Monday, October 8, 2012
SHOULD YOU REDUCE RISK EXPOSURE AS YOU GET OLDER?
A study suggests the "conventional wisdom" may be flawed.
If you move away from equities with age, are you making a mistake? For some time, financial professionals have encouraged investors to lessen their exposure to the stock market as they get older. After all, a 60-year-old has less time to recover from a market downturn than someone decades away from collecting Social Security checks.
Is that conventional thinking flawed? It might be. It isn't simply a matter of looking at the future; you may also want to look at the past.
What's the price of playing not to lose? It could be significant - at least in terms of opportunity cost. At this moment, how many people really want to shift money into fixed-rate investments?
Obviously, bonds, CDs and money market accounts will always hold some appeal as they tout protection of principal. Aside from that sense of safety, how does a 1% or 2% return sound? As we enter Q4 2012, the highest-paying 5-year CDs yield less than 2%.1
Who would want to be locked into these yields for five whole years when the Federal Reserve is going in for open-ended easing? With QE3, the Fed just opened a door to inflation - and it may have to leave it open for some time.
On October 1, Chicago Fed President Charles Evans told CNBC that the central bank will keep buying mortgages until unemployment falls below 7%. That might take a while: while the jobless rate fell to 7.8% in September, it was 8% or higher for the previous 42 months.2,3
With the Fed and the European Central Bank flooding the global economy with cheap money, the tame inflation of the past few years may give way to something greater. Fixed-rate investments are great tools for diversifying a portfolio, but retirees and pre-retirees with significant assets in investments yielding 1-2% will start wincing if inflation gets back to 4-5%.
As interest rates are so low now, some conservative investors are thinking about adding riskier bonds to their portfolios. The central problem with that is that corporate bonds don't act like Treasuries. Lower-quality bonds can have stock-like risks, and those risks become more evident when the stock market is slumping. Stocks are also more tax-efficient - bond interest is typically taxed as ordinary income whereas stock returns are taxed as capital gains.4
Is the "glide path" strategy overrated? You may or may not have heard of this term; it refers to a gradual adjustment in asset allocation across an investor's time horizon. With time, the asset allocation mix within the portfolio includes more fixed-income assets and fewer equities, becoming more conservative. (This is the whole idea behind target date funds.)
A recent article in Investment News questions the glide path approach. Research Affiliates chairman (and former global equity strategist) Rob Arnott looked at a whopping 140 years of bond and stock market returns (1871-2011) and ran model scenarios using three different asset allocation approaches across 41 years of hypothetical retirement saving and investing. The findings?
**"Prudent Polly" saves $1,000 annually and practices "classic glide path investing", gradually devoting more and more of her portfolio assets to bonds after age 40. This way, she winds up with an average portfolio of $124,460 at age 63 (with a $37,670 standard deviation across assorted 40-year windows).
** "Balanced Burt" also saves $1,000 annually, but he invests it in an unchanging 50/50 mix of equities and bonds across 41 years. He ends up with an average portfolio of $137,870 at age 63. In terms of deviation, his worst-case scenario, 10th percentile outcome and median outcome are all better than Polly's.
**"Contrary Connie" saves $1,000 annually while practicing the inverse of the classic glide path strategy - her portfolio tilts more and more toward stocks after age 40. She ends up with an average portfolio of $152,060 at age 63 and her worst-case, median and best-case scenarios all give her more retirement funds than Polly's.5
A recent CBS MoneyWatch article noted the risk-adjusted returns (i.e., annualized Sharpe ratios) of the equity premium (0.43), investment grade credit premium (0.07) and high-yield credit premium (0.21) from August 1998-June 2012. Stocks look good next to all that. (For that matter, who have predicted that the 10-year Treasury would someday have a negative real yield?)4
As many people haven't saved enough for retirement to begin with, they more or less have to stay in stocks or other forms of equity investment. Instead of shifting their focus from wealth accumulation to wealth preservation, they need to focus on both. Accepting more risk may be necessary as they seek suitable returns.
Citations.
1 - www.forbes.com/sites/marcprosser/2012/09/18/cd-yields-currently-beat-bond-yields-for-short-term-investments/print/ [9/18/12]
2 - www.cnbc.com/id/49238242 [10/1/12]
3 - www.ncsl.org/issues-research/labor/national-employment-monthly-update.aspx [10/05/12]
4 - www.cbsnews.com/8301-505123_162-57524713/better-returns-more-stocks-or-riskier-bonds/ [10/4/12]
5 - www.investmentnews.com/article/20121002/BLOG09/121009987 [10/2/12]
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.
