The Markets
Global markets celebrated
the New Year on Wednesday with a rally in appreciation of the U.S. fiscal cliff
agreement, now known as The American Taxpayer Relief Act of 2012 (ATRA). Many
European, Asian, and American markets closed the day sharply higher. The FTSE 100
was up 2.2 percent, Hong Kong’s Hang Seng was up 2.9 percent, Brazil’s Bovespa
was up 2.6 percent, and the Dow Jones Industrials Index was up 2.4 percent for
the day.
While markets
embraced ATRA with unabashed enthusiasm, pundits were less keen on the new law.
They greeted the changes with the excitement – or lack thereof – many readers
reserve for books with cliffhanger endings. That’s because ATRA failed to
resolve key issues related to the fiscal cliff, including automatic spending
cuts and the debt ceiling limit. As a result, Americans can soon expect new additions
to the fiscal cliff series. The next, which may be called the Debt Ceiling
Debacle, will undoubtedly be accompanied by considerable melodrama and bipartisan
bickering.
On Thursday, U.S.
stock markets faltered after the minutes of the Federal Reserve Open Market
Committee meeting were released. The Fed has promised to continue quantitative
easing indefinitely; however, the minutes included considerable discussion
about ending the program during 2013. That notion spooked Treasury investors
and the yield on 10-year Treasuries rose to 1.9 percent.
On Friday, the
unemployment report showed the jobless rate unchanged at 7.8 percent. Stock markets
bounced higher as investors appeared to interpret the news as an indication the
U.S. economy is not yet strong enough for the Fed to end quantitative easing. However,
the news that some at the Fed thought easing should end caused gold to drop to
its lowest in two weeks.
For the week, the
S&P 500 was up 4.6 percent, the Dow Jones Industrials were up 3.8 percent,
and the NASDAQ rose by 4.8 percent.
Data as of 1/4/13
|
1-Week
|
Y-T-D
|
1-Year
|
3-Year
|
5-Year
|
10-Year
|
|
Standard
& Poor's 500 (Domestic Stocks)
|
4.6%
|
2.8%
|
14.8%
|
9.0%
|
0.77%
|
4.9%
|
|
DJ Global
ex US (Foreign Stocks)
|
1.9
|
1.9
|
17.1
|
4.6
|
-1.6
|
10.4
|
|
10-year
Treasury Note (Yield Only)
|
1.9
|
N/A
|
2.0
|
3.8
|
3.9
|
4.0
|
|
Gold (per
ounce)
|
-0.6
|
-2.7
|
2.2
|
13.7
|
14.0
|
16.7
|
|
DJ-UBS
Commodity Index
|
-1.0
|
-1.0
|
-4.7
|
-1.1
|
-6.2
|
2.0
|
|
DJ Equity
All REIT TR Index
|
2.9
|
1.7
|
22.7
|
18.8
|
7.7
|
11.7
|
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.
The Year
in Review
2012
was a surprising year. Although many of the most notable events reflected
ongoing economic and fiscal issues – including crises in the European Union,
slowing growth in China, growing debt in the United States, government
intervention in Brazilian, and worries about fiscal cliff – investors remained
optimistic and many global stock markets delivered rather attractive
performance for the year. Here are a few of the headline events which caught
our attention during 2012:
- China
became an economic power, officially
All debate about when China’s economic importance
would rival that of the United States was put to rest when The Economist added a
section devoted entirely to China. The last time the publication introduced a
new country was 1942. It was devoted to The United States.
- It’s
all relative: the U.S. and global recovery
China’s growing importance did not diminish
the role of the United States. U.S. economic growth may have been modest during
2012, but it was positively robust relative to that of other developed nations.
In fact, the U.S. was called the sole bright spot in global economic recovery.
- Greece?
Really?
Greece’s ATHEX composite index was the top-performing
stock market in Europe during 2012. Despite five years of recession and record
unemployment, it closed about 33 percent higher at year’s end, beating
Germany’s DAX. The ATHEX remained significantly below its previous highs.
- “For
Euro Crisis Relief Bang Head Here”
Bloomberg BusinessWeek’s tongue-in-cheek
headline reflected ongoing frustration with events in Europe. While Europe faces
complicated issues that are likely to take time to resolve, there are reasons
for optimism including the region’s pursuit of a banking union.
- The
Supreme Court did what?
