WHAT, WE WORRY?

So far this year, the investment markets have held up pretty well, which doesn't always happen after a year of big returns like we experienced in 2013. But based on experience, you know that something will spook investors at some point this year, the way the markets took a dive when Congress decided to choke off the U.S. federal budget, or when investors realized that Greece had somehow managed to borrow ten times more than it could possibly pay back to its bondholders.

Professional investors have learned to create a mental "watch list" of possible market-shaking events, and they were helped recently when Noriel Roubini, chairman of Roubini Global Economics, former Senior Economist for International Affairs at the U.S. Council of Economic Advisors, compiled his own worry list. Roubini said that we're past the time when people should be fearful of a breakup of the Eurozone, or (for now) any Congressional tinkering with the debt ceiling. The public debt crisis in Japan seems to be fading in the optimism of Japanese Prime Minister Shinzo Abe's monetary easing and fiscal expansion, and the war between Israel and Iran over Iranian nuclear technology, once thought to be imminent, now appears to be on the back burner.

So what does today's worry list look like? Roubini starts off with China, which is trying to shift its growth away from exports toward private consumption. Chinese leaders, he says, tend to panic whenever China's economic growth slows toward 7% a year, at which time they throw more money at capital investment and infrastructure, creating more bad assets, a lot of industrial capacity that nobody can use, and a bunch of commercial and industrial buildings which sit empty along the skyline. By the end of next year, something will have to be done about the growing debt at the same time that investors face a potential crash in inflated real estate prices. Think: five or six 2008 real estate crises piled on top of each other, all of it happening in one country.

Numbers two and three on Roubini's worry list involve the U.S. Federal Reserve, which could (worry #2) cease its massive purchases of real estate mortgages and government bonds too quickly, causing interest rates to rise and sending financial shockwaves around the world. Or, on the other hand (worry #3) the Fed might keep rates low for so long that the U.S. experiences new bubbles in real estate, stocks and credit--and then experiences the consequences when the bubbles burst.

Roubini also worries about emerging market nations being able to manage their debt and capital inflows if interest rates go up, and of course the situation in the Ukraine has significant market-spooking potential. Finally, he notes that China has significant unresolved territorial disputes with Japan, Vietnam and the Philippines, which could escalate into military conflict. If the U.S. were drawn into a maritime confrontation, alongside Japan, with Chinese warships, investors might think it's a good time to retreat to the sidelines.

None of these scenarios are guaranteed to happen, and some of them seem unlikely. But these periodic, headline-related spookings come with the investment territory. If and when one of these events grabs the global headlines, it might be helpful to remember that the stock markets have weathered worse and come out ahead. Think: World War II, a presidential assassination, two wars in the Middle East, 9/11 and a Wall Street-created global economic meltdown. If we can survive and even profit, long-term, from a stay-the-course investment mentality through those events, then we might be able to weather the next big headline on (or off) the worry list.

Source:
http://www.project-syndicate.org/commentary/nouriel-roubini-warns-that-even-as-many-threats-to-the-world-economy-have-receded--new-ones-have-quickly-emerged#TA08zJsftAXboy7Y.99

Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.

THE ECONOMY HEADS FOR NORMAL

A look at the fundamentals affirms the hunch.

The stock market may be up and down this year, but America's economic recovery seems to be proceeding at a decent pace. Anyone who wants some evidence of that can find it in some key fundamental indicators.