Monday, October 1, 2012
THE VALUE OF ESTIMATES
In this age of ever-expanding technology, the data-gathering process for a financial plan has gradually become less complicated and intrusive. Computers can now pull the latest values of your 401(k) plan and bank account balances into various evaluative software programs, and update them automatically. We can model future returns on a variety of different portfolio combinations with a few mouse clicks, and future government income benefits are sent regularly from the Social Security Administration.
But a great deal of hard work still falls on the shoulders of financial planning clients. People still have to figure out how much they expect to spend in retirement, and how much income they expect to need to pay their living expenses. You have to make decisions about your future lifestyle, and estimate the costs of each component part, often by taking a closer look at your current expenses than you ever have before.
And this, of course, is complicated by questions like whether you plan to work during the traditional retirement years, what hobbies you plan to pursue, whether you'll keep your current home or downsize, and how long you'll live. You look at the list of questions and realize that anything you write is an estimate or an attempt to quantify something that you cannot possibly know with precision. You can be forgiven for wondering: what's the point of all this effort? Why should I have to go through with this? Can't we just create a workable plan using current account information and what we know today?
The answer, alas, is no -- and the reason is interesting, and not always well-understood. The truth is that being able to live a successful financial life, and meeting your goals, is far more dependent on a person's behavior than his or her financial planner's. Even if the financial planner were to get an extraordinary rate of return on your investments over a long period of time (and this is usually not possible), how much you save and invest from your monthly budget will still be a more important factor in how wealthy you will become. And the amount of your future expenses will be more important still in whether you'll be able to fund your future lifestyle.
In addition, and related to this, it is important to know whether the amount you're saving and investing today is likely to be enough to meet your future expectations. If not, it's better to make a course correction now, before it's too late.
In addition to that, it's always better to have an understanding of your future expectations, so you can start making concrete plans for that part of your life when work becomes optional. For some people who enter their retirement years and look back, this advance planning and preparation turned out to be the most valuable part of a financial planning relationship.
More recently, some advisors are distinguishing between the types of future lifestyle expenses that they are assuming in their models. For instance, suppose your retirement plan calls for staying in your current home, dining out three times a week, buying a new luxury automobile every five years and taking a trip abroad once a year. If the market collapses the way it did in 2008, you might suddenly have a frighteningly high probability of running out of money in retirement.
But a new evaluation might look at a retirement where you downsize the home, or cut back to eating out once a week, or buy a less expensive automobile, or take a trip every other year. A truly pared-down retirement expense model might look only at the costs of food, rent, gas, utilities and other expenses necessary for living comfortably. You might have virtually 100% chance of affording your pared-down retirement, a high probability of affording the reduced future lifestyle, and still have a reasonable shot at affording everything you hope for.
This broader evaluation allows you to look at the alternatives. If you decide to work an additional two years at your current job, you will raise the odds of affording your optimal retirement. Saving and investment more each month raises the odds still further.
None of this analysis is possible, however, until the unpleasant homework assignment has been completed, until you've provided your projected spending information after taking a hard look at your current spending habits. In the computer industry, they have a phrase: "garbage in, garbage out," which means that if the data that is used in an analysis isn't accurate or precise, the analysis will give you meaningless outputs. This is also true in financial planning, where no professional wants to give out a garbage plan, and no client wants to receive one.
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.
But a great deal of hard work still falls on the shoulders of financial planning clients. People still have to figure out how much they expect to spend in retirement, and how much income they expect to need to pay their living expenses. You have to make decisions about your future lifestyle, and estimate the costs of each component part, often by taking a closer look at your current expenses than you ever have before.
And this, of course, is complicated by questions like whether you plan to work during the traditional retirement years, what hobbies you plan to pursue, whether you'll keep your current home or downsize, and how long you'll live. You look at the list of questions and realize that anything you write is an estimate or an attempt to quantify something that you cannot possibly know with precision. You can be forgiven for wondering: what's the point of all this effort? Why should I have to go through with this? Can't we just create a workable plan using current account information and what we know today?
The answer, alas, is no -- and the reason is interesting, and not always well-understood. The truth is that being able to live a successful financial life, and meeting your goals, is far more dependent on a person's behavior than his or her financial planner's. Even if the financial planner were to get an extraordinary rate of return on your investments over a long period of time (and this is usually not possible), how much you save and invest from your monthly budget will still be a more important factor in how wealthy you will become. And the amount of your future expenses will be more important still in whether you'll be able to fund your future lifestyle.
In addition, and related to this, it is important to know whether the amount you're saving and investing today is likely to be enough to meet your future expectations. If not, it's better to make a course correction now, before it's too late.
In addition to that, it's always better to have an understanding of your future expectations, so you can start making concrete plans for that part of your life when work becomes optional. For some people who enter their retirement years and look back, this advance planning and preparation turned out to be the most valuable part of a financial planning relationship.
