The Markets
After all the huffing and puffing of the election, the
fiscal cliff, and the Dancing With the Stars season finale, the U.S. stock
market ended the month of November within 0.3 percent of where it started,
according to The Wall Street Journal.
Although the return for the month was basically flat, a
chart of the daily returns looked more like a healthy man’s EKG. From the
closing high of the month to the closing low, the S&P 500 dropped 5.3
percent. Then, from that closing low to the last trading day of the month, the
index rose 4.6 percent, according to data from Yahoo! Finance.
Overseas, the markets jumped around, too:
·
In Europe, the Stoxx Europe 600
index rose 2.0 percent on the month – its sixth monthly gain in a row.
·
In China, the Shanghai Composite
index fell 4.3 percent in November and is now down about 10 percent for the
year.
·
In Japan, the Nikkei Stock Average
jumped 5.8 percent on the month to close at a seven-month high.
Source: The Wall Street Journal
What’s happening in Japan is rather interesting. The country
will hold an election later this month to elect a Prime Minister. The leading
candidate, Shinzo Abe, recently said the Bank of Japan should pursue a policy
of unlimited bond purchases and zero-to-negative interest rates in order to rev
up the moribund Japanese economy (sounds like the U.S.!). Abe’s easy money
policy rhetoric helped lead to a roughly 10 percent drop in the value of the
Japanese yen against a basket of developed market currencies between June and
November 19 of this year and helped propel last month’s 5.8 percent rise in the
Japanese stock market, according to Bloomberg and The Wall Street Journal.
As last month’s results show, we live in an interconnected
world with many moving parts. Even something as simple as a Japanese Prime
Minister candidate promoting an easy money policy can move markets
dramatically.
Data as of 11/30/12
|
1-Week
|
Y-T-D
|
1-Year
|
3-Year
|
5-Year
|
10-Year
|
|
Standard
& Poor's 500 (Domestic Stocks)
|
0.5%
|
12.6%
|
13.6%
|
8.9%
|
-0.9%
|
4.2%
|
|
DJ
Global ex US (Foreign Stocks)
|
1.1
|
9.8
|
8.3
|
1.1
|
-6.2
|
6.9
|
|
10-year
Treasury Note (Yield Only)
|
1.6
|
N/A
|
2.1
|
3.2
|
4.0
|
4.2
|
|
Gold
(per ounce)
|
-0.5
|
9.6
|
-1.1
|
13.7
|
17.1
|
18.5
|
|
DJ-UBS
Commodity Index
|
-0.9
|
1.5
|
-2.3
|
1.5
|
-4.2
|
3.0
|
|
DJ
Equity All REIT TR Index
|
0.3
|
15.4
|
20.7
|
19.3
|
3.8
|
11.3
|
Notes: S&P 500, DJ Global ex US,
Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does
not pay a dividend) and the three-, five-, and 10-year returns are annualized;
the DJ Equity All REIT TR Index does include reinvested dividends and the
three-, five-, and 10-year returns are annualized; and the 10-year Treasury
Note is simply the yield at the close of the day on each of the historical time
periods.
Sources: Yahoo! Finance, djindexes.com, London Bullion
Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested
into directly. N/A means not applicable.
ARE STOCK MARKET RETURNS CLOSELY RELATED TO the overall level of growth in the
economy? Logically, it makes sense to think as the economy grows, so will stock
prices, and vice versa. Let’s test that hypothesis using historical data.
The following table
compares the return in the stock market during three different time periods to
economic growth during those periods. Two of these periods were weak times for
the market and one was strong. They are compared to real growth in the economy
(i.e., after removing inflation) and to nominal growth in the economy (i.e.,
with inflation included).
|
Period
|
S&P
500 Annualized Return
|
Real
GDP Growth
|
Nominal
GDP Growth
|
Market
Cycle
|
|
1966 - 1981
|
1.7%
|
3.0%
|
9.6%
|
Weak Period
|
|
1982 - 1999
|
14.6%
|
3.3%
|
6.3%
|
Strong Period
|
|
2000 - 2008
|
-6.2%
|
2.3%
|
4.8%
|
Weak Period
|
Sources: Bureau of
Economic Analysis, Yahoo! Finance
Note: S&P 500
returns exclude reinvested dividends
Here are some
conclusions from the table:
1. Economic growth – after removing the
effect of inflation – has remained remarkably stable at 2.3 percent to 3.3
percent during extended strong and weak market periods dating back to 1966.
2. Stock prices can rise or fall
dramatically during extended periods of time regardless of what’s happening to
underlying economic growth.
3. The high inflation period from 1966
to 1981 – as shown by nominal GDP growing 9.6 percent versus real GDP growing
3.0 percent – did not help stock prices as the S&P 500 index only rose 1.7
percent on average per year excluding reinvested dividends.
4. A combination of strong stock market
returns from 1982 to 1999 (which raised market valuation to an extremely high
level) and somewhat slower economic growth helped cause stock market returns
from 2000 to 2008 to be quite negative.