Pessimists may counter: didn't the economy grow just 0.1% in the first quarter? Indeed, that was the federal government's initial estimate - but the initial estimate of quarterly GDP is twice revised, and often drastically so. Other key indicators point to a healthier economy, and some suggest that March and April were better than presumed.1

Jobless claims reached a 7-year low this month. They decreased to pre-recession levels at last, with a seasonally-adjusted 297,000 applications received in the week of May 3-10, the fewest in any week since May 2007. Economists Reuters polled thought 320,000 claims would appear.2

Hiring has picked up. April saw employers hire 288,000 people with gains in the manufacturing, construction, and professional/technical sectors. Even state and local governments hired.1

From November to April, non-farm payrolls grew by an average of 203,000 jobs per month. From January through April, the gain averaged 214,000 jobs per month. That is the kind of steady growth that pulls an economy out of the doldrums.1,3

Yes, the jobless rate hit a 5½-year low in April partly due to fewer jobseekers - but when fewer people look for work, it often translates to an indirect benefit for those in the hunt. That benefit is higher pay. Analysts think noticeable wage growth might be the next step in the labor market recovery.1

So has consumer spending. With a 0.9% increase (0.7% in inflation-adjusted terms), March was the strongest month for personal spending since August 2009. While the gain on April retail sales was just 0.1%, the March advance was just revised up to 1.5%, representing the best month for retail purchases in four years.3,4

The sequester is in the rear-view mirror. Major federal spending cuts probably exerted a significant drag on the economy in 2013. In 2014, they are gone.

The manufacturing & service sectors keep growing. The Institute for Supply Management's globally respected monthly PMIs monitor these sectors. ISM recorded economic activity in the U.S. manufacturing sector expanding for an eleventh straight month in April; its service sector index has recorded growth for 51 straight months.5,6

Inflation is normalizing. In the big picture, inflation is not necessarily a negative. At the turn of the decade, our economy faced notable deflation risk. The euro area is still facing it today - as of April, consumer prices there had risen just 0.7% in a year. A return to moderate inflation is expected as the economy recovers. Interest rates should move higher, and in the long run, higher interest rates should lend a helping hand to the savings efforts of many households and the incomes of many retirees.7

Pending home sales went positive again in March. Before the 3.4% gain in that month, this leading indicator of housing market demand had been negative since last June. An increase in contracts to buy homes speaks to a pick up in residential real estate. The gain brought the National Association of Realtors' pending home sales index to a reading of 97.4 in March, close to its origination (or "normal") mark of 100.8

Some analysts think Q2 should bring solid expansion. Economists surveyed by MarketWatch expect GDP to hit 3.5% this quarter, and in the Wall Street Journal's May poll of 48 economists, the consensus was for 3.3% growth in Q2.3,9

More inflation pressure, tightening by the Federal Reserve ... how can that be good? In the short term, it will likely hamper the stock market and the housing market. In fact, the Mortgage Bankers Association has been tracking a reduction in demand for home loans, and that and any wavering in consumer spending may lead the Fed to ease a little longer or less gradually than planned (news Wall Street might welcome).7

Normal is good. Over the past several years,we have witnessed some extreme and aberrational times with regard to market behavior and monetary policy.  A little equilibrium may not be so bad.

Citations.
1 - mercurynews.com/business/ci_25684116/u-s-has-best-month-job-gains-two [5/2/14]
2 - reuters.com/article/2014/05/15/idUSLNSFGEAGK20140515 [5/15/14]
3 - marketwatch.com/story/sales-at-us-retailers-barely-rise-in-april-2014-05-13 [5/13/14]
4 - tinyurl.com/q88a338 [5/1/14]
5 - ism.ws/ISMReport/MfgROB.cfm [5/1/14]
6 - ism.ws/ISMReport/NonMfgROB.cfm [5/5/14]
7 - blogs.wsj.com/moneybeat/2014/04/30/macro-horizons-all-eyes-on-fed-but-central-banks-overseas-more-interesting/ [4/30/14]
8 - usnews.com/news/business/articles/2014/04/28/contracts-to-buy-us-homes-up-1st-time-since-june [4/28/14]
9 - projects.wsj.com/econforecast/#ind=gdp&r=20 [5/14]

Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO PETER MONTOYA.