More recently, some advisors are distinguishing between the types of future lifestyle expenses that they are assuming in their models. For instance, suppose your retirement plan calls for staying in your current home, dining out three times a week, buying a new luxury automobile every five years and taking a trip abroad once a year. If the market collapses the way it did in 2008, you might suddenly have a frighteningly high probability of running out of money in retirement.
But a new evaluation might look at a retirement where you downsize the home, or cut back to eating out once a week, or buy a less expensive automobile, or take a trip every other year. A truly pared-down retirement expense model might look only at the costs of food, rent, gas, utilities and other expenses necessary for living comfortably. You might have virtually 100% chance of affording your pared-down retirement, a high probability of affording the reduced future lifestyle, and still have a reasonable shot at affording everything you hope for.
This broader evaluation allows you to look at the alternatives. If you decide to work an additional two years at your current job, you will raise the odds of affording your optimal retirement. Saving and investment more each month raises the odds still further.
None of this analysis is possible, however, until the unpleasant homework assignment has been completed, until you've provided your projected spending information after taking a hard look at your current spending habits. In the computer industry, they have a phrase: "garbage in, garbage out," which means that if the data that is used in an analysis isn't accurate or precise, the analysis will give you meaningless outputs. This is also true in financial planning, where no professional wants to give out a garbage plan, and no client wants to receive one.
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.
Monday, September 24, 2012
FINANCIAL CONSIDERATIONS FOR 2013
It isn't too early to think about next year.
We are now in plain view of the "fiscal cliff". After the election,Congress may or may not end up keeping income and estate tax rates at their recent levels. Next year may bring some notable financial developments, and it isn't too soon for households to think about them.
You may want to prioritize tax reduction. If the Bush-era tax cuts sunset, everyone will see higher taxes. The federal income tax brackets (10%, 15%, 25%, 28%, 33%, 35%) that we have known for the last nine years would be replaced by five higher ones (15%, 28%, 31%, 36%, 39.6%) come 2013.1
High earners may want to watch their incomes. If your earned income for 2013 tops $200,000 - or exceeds $250,000, in the case of a couple - you may face two Medicare surtaxes. While the Medicare payroll tax on earned incomes above these levels is set to rise to 2.35% from the current 1.45%, the second surtax may prove to be the real annoyance: there is scheduled to be a 3.8% charge on net investment income for individuals and couples whose modified adjusted gross incomes surpass these levels.1,2
Some fine points about this second surtax must be mentioned. It would actually be levied on the lesser of two amounts - either your net investment income or excess MAGI above the $200,000/$250,000 levels. Most investment income derived from material participation in a business activity would be exempt from the 3.8% surtax, along with tax-exempt interest income, tax-exempt gains realized from selling your home, retirement plan distributions and income that would already be subject to self-employed Social Security tax.2
The bottom line is that a bonus, an IRA distribution, or a sizable capital gain may push your earned income above these thresholds - and it will be wise to consider the impact that would have.
You may have less take-home pay next year. Social Security taxes for paycheck employees are slated to return to the 6.2% level in 2013. They've been at 4.2% since the start of 2011. If you earn $75,000 during 2013, you will take home about $1,500 less of it than you would have in 2012. If you earn $50,000, we're talking $1,000 less.3
Any 2013 Social Security COLA may be minor. In 2012, the cost of living adjustment to Social Security benefits was 3.6%. Before that, Social Security recipients went three years without a COLA. As inflation is mild, whatever COLA is announced this fall in tandem with Medicare premium changes may not amount to much.1
Next year, medical expense deductions may shrink. If you are thinking about delaying a procedure or surgery until 2013, remember that the itemized deduction threshold for unreimbursed medical expenses is set to increase from 7.5% to 10% of adjusted gross income in 2013. Even if that happens, however, the threshold will remain at 7.5% through 2016 for taxpayers age 65 and older.1
You may be able to find a better Medicare Advantage plan for 2013. The Affordable Care Act has altered the landscape for these plans (and their prescription drug coverage). Using Medicare's Plan Finder (click on the "Find health & drug plans" link at Medicare.gov), you may discover similar or better coverage at lower premiums. The enrollment period for 2013 coverage runs from October 15 to December 7.1
Those without work may find a safety net gone. Extended jobless benefits may disappear for the long-term unemployed at the start of 2013. Will Congress extend them once again? Possibly - but that isn't a given.
