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 | January 2020

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Happy New Year!

Everything was higher in 2019 including equities and fixed-income. The S&P 500 stock index gained 31.49% and the Barclay's Aggregate Bond Index was up 8.72%.

While the overall percentages are impressive, it is important to keep matters in perspective.  Notably, last December's near 20%% equity sell-off which wiped out all of 2018's gains in just a few weeks and skewed the starting point for the year; and then two sharp corrections in May and August that had investors shaking in their boots.  If you stayed the course (or just didn't open your statements) you were richly rewarded. If every there was a year for "buy and hold" investing, this was it.

Beyond great performance, there were plenty of interesting macro topics worth discussing including the US Federal Reserve cutting interest rates, the ongoing trade war with China and North Korea .  For the most part, a repeat of 2018.  So rather than bore you with a rehash of what was then and still now, we will share some perspective on the life expectancy of this record-setting bull market. 

Last month, we wrote about our Sideways Windup which suggests that:

  1. the stock market could be strong over the coming months (and it was up X% in December);
  2. the bull market that started in 2009 could end by 2021. 
This month, we will focus on why and how #2 may transpire.
First the why: equity valuation is historically high relative to economic activity.  Here is a chart of total domestic stock market capitalization (Wilshire 5000) divided by trailing one-year GDP.

Warren Buffett cited a similar metric (in some Fortune magazine articles circa 1999 and 2008) as something he looks at to determine whether the overall market is cheap or expensive.
As you can see, we are now above the 1999 peak that caused Warren to predict that stock market returns going forward from 1999 would be nothing like what was experienced in the 1990s. 
The ratio has never been this high.  Put another way, 150% stock market cap to GDP is extremely expensive signifying that the stock market is disconnected from the underlying size of the economy.

We think this ratio can go higher for a while and significantly eclipse the 1999 peak, primarily because interest rates are much lower today than they were in 1999 .  

Interest rates matter as investors have choices when comparing stock and bond returns and risk.  When bonds are yielding 2%, the risk of investing in stocks trading at 20x or 25x earnings can be attractive since that implies 4-5% return on price, i.e., $1 earnings/$20 price or $1 earnings/$25 price.  When bonds are yielding 4-5%, the risk of stocks trading at 20 - 25x earnings is not nearly as attractive. Therefore, lower interest rates usually pave the way for higher stock valuations. But this chart lends credence to the concept that the 2009 bull market's days are numbered.  
The stock market GDP ratio is not the only thing reminiscent of the 1998-00 period which preceded the 2001-03 bear market.  Other similarities:
  • 1998 saw a 20% correction, as did 2018;
  • Both times, the Fed cut rates 75 bps in response;
  • The Fed started injecting liquidity in 1999 (anticipating Y2K hiccups) and 2019 (repo madness);
  • Impeached presidents;
  • Yield curve inversion followed by steepening;
  • Transports failing to confirm new stock highs.

In Yogi Berra's words, it's starting to feel like déjà vu all over again. 
As to the how the bull market might end: only in 1929 and arguably 1987 have bull markets ended with a black swan crash event. Typically, bull markets end with a relatively long (several months or more) up-and-down topping process where fewer and fewer stocks lead the market higher.

This is usually evident in the advance-decline line, which measures total net advancing stocks. So far, the advance-decline line has not faltered, which is why we think the bull market still has legs.  Compare the 2007 advance-decline line to current:

Note how the advance-decline line (in blue) started to break down in 2007 even before the July peak, and again before the October peak.  The current advance-decline line shows no weakness.   So we aren't there yet ... 

On December 22, 2019, President Trump signed the SECURE Act into law as part of the government spending bill. The SECURE Act represents the most sweeping retirement reform in over ten years.  For most the bill will have little immediate impact; however, here are a few things  to know about the legislation:

1.   RMDs Will Now Start at Age 72, not 70 ½

Staring Jan. 1, 2020, the new bill pushes the age at which you need to start withdrawing money from your traditional retirement accounts to age 72 from age 70 ½. These "required minimum distributions" are Uncle Sam's way of getting his share of your retirement savings that have grown tax-free for decades.  Those who are currently 70½ or older should not interrupt their RMDs but proceed with them as scheduled under current rules. Those who turn 70½ on or after Jan. 1, 2020, are subject to the new rules and will have an extra year and a half before they need to start withdrawals.

2.   You Can Contribute to Your Traditional IRA After Age 70 ½

The law will allow you to contribute to your traditional IRA in the year you turn 70 ½ and beyond, provided you have earned income. This is currently prohibited (although there's no age cap on contributing to a Roth IRA).

3.   You Will Have to Pay Taxes on Inherited IRAs Sooner

The bill essentially eliminates the "stretch IRA," an estate planning method that allows IRA beneficiaries to stretch their distributions from their inherited account - and the required tax payments on them - based on their life expectancy. If you named your grandchild as your beneficiary, for example, most of your account can stay invested for decades past your death, and your grandchild could continue to reap the tax benefits. 

But under the new law, most beneficiaries will have to withdraw all the distributions from their inherited account and pay taxes on it within 10 years . Exceptions are made for certain beneficiaries, including spouses and the chronically ill or disabled. 

This provision is not retroactive and will not affect those who have already inherited an IRA. It will apply to those who inherit them starting on Jan. 1, 2020, and may affect the estate planning of those planning to pass on an IRA to a non-spouse.


We're currently in the November to April seasonal sweet spot for the stock market, and so far, the market has not disappointed.  With record low interest rates and unemployment, low inflation and solid corporate earnings, we're expecting the uptrend to continue. As for impeachment, ignore it, the market clearly doesn't care.

Now there are more overweight people in America than average-weight people. So overweight people are now average. Which means you've met your New Year's resolution.  - Jay Leno

To your financial future, 

Marty Kerns
President & Chief Executive Officer
Parker Binion
Chief Investment Officer
About Kerns Capital Management

Kerns Capital Management is a leading asset management firm with a focus on tactical, liquid alternative investment strategies.  We are value-oriented investors in equity, long/short equity, credit and volatility, and apply the same attention to risk in the deployment of capital that has guided us since our inception as a fiduciary investment manager to corporate pensions, trusts and high net worth individuals. Kerns was founded in 1996, and is based in Houston, Texas.

For more information on our products, including fund performance, please visit or contact Martin Kerns or Parker Binion at 1 (800) 945-2125 or

Performance data represents past performance and is not a guarantee of future results.  Performance current to the most recent month-end may be lower or higher, and can be obtained by calling 800-945-2125.

The S&P TR 500 Index is an unmanaged composite of 500 common stocks. This index is widely used by professional investors as a performance benchmark. Total return includes reinvestment of dividends. You cannot invest directly in an index. The Dow Jones Industrial Average is a price-weighted average of 30 of the largest and most widely held stocks traded on the New York Stock Exchange and the Nasdaq. The Nasdaq Composite Index is a market-capitalization weighted index of the more than 3,000 common equities listed on the Nasdaq stock exchange. The types of securities in the index include American depository receipts, common stocks, real estate investment trusts (REITs) and tracking stocks.

The Bloomberg Barclays US Aggregate Bond Index, or the Agg, is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States. Investors frequently use the index as a stand-in for measuring the performance of the US bond market. Wikipedia