THE DANGERS OF INSTINCTIVE INVESTING

You've probably read about behavioral finance research. The conclusion is generally the same, no matter what aspect of our decision-making is being probed: the human mind is hard-wired to process information in certain ways which were extremely helpful when the environment contained gazelles (very tasty!) and saber-toothed tigers (extremely dangerous!), but are not so helpful when we're navigating the unfamiliar terrain of the investment markets. People shop at the mall looking for bargain prices, rather than flocking to stores where the price tags have been constantly revised upwards for the past 12 months. But for some reason, they do the opposite when they're shopping for investments.

The research reports make it sound like ordinary investors are subject to these stupid urges, but professional financial advisors are somehow immune to them. This is far from the truth. Financial planners and advisors are better-trained to understand the markets, but we're all subject to the same primal urges and instincts. Most professional advisors looked back with some regret at the 30% returns the U.S. markets experienced last year, and wished they'd had the foresight to go all-in on stocks on January 1. That, of course, was when Congress was flirting with the fiscal cliff and a potentially-catastrophic repudiation of Treasury debt, 597 U.S. counties in 14 states were receiving disaster relief from the worst drought on record, blizzards were burying the Northeast, people were saying that the Mayan calendar predicted the end of the world, and some voters were saying that the Presidential election results confirmed it.

Today, as advisors look back with envy, so too do their clients and investors. It is deeply engrained in our nature to wonder whether we should pile into stocks now while the markets are still going up. If the Russian invasion of Crimea can't stop the upward trend, then what else can?

These are sometimes the hardest conversations a professional advisor can have, for a couple of reasons. First, because it requires the advisor to admit that we really don't have a clue about what the markets are going to do next. This is true of every living person, of course, but shouldn't professionals have better insight into the future? It feels like we're admitting a dirty secret, when in fact the inability to see the future is a limitation we mortals all share.

The second reason this conversation is hard is because it always seems like the advisor is trying to talk people out of what they want to do. We are right at the five-year anniversary of one of the best times in history to have thrown all your money into stocks--in March 2009, right after the massive global economic meltdown, in the teeth of the Great Recession. But of course, most of the conversations at that time revolved around just the opposite decision: shouldn't I take all my money out of the market and avoid any further losses?

Instead of encouraging their clients to double-down on stocks in early March 2009, most advisors were still looking back with shock and horror. All of us were feeling our own sense of regret that somehow, some way, we should have seen the meltdown coming--even though Fed economists, regulators and global leaders couldn't predict it either.

Today, as always, we have no idea where the markets are headed. All we know is that history has shown, over and over again, that when the markets have been on a long upward run, and the run seems to be accelerating, that has traditionally been a poor time to load up on stocks.

But it's fair to ask: what could derail stocks this year? Interest rates are low and likely to remain that way as long as the Federal Reserve Board intends them to--which, if we believe their pronouncements, won't be until next year at the earliest. The economy is still in recovery, but GDP gains are now in line with historical averages and trending upward. Household financial obligations (measured by the share of income needed to make payments on mortgages, leases, student loans, credit cards and auto loans) is the smallest share of income since the early 1980s. Oil and gas prices are low and trending downward. We seem, on the surface, to be facing the exact opposite conditions that we experienced at the beginning of 2013: less uncertainty, calmer economic weather.

But maybe that's the point. The current circumstances really don't tell us much about future market movements. Stock prices jump up and down and around based on what analysts call "sentiment," which basically means all those dysfunctional behavioral finance heuristics playing out day by day, week by week, as we hunt stocks the way our ancestors hunted antelope. All we know is that over the long-term, companies in aggregate (and their stocks, in aggregate) have become increasingly valuable, due to the time and energy and ingenuity of all the workers whose daily labor creates, builds and manages this growth. Fortunately, for those who have the discipline to act on it, this information can be enough to build wealth over years of patience, while the people who try to time the markets on the upside and downside are letting this stable long-term wealth opportunity slip through their fingers.

Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.