The estate & gift tax exemptions may shrink significantly. The (unified) lifetime federal gift and estate tax exemption is currently set at $5.12 million - and it will drop to $1 million in 2013 if Congress stands pat. Federal gift tax and estate tax rates are also slated to max out at 55% in 2013, as opposed to 35% in 2012. Right now, an unused portion of a $5.12 million lifetime exemption is portable to a surviving spouse; in 2013, that portability is supposed to disappear.4
Many analysts and economists think that Congress will eventually abide by President Obama's wishes and take things back to 2009 instead of 2001 - that is, a $3.5 million estate tax exemption, a $1 million lifetime gift tax exemption, and a 45% maximum estate and gift tax rate.4
Prepare for year-end drama ... and for 2013. The last two months of 2012 will surely bring political theatre to Capitol Hill. As it unfolds, you may want to look ahead to next year and consider the impact that these potential changes could have on your financial life.
Citations.
1 - money.usnews.com/money/blogs/the-best-life/2012/08/29/get-ready-for-5-key-money-changes-in-2013 [8/29/12]
2 - www.cliftonlarsonallen.com/inside.aspx?id=364 [2/23/12]
3 - money.cnn.com/2012/05/29/news/economy/payroll-tax-cut/index.htmx [5/29/12]
4 - www.smartmoney.com/taxes/income/preparing-for-taxmageddon-1337724496427/ [5/23/12]
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.
We are now in plain view of the "fiscal cliff". After the election,Congress may or may not end up keeping income and estate tax rates at their recent levels. Next year may bring some notable financial developments, and it isn't too soon for households to think about them.
You may want to prioritize tax reduction. If the Bush-era tax cuts sunset, everyone will see higher taxes. The federal income tax brackets (10%, 15%, 25%, 28%, 33%, 35%) that we have known for the last nine years would be replaced by five higher ones (15%, 28%, 31%, 36%, 39.6%) come 2013.1
High earners may want to watch their incomes. If your earned income for 2013 tops $200,000 - or exceeds $250,000, in the case of a couple - you may face two Medicare surtaxes. While the Medicare payroll tax on earned incomes above these levels is set to rise to 2.35% from the current 1.45%, the second surtax may prove to be the real annoyance: there is scheduled to be a 3.8% charge on net investment income for individuals and couples whose modified adjusted gross incomes surpass these levels.1,2
Some fine points about this second surtax must be mentioned. It would actually be levied on the lesser of two amounts - either your net investment income or excess MAGI above the $200,000/$250,000 levels. Most investment income derived from material participation in a business activity would be exempt from the 3.8% surtax, along with tax-exempt interest income, tax-exempt gains realized from selling your home, retirement plan distributions and income that would already be subject to self-employed Social Security tax.2
The bottom line is that a bonus, an IRA distribution, or a sizable capital gain may push your earned income above these thresholds - and it will be wise to consider the impact that would have.
You may have less take-home pay next year. Social Security taxes for paycheck employees are slated to return to the 6.2% level in 2013. They've been at 4.2% since the start of 2011. If you earn $75,000 during 2013, you will take home about $1,500 less of it than you would have in 2012. If you earn $50,000, we're talking $1,000 less.3
Any 2013 Social Security COLA may be minor. In 2012, the cost of living adjustment to Social Security benefits was 3.6%. Before that, Social Security recipients went three years without a COLA. As inflation is mild, whatever COLA is announced this fall in tandem with Medicare premium changes may not amount to much.1
Next year, medical expense deductions may shrink. If you are thinking about delaying a procedure or surgery until 2013, remember that the itemized deduction threshold for unreimbursed medical expenses is set to increase from 7.5% to 10% of adjusted gross income in 2013. Even if that happens, however, the threshold will remain at 7.5% through 2016 for taxpayers age 65 and older.1
You may be able to find a better Medicare Advantage plan for 2013. The Affordable Care Act has altered the landscape for these plans (and their prescription drug coverage). Using Medicare's Plan Finder (click on the "Find health & drug plans" link at Medicare.gov), you may discover similar or better coverage at lower premiums. The enrollment period for 2013 coverage runs from October 15 to December 7.1
Those without work may find a safety net gone. Extended jobless benefits may disappear for the long-term unemployed at the start of 2013. Will Congress extend them once again? Possibly - but that isn't a given.
The estate & gift tax exemptions may shrink significantly. The (unified) lifetime federal gift and estate tax exemption is currently set at $5.12 million - and it will drop to $1 million in 2013 if Congress stands pat. Federal gift tax and estate tax rates are also slated to max out at 55% in 2013, as opposed to 35% in 2012. Right now, an unused portion of a $5.12 million lifetime exemption is portable to a surviving spouse; in 2013, that portability is supposed to disappear.4
Many analysts and economists think that Congress will eventually abide by President Obama's wishes and take things back to 2009 instead of 2001 - that is, a $3.5 million estate tax exemption, a $1 million lifetime gift tax exemption, and a 45% maximum estate and gift tax rate.4
Prepare for year-end drama ... and for 2013. The last two months of 2012 will surely bring political theatre to Capitol Hill. As it unfolds, you may want to look ahead to next year and consider the impact that these potential changes could have on your financial life.