Offering headlines that rivaled the
memorable ‘Dewey Beats Truman,’ both CNN and Fox News misreported the Supreme
Court’s ruling on the Affordable Care Act. The Act remains controversial.
- Like
a phoenix, Bank of America rose from the ashes
After delivering the worst performance in
the Dow Jones Industrial Average during 2011, Bank of America became the best
performer for 2012. One of the biggest beneficiaries was Warren Buffet who stepped
in when no one else would. He invested $5 billion in preferred shares and received
700 million in warrants.
- Not ready for prime time: NFL
replacement officials
Early in the
season, pundits tried to identify the biggest blunders made by the NFL’s
temporary referees each week. It wasn’t easy. From cheap shots to reviews for
teams that had no time outs to the infamous simultaneous catch call, the
temporary refs made fans appreciate the real thing.
- Australian police said Apple Maps can
kill you
Apple maps were
called a lot of things during 2012, but accurate was not one of them. San
Francisco had a French Quarter, Stratford-on-Avon disappeared, and the town of
Mildura moved to the middle of Australia’s Murray Sunset National Park. Since
the park has no water supply, Australian police issued a warning.
Weekly Focus – Think About It
Don't tell people how to do things, tell them what to
do and let them surprise you with their results.
--George S. Patton, U.S. Army general
Happy
New Year!
Value
vs. Growth Investing (1/4/13)
|
4.71
|
2.95
|
4.75
|
1.67
|
17.97
|
11.79
|
3.66
|
|
|
4.56
|
2.84
|
4.21
|
0.44
|
17.39
|
10.97
|
2.77
|
|
|
4.16
|
2.79
|
4.61
|
1.86
|
18.82
|
11.68
|
3.96
|
|
|
4.52
|
2.47
|
2.34
|
-1.48
|
18.85
|
10.93
|
4.00
|
|
|
4.96
|
3.27
|
5.83
|
1.11
|
14.89
|
10.24
|
0.10
|
|
|
4.95
|
3.18
|
6.05
|
5.19
|
19.50
|
13.79
|
5.46
|
|
|
4.86
|
3.10
|
5.35
|
5.84
|
20.33
|
15.72
|
7.16
|
|
|
4.69
|
2.89
|
5.65
|
3.23
|
17.78
|
13.50
|
3.46
|
|
|
5.31
|
3.55
|
7.14
|
6.67
|
20.53
|
12.06
|
5.70
|
|
|
5.56
|
3.53
|
6.73
|
5.01
|
19.69
|
13.90
|
7.14
|
|
|
5.32
|
3.35
|
6.59
|
6.22
|
19.78
|
12.83
|
6.96
|
|
|
5.27
|
3.04
|
6.32
|
2.46
|
17.66
|
14.55
|
5.19
|
|
|
6.10
|
4.17
|
7.25
|
6.38
|
21.70
|
14.28
|
9.33
|
|
|
4.40
|
2.90
|
4.92
|
2.93
|
19.22
|
12.67
|
4.91
|
|
|
4.60
|
2.59
|
3.24
|
-0.32
|
18.53
|
11.79
|
4.03
|
|
|
5.11
|
3.39
|
6.19
|
2.56
|
16.47
|
10.88
|
1.83
|
©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:
Averting the Fiscal Cliff
In the end, it came down to the
wire.
Ever since the November elections,
Congress has worked to avert the “fiscal cliff.” Quick recap: the fiscal cliff is—or would
have been—a series of automatic government spending cuts coupled with the
expiration of the Bush tax cuts. Taken
together, this combination of diminished spending, along with increased tax
revenue, meant that our national deficit would have decreased by $4.5 trillion
over a ten-year period. But it also
might have sent our economy into another recession. Why?
Because the automatic spending cuts would have probably resulted in fewer
federal jobs, increasing unemployment.
Meanwhile, the tax hikes would have lessened the amount of money people
spend on goods and services. For that
reason, both Democrats and Republicans were opposed to seeing us “go over the
cliff.”
But while both parties agreed there
was a problem, neither could agree on a potential solution. As November turned into December, and the
year drew to a close, it looked more and more like gridlock would prevail. Christmas came and went, and still no
deal. The fiscal cliff was due to hit on
January 1st … at midnight.
Enter Vice-President Joe Biden and
Senate Minority Leader Mitch McConnell.
The two men met to personally hammer out a deal on December 31st
(talk about leaving it to the last minute!)