5. The change in the rate of inflation
or disinflation can have a major impact on stock market returns.
This table is a great
example of why it’s so important to do research. The logical thought that stock
price movements mirror changes in economic growth is not supported by data
going back to 1966.
Just like you can’t
judge a book by its cover, you can’t always evaluate the stock market by taking
logical ideas at face value.
Weekly Focus – Think About It…
“Reason itself is fallible, and this fallibility must find a
place in our logic.”
--Nicola
Abbagnano, Italian existential philosopher
Value
vs. Growth Investing (11/30/12)
|
0.68
|
14.95
|
0.76
|
1.46
|
15.92
|
11.89
|
1.85
|
|
|
0.59
|
15.28
|
0.49
|
1.04
|
16.63
|
10.78
|
1.17
|
|
|
0.14
|
16.36
|
0.83
|
1.86
|
18.08
|
11.38
|
2.32
|
|
|
1.15
|
18.94
|
2.35
|
0.13
|
17.98
|
12.13
|
2.61
|
|
|
0.45
|
10.89
|
-1.82
|
1.22
|
14.07
|
8.78
|
-1.66
|
|
|
0.78
|
14.39
|
1.75
|
2.91
|
14.05
|
14.50
|
3.19
|
|
|
0.92
|
15.83
|
2.39
|
3.69
|
16.86
|
16.69
|
4.75
|
|
|
0.45
|
13.36
|
1.79
|
0.86
|
9.61
|
14.76
|
1.86
|
|
|
1.00
|
14.13
|
1.10
|
4.36
|
15.88
|
12.00
|
2.80
|
|
|
1.30
|
13.00
|
0.91
|
1.78
|
13.66
|
15.04
|
4.41
|
|
|
1.22
|
13.09
|
1.51
|
2.02
|
13.92
|
13.96
|
3.87
|
|
|
1.18
|
11.10
|
0.58
|
-0.47
|
10.24
|
15.94
|
3.07
|
|
|
1.49
|
14.86
|
0.65
|
3.84
|
16.89
|
15.21
|
6.26
|
|
|
0.37
|
16.05
|
1.17
|
2.22
|
17.59
|
12.73
|
3.03
|
|
|
1.01
|
17.25
|
2.13
|
0.24
|
15.74
|
13.04
|
2.55
|
|
|
0.63
|
11.81
|
-1.07
|
2.02
|
14.62
|
9.88
|
-0.23
|
©2004
Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is
proprietary to Morningstar; (2) is not warranted to be accurate, complete or
timely. Morningstar is not responsible for any damages or losses arising from
any use of this information and has not granted its consent to be considered or
deemed an “expert” under the Securities Act of 1933. Past performance is no
guarantee of future results. Indices are
unmanaged and while these indices can be invested in directly, this is neither
a recommendation nor an offer to purchase.
This can only be done by prospectus and should be on the recommendation
of a licensed professional.
Office Notes:
7 Ways To Avoid New
Taxes
Tax planning is even
more important for those with a higher net worth. Why tax the rich? Because they have the money. And a dollar saved on taxes is worth more
than a dollar earned.
If you aren’t able to run zigzag around tax planning, you will be easier for our legislative snipers to pick off. There is still time between now and year-end for massive tax planning. Here are seven strategies to hide and stay clear of the new tax structure:
1. Convert the optimum amount of your IRA to a Roth before the end of the year. Use segregated Roth accounts. You can always recharacterize any amount you decide you shouldn’t have converted in the first place.
2. Plan for Roth conversions during your gap years. Between retirement (age 65 or 66) and when you have to start taking required minimum distributions (age 70 1/2) you may have little or no income. This is another tax-planning opportunity.
3. Place your investments in the appropriate investment vehicles. Understand which assets belong in a Roth, taxable or traditional retirement account. This can boost your after-tax returns by as much as 1%.
4. Consider postponing your charitable giving until January 2013. This will increase your taxable income this year while your rates are low and decrease your taxable income next year when the rates are higher. Whichever year you do your charitable giving, gift appreciated stock.
5. Analyze your unrealized capital gains before the end of the year. Capital gains tax changes are very significant and quite complex. They are also changing extensively this year. In some cases there is an optimum amount of capital gains to realize before the end of the year. In other cases you should not realize any. There is much to be gained by careful tax planning for your specific situation.
One strategy for those with taxable income under $70,700 is to purposefully realize some capital gains this year. Any gains that come in under that taxable income limit are taxed in 2012 at a rate of 0%. This is the last year such a rate is offered because the Bush tax cuts will expire at the end of 2012.
6. Fund tax-sheltered accounts. College 529 accounts grow tax free, and withdrawals for qualified educational expenses are also free of tax. Health Savings Accounts are even better. Contributions are made pretax, and withdrawals for qualified medical expenses are free of tax.
Most importantly, fund your Roth accounts to the maximum extent possible. Money saved and invested in a Roth account is like being lowered in the first lifeboat off the Titanic. You can save in a Roth IRA, as part of a Roth 401(k) or in a nondeductible IRA that is then converted to a Roth IRA. Talk with your advisor to determine which choice is best in your situation.