Citations.
1 - money.usnews.com/money/blogs/the-best-life/2012/08/29/get-ready-for-5-key-money-changes-in-2013 [8/29/12]
2 - www.cliftonlarsonallen.com/inside.aspx?id=364 [2/23/12]
3 - money.cnn.com/2012/05/29/news/economy/payroll-tax-cut/index.htmx [5/29/12]
4 - www.smartmoney.com/taxes/income/preparing-for-taxmageddon-1337724496427/ [5/23/12]
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.
Monday, September 17, 2012
THE FED ANNOUNCES QE3
THE FED ANNOUNCES QE3
A look at the central bank's latest strategy.
One more round of easing brightens the mood of Wall Street. With the fiscal cliff roughly 100 days away and the first Tuesday in November still too far off, institutional and retail investors were counting on the Federal Reserve to combat market anxiety with a new stimulus. In its latest policy announcement, the Fed came through - on September 14, the central bank launched its third round of easing in the past four years.1
How does QE3 compare to QE2? Well for one thing, QE3 is open-ended. The Fed will purchase $40 billion of agency mortgage-backed securities per month, until it decides otherwise. It is also continuing its Operation Twist bond-swap program through the end of 2012, meaning that the Fed will be adding $85 billion worth of long-term securities in each of the last four months of this year.1
Additionally, the central bank reinforced its pledge to keep interest rates at record lows "at least through mid-2015."1
During QE2 (November 2010-June 2011), the Fed incrementally bought $600 billion in longer-term Treasuries and reinvested payments on $1.25 trillion of mortgage-linked securities it purchased from banks during QE1 (November 2008-March 2010).2,3
What could QE3 potentially accomplish? Ideally, QE3 will aid the stock market, the housing market and by extension the job market. By buying mortgages, the Fed is seeking to accelerate the promising rebound in the real estate sector and keep long-term interest rates low.
Did the announcement live up to expectations? The Dow soared 100 points just minutes after announcement of the policy statement, so any thoughts that the market had priced QE3 in initially appeared inaccurate. The CBOE VIX (the so-called "fear index") slid below 16 on the news. In short, the market got what it wanted - and the summer rally found a little more momentum.4
As Bank of Tokyo-Mitsubishi chief financial economist Chris Rupkey commented to CNBC.com this week, this rally has been fueled largely "on hopes for QE3 even as investors believe QE3 will have virtually no effect. The market does not seem to know what it wants, but the Fed is going to give it to them anyway." BlackBay Group managing principal Todd Schoenberger seconded that notion: "This rally's been based on a 'Bernanke bubble' ... if he doesn't come through with another round of QE, it's going to be a big disappointment."5,6
With the Fed more or less saying that easy money will be available for some time, you might say the markets are pleased.
Is QE3 really necessary? Stocks have performed better than many analysts expected this summer, thanks in part to renewed hope that the European Union will solve its debt crises. With the markets at multi-year highs, some analysts felt that the Fed should have refrained from further stimulus measures.
In a September 12 CNBC survey of 58 noted money managers, strategists and economists, 59% of respondents felt QE3 would do nothing to reduce the jobless rate. That said, the Fed obviously saw merit in easing before the economy approaches the edge of the fiscal cliff.6
Central bank easing doesn't always realize its aims. Looking back, we can see that QE2 had some unexpected effects. Many economists and housing industry analysts assumed that it would drive mortgage rates lower. It didn't. In fact, interest rates on 30-year fixed-rate mortgages climbed about 30 basis points during the program. Six weeks after QE2 started, rates on the 30-year FRM had jumped nearly half a percent.2
What might happen in the near term? Hopefully the Fed's action will give stocks a shot in the arm for fall and winter, strengthen the residential real estate market and show support for both Wall Street and Main Street. Let's hope that this major announcement leads to a major improvement for the broader economy.
Citations.
1 - www.marketwatch.com/story/fed-to-launch-qe3-of-40-billion-mbs-each-month-2012-09-13 [9/13/12]
2 - www.bankrate.com/finance/federal-reserve/qe2-financial-crisis-timeline.aspx [9/21/11]
3 - www.bankrate.com/finance/federal-reserve/qe1-financial-crisis-timeline.aspx [9/21/11]
4 - www.bankrate.com/finance/federal-reserve/qe1-financial-crisis-timeline.aspx [9/21/11]
5 - www.cnbc.com/id/49002386 [9/12/12]
6 - www.cnbc.com/id/48990032/ [9/12/12]
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.
