. Its implementation through the ABC Test ensures that workers are correctly classified, granting them the appropriate benefits and protections. Businesses must be diligent in understanding and adhering to the statute's requirements to avoid legal consequences, while workers should be aware of their classification to assert their rights effectively. As the world of work continues to evolve, the statute's significance remains undeniable in maintaining a fair and balanced labor landscape.