7. If you run a small business, consider employing your dependent children. This strategy reduces the income taxed at your high marginal rate and realizes income at your children’s lower marginal rate. If your children then pay for some of their own expenses, the family is paying with dollars that haven’t been taxed as much. For example, children can buy their own clothes, electronics, food, etc.
If you aren’t able to run zigzag around tax planning, you will be easier for our legislative snipers to pick off. There is still time between now and year-end for massive tax planning. Here are seven strategies to hide and stay clear of the new tax structure:
1. Convert the optimum amount of your IRA to a Roth before the end of the year. Use segregated Roth accounts. You can always recharacterize any amount you decide you shouldn’t have converted in the first place.
2. Plan for Roth conversions during your gap years. Between retirement (age 65 or 66) and when you have to start taking required minimum distributions (age 70 1/2) you may have little or no income. This is another tax-planning opportunity.
3. Place your investments in the appropriate investment vehicles. Understand which assets belong in a Roth, taxable or traditional retirement account. This can boost your after-tax returns by as much as 1%.
4. Consider postponing your charitable giving until January 2013. This will increase your taxable income this year while your rates are low and decrease your taxable income next year when the rates are higher. Whichever year you do your charitable giving, gift appreciated stock.
5. Analyze your unrealized capital gains before the end of the year. Capital gains tax changes are very significant and quite complex. They are also changing extensively this year. In some cases there is an optimum amount of capital gains to realize before the end of the year. In other cases you should not realize any. There is much to be gained by careful tax planning for your specific situation.
One strategy for those with taxable income under $70,700 is to purposefully realize some capital gains this year. Any gains that come in under that taxable income limit are taxed in 2012 at a rate of 0%. This is the last year such a rate is offered because the Bush tax cuts will expire at the end of 2012.
6. Fund tax-sheltered accounts. College 529 accounts grow tax free, and withdrawals for qualified educational expenses are also free of tax. Health Savings Accounts are even better. Contributions are made pretax, and withdrawals for qualified medical expenses are free of tax.
Most importantly, fund your Roth accounts to the maximum extent possible. Money saved and invested in a Roth account is like being lowered in the first lifeboat off the Titanic. You can save in a Roth IRA, as part of a Roth 401(k) or in a nondeductible IRA that is then converted to a Roth IRA. Talk with your advisor to determine which choice is best in your situation.
7. If you run a small business, consider employing your dependent children. This strategy reduces the income taxed at your high marginal rate and realizes income at your children’s lower marginal rate. If your children then pay for some of their own expenses, the family is paying with dollars that haven’t been taxed as much. For example, children can buy their own clothes, electronics, food, etc.
Regards,
,
Michael L. Schwartz, RFC®, CWS®, CFS
P.S.
Please feel free to forward this commentary to family, friends, or
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will ask for their permission to be added.
Michael
L. Schwartz, RFC®, CWS®, CFS, offers securities through First Allied
Securities, Inc., A Registered Broker/Dealer, Member FINRA-SIPC. Advisory Services offered through First
Allied Advisory Services, A Registered Investment Advisor.
Schwartz Financial Service is not an
affiliate of First Allied Securities, Inc.
This
information is provided for informational purposes only and is not a
solicitation or recommendation that any particular investor should purchase or
sell any security. The information contained herein is obtained from sources
believed to be reliable but its accuracy or completeness is not
guaranteed. Any opinions expressed
herein are subject to change without notice.
An Index is a composite of securities that provides a performance
benchmark. Returns are presented for
illustrative purposes only and are not intended to project the performance of
any specific investment. Indexes are
unmanaged, do not incur management fees, costs and expenses and cannot be
invested in directly. Past
performance is not a guarantee of
future results.
* The Standard & Poor's 500 (S&P
500) is an unmanaged group of securities considered to be representative of the
stock market in general.
* The DJ Global ex US is an unmanaged group
of non-U.S. securities designed to reflect the performance of the global equity
securities that have readily available prices.
* The 10-year Treasury Note represents debt
owed by the United States Treasury to the public. Since the U.S. Government is
seen as a risk-free borrower, investors use the 10-year Treasury Note as a
benchmark for the long-term bond market.
* Gold represents the London afternoon gold
price fix as reported by the London Bullion Market Association.
* The DJ Commodity Index is designed to be
a highly liquid and diversified benchmark for the commodity futures market. The
Index is composed of futures contracts on 19 physical commodities and was
launched on July 14, 1998.
* The DJ Equity All REIT TR Index measures
the total return performance of the equity subcategory of the Real Estate
Investment Trust (REIT) industry as calculated by Dow Jones.
* Yahoo! Finance is the source for any
reference to the performance of an index between two specific periods.
* Opinions expressed are subject to change
without notice and are not intended as investment advice or to predict future
performance.
* Past performance does not guarantee
future results.
* You cannot invest directly in an index.
* Consult your financial professional
before making any investment decision.
* To unsubscribe from our “market commentary” please reply to this e-mail
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