Monday, September 10, 2012
BUYING vs. RENTING REVISITED
For people of a certain age, who remember taking out a home mortgage at 15%, 16% or even near the top at 18%, the astonishingly low rates that banks are charging today are a little hard to believe. This chart, taken from statistics collected by the Federal Home Loan Mortgage Corporation for 15-year and 30-year fixed-rate mortgages, tells the story: rates have been historically low for years, and they have been trending lower ever since the bottom fell out of the real estate market.
This has created a strange but not unusual market situation: people who remember the housing market collapse are nervous about buying right at the time when they can buy more house for less money than ever before in their lifetime, and finance at rates we may never see again. Our instincts tell us to buy when the markets are booming and prices are high, and to stay on the sidelines when the markets are offering us bargains.
The economic case for purchasing a home vs. renting has always been a bit sketchy. The real estate site Trulia has calculated that the breakeven between the two comes when you can buy for 15 times your yearly rental costs. By that formula, if you're paying $20,000 a year in rent, you might think twice about purchasing a comparable home that costs more than $300,000. But that formula has some embedded assumptions about mortgage rates. If you were to buy that $300,000 house and finance it at 18.45%--the average national mortgage rate back in October, 1981--then your $4,631 monthly payments would amount to $55,572 a year--more than two and a half times the rental rate you're paying now. This might not be the ideal tradeoff. But at 3.55%--the average national rate in July--the payments are $1,355 a month, or $16,260. At those rates, even if you factor in maintenance and property taxes, buying might actually cost less per month than renting.
Trulia identifies some markets where prices are historically high and historically low. The average two-bedroom condominium or townhouse in the New York City area currently costs about 32 times as much to buy as to rent. In Seattle, you can expect to buy at about 24 times the rental cost; San Francisco and Portland, OR now cost 22 times as much. Meanwhile, Miami homes are going for about about eight times annual rents, while Phoenix (10 times) and Las Vegas (11) seem to be relative bargains.
In general, you should avoid committing too much of your cash flow to the place you live; annual housing costs should be less than a third of your gross annual income. And you probably shouldn't count on your home appreciating in value immediately. A recent report by Fitch Investors Services says that in many markets, housing prices won't have completely bottomed out until late next year. This is not a market for flipping homes. But with the combination of low rates and distressed prices, it may be the best time to buy that many of us have seen in a long, long time.
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.
This has created a strange but not unusual market situation: people who remember the housing market collapse are nervous about buying right at the time when they can buy more house for less money than ever before in their lifetime, and finance at rates we may never see again. Our instincts tell us to buy when the markets are booming and prices are high, and to stay on the sidelines when the markets are offering us bargains.
The economic case for purchasing a home vs. renting has always been a bit sketchy. The real estate site Trulia has calculated that the breakeven between the two comes when you can buy for 15 times your yearly rental costs. By that formula, if you're paying $20,000 a year in rent, you might think twice about purchasing a comparable home that costs more than $300,000. But that formula has some embedded assumptions about mortgage rates. If you were to buy that $300,000 house and finance it at 18.45%--the average national mortgage rate back in October, 1981--then your $4,631 monthly payments would amount to $55,572 a year--more than two and a half times the rental rate you're paying now. This might not be the ideal tradeoff. But at 3.55%--the average national rate in July--the payments are $1,355 a month, or $16,260. At those rates, even if you factor in maintenance and property taxes, buying might actually cost less per month than renting.
Trulia identifies some markets where prices are historically high and historically low. The average two-bedroom condominium or townhouse in the New York City area currently costs about 32 times as much to buy as to rent. In Seattle, you can expect to buy at about 24 times the rental cost; San Francisco and Portland, OR now cost 22 times as much. Meanwhile, Miami homes are going for about about eight times annual rents, while Phoenix (10 times) and Las Vegas (11) seem to be relative bargains.
In general, you should avoid committing too much of your cash flow to the place you live; annual housing costs should be less than a third of your gross annual income. And you probably shouldn't count on your home appreciating in value immediately. A recent report by Fitch Investors Services says that in many markets, housing prices won't have completely bottomed out until late next year. This is not a market for flipping homes. But with the combination of low rates and distressed prices, it may be the best time to buy that many of us have seen in a long, long time.
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.
Tuesday, September 4, 2012
OVER THE CLIFF
It may not feel like we're in a bull market, but stocks are in the midst of an extended rally that has taken the S&P 500 index from below 1280 in early June to the low 1400s currently. Yet whenever you read about America's economic recovery, there is inevitably a mention of the looming fiscal cliff, a scary future event that could decimate the economy and drive share prices back down.