Their agreement was quickly passed in the Democrat-controlled Senate,
then more narrowly in the Republican-dominated House on New Year’s Day.
So here’s what the deal looks like:
Taxes
·
What
Will Happen: Income tax rates will rise to 39.6% for all
individuals making over $400,000 a year, and all families making over
$450,000. No other income tax rates are
affected. What Would Have Happened: Income tax rates would have risen for
everybody.
·
What
Will Happen: Payroll taxes will rise by 2%. What
would have happened: The same. In
2010, a payroll “tax holiday” was enacted that lowered payroll taxes by
2%. It was always due to expire in 2013,
and neither side made any attempt to change that.
·
What
Will Happen: The tax rate on capital gains and dividend
income will rise to 20% (up from 15 %) for individuals making $400,000 a year
and families making $450,000. The rate
remains the same for all those making less.
What Would Have Happened: Taxes
on capital gains would have risen to 20% for everyone, and dividends would have
been taxed as ordinary income.
·
What
Will Happen: The estate tax will rise from 35% to 40%
for estates worth over $5 million. What Would Have Happened: The estate tax
would have risen to 45% for all
estates over $1 million.
·
What
Will Happen: Limits on some tax exemptions and
deductions for individuals making $250,000 a year, and families making over
$300,000. What Would Have Happened: Nothing.
The fiscal cliff had no automatic provisions for changing exemptions or
deductions.
What
the Deal Didn’t Cover
Remember that there were two parts
to the fiscal cliff: tax hikes and spending cuts. For the most part, this deal only covered the
tax portion. The spending cuts, on the
other hand, will be delayed for two months.
The good news is that government departments can avoid painful layoffs
for at least a little longer, helping our unemployment rate. The bad news is that Congress is in for another bruising argument in March, only
two months away. There’s no way to know
what the outcome will be.
Another important topic the deal
didn’t cover is our debt-ceiling. The
debt-ceiling is the maximum amount our government can legally borrow. As of December 31st, we’ve already
reached the limit. Thanks to a few
tricks and loopholes, the government won’t actually exceed the limit until February 28th, but those tricks
are merely a band-aid on the overall problem. Once March rolls around, Congress faces three
options:
·
Raise the debt-ceiling again, which
Republicans do not want to do.
·
Default on their debt, which could lower
our credit rating again, as well as make it harder to borrow money in the
future.
·
Make drastic spending cuts, which is what
the fiscal cliff would have done in the first place.
So what does all this mean for
you?
At the very least, we’ve averted a
second recession … for now. With the
bulk of the tax hikes canceled, consumer spending shouldn’t be affected by too
much. That’s definitely a good thing. And the markets have reacted positively. On January 2nd, 2013, the Dow rose
210 points after opening while the S&P 500 rose 1.8%, and the Nasdaq 2.4%.
Whether those gains last or not depends much on whether Congress can compromise
on spending cuts the way they did on taxes.
But for the long term, massive
problems remain. Our national debt is still
over $16 trillion. The fiscal cliff
would have shrunk our deficit substantially, but the deal provides only $600
billion in new revenue over 10 years. When you consider that our national deficit
for the year 2013 alone is expected
to be 1.1 trillion, those are pretty sobering numbers.
In the end, Washington chose to go
with a short-term solution to fix a short-term problem, leaving the long-term
problems untouched. More decisions need
to be made, and soon. For the moment, we
can all bask in the knowledge that at least Congress got something done, but as long as gridlock remains, so too will
economic uncertainty. And it’s
uncertainty that makes the markets nervous.
Still, we as a country needed to avoid the fiscal cliff. As of right now, it appears that we have.
This is a complex topic. Too complex, in fact, to adequately cover in
a single letter. So if you have any
questions as to how the fiscal cliff deal affects you, or what happens next,
please give me a call. I’d love to speak
to you in person. In the meantime, rest
assured that we’re watching both Washington and the markets closely. If we feel that the aftermath of the fiscal
cliff deal is going to impact your investments, we’ll notify you immediately. In times like this, the best thing to do is
simply be alert. So as 2013 goes on,
that’s exactly what we’ll be.
Regards,
,
Michael L. Schwartz, RFC®, CWS®, CFS
P.S. Please feel
free to forward this commentary to family, friends, or colleagues. If you would like us to add them to the list,
please reply to this email with their email address and we 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.
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