IRS ANNOUNCES NEW IRA ROLLOVER LIMITATION

A tax court ruling raises eyebrows & leads to a decision that may affect you.



What was once allowed is now prohibited. In 2008, an affluent New York City couple made a series of withdrawals and transfers among contributory IRAs, rollover IRAs and non-IRA investment accounts, all with the long-established 60-day deadline for tax-free IRA rollovers in mind. As esteemed tax attorney Alvan Bobrow and his wife withdrew and rolled over a series of five-figure sums within a six-month period, they assumed their actions were permissible under the Internal Revenue Code. In January 2014, a U.S. Tax Court judge ruled otherwise.1

This Tax Court opinion has prompted the IRS to tighten the IRA rollover rules. In the past, some clever taxpayers have effectively treated themselves to interest-free loans from their IRA funds by using multiple IRA accounts to sequence multiple 60-day rollover periods. In the court's view, the Bobrows were exploiting this loophole, and the IRS is closing it.1,2

Starting in 2015, you are allowed one IRA-to-IRA rollover per 365 days - period. A subtle but important change has been made. Publication 590 has long stated that a taxpayer can generally only make one tax-free rollover of any part of a distribution from a single IRA to another IRA during a 12-month period. That didn't preclude a taxpayer from making multiple IRA-to-IRA rollovers using multiple IRAs during such a timeframe.1,4

In response to Bobrow v. Commissioner, T.C. Memo 2014-21, the IRS issued Announcement 2014-15. Effective January 1, 2015, the once-a-year rollover restriction applies to all IRAs maintained by a taxpayer. So the tactic of making multiple IRA-to-IRA tax-free rollovers during a 12-month period is kaput.3,4

So beginning next year, you can only make a tax-free IRA-to-IRA rollover if you haven't made one within the past 365 days.3

Don't grumble just yet. If you want to move money between IRAs more than once next year, there is still a way you can do it. The new IRS rule change doesn't apply to every type of IRA "rollover."

The financial media uses the phrase "IRA rollover" pretty loosely. When you read a story about "IRA rollovers," the term may refer to IRA-to-IRA rollovers, distributions from a workplace retirement plan going into an IRA, or a trustee-to-trustee transfer of IRA assets between financial firms in which the taxpayer never handles the money.

Here's the good news. IRS Announcement 2014-15 states: "These actions by the IRS will not affect the ability of an IRA owner to transfer funds from one IRA trustee directly to another, because such a transfer is not a rollover and, therefore, is not subject to the one-rollover-per-year limitation of § 408(d)(3)(B)."3

In other words ... the new restriction does not apply to trustee-to-trustee transfers. The IRS has clearly defined in the above language that it does not regard these transfers as rollovers. Some transition relief is also available: the IRS won't apply the new limitation to any rollover involving an IRA distribution that happens prior to January 1, 2015.4

Some important questions beg for answers. As Bloomberg BNA notes, the new limitation actually muddies the waters a bit. Some taxpayers own both traditional and Roth IRAs; will they be allowed to take one distribution from their traditional IRA with the intention of a tax-free rollover and another distribution from their Roth IRA pursuant to a tax-free rollover within the same 12-month period? Could an IRA owner and his/her tax planner argue that a succession of linked IRA distributions pursuant to a single outcome substantively amount to a single distribution, citing the step transaction doctrine in defense?4

It is possible that further guidance from the IRS may emerge. Regardless of whether it does or not, IRA-to-IRA rollovers are about to be scrutinized more closely.

Citations.
1 - wealthmanagement.com/retirement-planning/seeing-double [2/4/14]
2 - marketwatch.com/story/new-ira-rollover-rule-coming-in-2015-2014-04-04 [4/4/14]
3 - irs.gov/pub/irs-drop/a-14-15.pdf [4/16/14]
4 - tinyurl.com/lnd86vs [4/24/14]

Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO PETER MONTOYA.