What is this fiscal cliff? Why are economists so frightened of it? The term refers to a sudden change in a lot of different tax policies that is scheduled to take place automatically at midnight on December 31. As soon as the clock strikes twelve, the Bush-era tax cuts will expire, eliminating the 10% tax bracket altogether, and moving the current 25%, 28%, 33% and 35% brackets up to 28%, 31%, 36% and 39.6% respectively. At the same time, the 0% capital gains tax rate would bump up to 10%, and the tax rate on dividends would rise to 15% or 28%, depending on the recipient's income tax bracket.
Also expiring: a provision that eases the so-called "marriage penalty," some deductions for college tuition, child tax credits, dependent care credits and a particularly harsh phase-out would eliminate up to 80% of some taxpayers' itemized deductions for mortgage interest, state and local taxes, and charitable donations.
Making the cliff a bit steeper, the Budget Control Act of 2011--what most of us remember as the tense compromise that ended last year's budget standoff--calls for automatic government spending cuts of $1.2 trillion from the federal budget over the next 10 years.
The cliff becomes a bit steeper still as the Obama-era payroll tax cuts (reducing taxes by about 2% for workers) expire at the same moment in time.
All of this would boost government revenues and lower government spending--the opposite of a government stimulus--and suck some of the spending power out of consumer balance sheets. How much? The Congressional Budget Office estimates that if we go over the cliff--that is, if Congress doesn't act between now and the end of the year--a total of $560 billion would exit the economy to pay down the government deficit. That's the good news. The bad news is that the CBO estimates that this would reduce America's total economic activity in 2013 by four percentage points. To put that in perspective, last year our economy grew at a 1.7% rate.
So is a recession inevitable? What are the odds that Congress will take bold, decisive action during a Presidential election year? Some pundits believe that the magnitude of the economic consequences has gotten the attention of Congress, and that no matter who gets elected, something will be done. The most likely possibility, alas, is yet another stop-gap measure which might extend some of the tax cuts but repeal some of the automatic spending cuts, pushing the cliff out so that future lawmakers will have to deal with it--which is basically how we got in this mess in the first place.
Meanwhile, as the U.S. economy continues to march straight toward the edge, a growing nervousness may be part of the reason why the economy has been so slow to recover. Businesses are reluctant to hire or invest in the future when there are serious questions about what that future will look like. The slow, steady rise in the stock market this summer suggests that many investors have not yet looked up and noticed that the economy is on a collision course with a recession-causing event. The big question that none of us knows the answer to is: what will they do when they look up and see the cliff?
Sources:
http://www.smartmoney.com/taxes/income/how-the-expiring-bush-tax-cuts-affect-you/
http://bonds.about.com/od/Issues-in-the-News/a/What-Is-The-Fiscal-Cliff.htm
http://bonds.about.com/od/Issues-in-the-News/a/What-Is-The-Fiscal-Cliff.htm
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.
What is this fiscal cliff? Why are economists so frightened of it? The term refers to a sudden change in a lot of different tax policies that is scheduled to take place automatically at midnight on December 31. As soon as the clock strikes twelve, the Bush-era tax cuts will expire, eliminating the 10% tax bracket altogether, and moving the current 25%, 28%, 33% and 35% brackets up to 28%, 31%, 36% and 39.6% respectively. At the same time, the 0% capital gains tax rate would bump up to 10%, and the tax rate on dividends would rise to 15% or 28%, depending on the recipient's income tax bracket.
Also expiring: a provision that eases the so-called "marriage penalty," some deductions for college tuition, child tax credits, dependent care credits and a particularly harsh phase-out would eliminate up to 80% of some taxpayers' itemized deductions for mortgage interest, state and local taxes, and charitable donations.
Making the cliff a bit steeper, the Budget Control Act of 2011--what most of us remember as the tense compromise that ended last year's budget standoff--calls for automatic government spending cuts of $1.2 trillion from the federal budget over the next 10 years.
The cliff becomes a bit steeper still as the Obama-era payroll tax cuts (reducing taxes by about 2% for workers) expire at the same moment in time.
All of this would boost government revenues and lower government spending--the opposite of a government stimulus--and suck some of the spending power out of consumer balance sheets. How much? The Congressional Budget Office estimates that if we go over the cliff--that is, if Congress doesn't act between now and the end of the year--a total of $560 billion would exit the economy to pay down the government deficit. That's the good news. The bad news is that the CBO estimates that this would reduce America's total economic activity in 2013 by four percentage points. To put that in perspective, last year our economy grew at a 1.7% rate.
So is a recession inevitable? What are the odds that Congress will take bold, decisive action during a Presidential election year? Some pundits believe that the magnitude of the economic consequences has gotten the attention of Congress, and that no matter who gets elected, something will be done. The most likely possibility, alas, is yet another stop-gap measure which might extend some of the tax cuts but repeal some of the automatic spending cuts, pushing the cliff out so that future lawmakers will have to deal with it--which is basically how we got in this mess in the first place.
Meanwhile, as the U.S. economy continues to march straight toward the edge, a growing nervousness may be part of the reason why the economy has been so slow to recover. Businesses are reluctant to hire or invest in the future when there are serious questions about what that future will look like. The slow, steady rise in the stock market this summer suggests that many investors have not yet looked up and noticed that the economy is on a collision course with a recession-causing event. The big question that none of us knows the answer to is: what will they do when they look up and see the cliff?
Sources:
http://www.smartmoney.com/taxes/income/how-the-expiring-bush-tax-cuts-affect-you/
http://bonds.about.com/od/Issues-in-the-News/a/What-Is-The-Fiscal-Cliff.htm
http://bonds.about.com/od/Issues-in-the-News/a/What-Is-The-Fiscal-Cliff.htm
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.
Monday, August 27, 2012
WHY IS THE MARKET ADVANCING?
The summer of 2012 has defied expectations.
On August 21, the S&P 500 hit a 4-year high. It climbed 3% in the first three weeks of the month following a 1.26% July gain. Across the past four weeks, the index’s total return has been just under 4%.1,2,3
Unexpected? You might say so. You can’t predict how the market will behave. This summer, stocks are managing to advance despite lingering threats.
Shouldn’t Wall Street be more pessimistic? After all, the “fiscal cliff” is drawing closer, the risk of a crack in the eurozone hasn’t exactly faded, and the European Central Bank and the Federal Reserve have not yet boldly responded to disappointing economic signals. Did Wall Street just collectively dismiss all of this in recent weeks?
Few saw this rally coming. The prevailing opinion – at least in spring – was that stocks would limp along through the summer, possibly retreating in reaction to news from Europe and subpar U.S. indicators. That was essentially the story in 2010 and 2011. In 2010, the S&P saw an April-May selloff and didn’t recover until that November. In 2011, a May-June selloff preceded a disastrous July; it took until February 2012 for stocks to get back to where they had been ten months earlier.4
This year, the S&P hit a peak in April and a valley in June – and just two months later, it returned to its YTD high.4
What factors are buoying the market? ECB President Mario Draghi’s (vague) pledge to do whatever is necessary to support the euro has certainly calmed some nerves. Investors continue to anticipate that the Fed will ease in the near term. The real estate sector appears to be healing, even as other economic indicators show sluggishness.
Some analysts think that the market simply wants to move higher - bullish sentiment has prevailed, even with all this uncertainty. In fact, a few analysts wonder if this summer’s advance mirrors a longstanding pattern.
Will history repeat? While it is far too early to answer “yes” to that question, it is interesting to note some past tendencies of “mature” bull markets. According to research from Bespoke Investment Group, we are now in the ninth longest and ninth strongest bull market since 1928 (nearly 1,300 days old with 110% appreciation).4
Mature bull markets witness corrections. In June, we more or less saw one – the S&P dropped 9.9% from its April high, actually 10.9% on an intraday basis. According to Bespoke, this was the twentieth bull market correction in the past 84 years. In the 19 previous corrections, the S&P took an average of 98 days to fully rebound from its low. This year, only 81 days were required.4
So what happened once the S&P recaptured its highs after these corrections? The index rose during the following month in 84% of these instances, with the average gain in those 30 days being 2.1%. Stretch that window of time out to three months, and data shows the index advancing 65% of the time with an average gain of 1.3%. Six months after such a rebound, the S&P was higher 84% of the time with the average advance at 5.5%.4
This data suggests that once a bull market is entrenched, a correction doesn’t shake the confidence of investors. There is still the perception of an upside.
A steepening VIX curve may be cause for concern. The CBOE VIX (the so-called “fear index” indicating expected volatility) fell below 14 in mid-August. This month, the VIX futures curve has shown a steepness not seen in several years, with VIX futures prices for October above 20 and in the vicinity of 25 for January. Some analysts wonder if complacency is about to give way to greater anxiety, since the VIX has shown longer-term volatility at a higher premium than short-term volatility.5
Yesterday’s statistics don’t equal tomorrow’s reality; nobody knows what the market will do this fall and winter. What we do know is that this summer, stocks have nicely exceeded expectations.
Citations.
1 – www.cnbc.com/id/48737245/ [8/21/12]
2 - www.bloomberg.com/markets/stocks/ [7/31/12]
3 - news.morningstar.com/index/indexReturn.html [8/22/12]
4 - www.cnbc.com/id/48740766 [8/21/12]
5 - www.cnbc.com/id/48692307 [8/16/12]
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.
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