Schwartz Financial Weekly Commentary 3/18/13

Schwartz Financial Weekly Commentary

March 18, 2013

 

The Markets

Like winded runners, stock markets slowed at the end of last week.   

 

Since the start of the year, the Dow Jones Industrials Index has risen by almost 11 percent, hurdling past new highs several times. The S&P 500 Index gained 9.4 percent over the same period. The index moved higher in 10 of the past 11 weeks and finished last week just shy of its all-time high. However, the Dow and the S& P’s momentum – and that of some other U.S. stock markets – slowed on Friday as stronger economic data was offset by an unexpected slump in consumer sentiment.

 

Economists expected the Thomson Reuters/University of Michigan consumer sentiment index – which gauges Americans’ feelings about their current financial health, the health of the economy over the shorter-term, and growth prospects for the economy over the longer-term – to move higher in March. Instead, the index fell from 77.6 to 71.8, reaching its lowest level since December 2011. Markets fell on the news even though the negative results contradicted those of other consumer confidence measures, such as Bloomberg’s Consumer Comfort Index which has moved higher for six consecutive weeks.

 

The consumer sentiment surprise also pushed Treasury yields down. Yields on benchmark 10-year Treasury notes fell to 2 percent. The Treasury market remains concerned that stronger economic data could lead the Federal Reserve to change its policy on quantitative easing. The Federal Reserve’s next Open Market Committee meeting is next week, and may provide further insight to the matter.

 

Data as of 3/15/13	1-Week	Y-T-D	1-Year	3-Year	5-Year	10-Year
Standard & Poor's 500 (Domestic Stocks)	0.6%	9.4%	11.3%	10.7%	4.1%	6.1%
10-year Treasury Note (Yield Only)	2.0	N/A	2.3	3.7	3.3	3.8
Gold (per ounce)	0.9	-5.8	-3.2	13.1	9.6	16.7
DJ-UBS Commodity Index	0.8	-0.5	-5.0	1.8	-7.7	1.7
DJ Equity All REIT TR Index	0.5	6.7	17.6	17.8	8.0	12.6

Notes: S&P 500, 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, Barron’s, 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 middle class is growing. In the United States, households that earn between $35,600 a year and $94,600 a year are considered to be middle class. That’s about 40 percent of U.S. households (another 40 percent earn less than the middle class and 20 percent earn more). Scholars and pundits have noted that job insecurity and stagnant income levels have weakened the middle class in the United States during the past few years, but that’s not what’s happening in the rest of the world.

 

The global middle class has been growing and is expected to continue to grow over the next few decades. The Organization for Economic Development defines the global middle class as including people earning between $10 and $100 a day with purchasing power parity. (Purchasing power parity is the theory that currency exchange rates should adjust so the same goods cost the same in different countries. It’s what the Big Mac Index measures.) By 2030, according to Ernst & Young, the global middle class is expected to more than double, adding three billion new members. These up-and-comers primarily will live and work in rapidly-growing countries.

 

As the global middle class grows so should its spending power. Between 2011 and 2030, middle class demand for goods and services is expected to increase from $21 trillion to $56 trillion. Forty percent of that spending will be done by the burgeoning middle class in Asia, including China and India. According to Forbes, these consumers are creating demand for all kinds of goods and services including cosmetics, automobiles, cell phone minutes, personal banking, and retirement planning.

 

For many decades, consumer spending has been an important driver behind economic growth in the United States. It’s likely to play a significant role in the economic growth of emerging countries, too. As developing countries become developed countries, interesting opportunities for investment are likely to emerge.

 

Weekly Focus – Think About It

 

“A man who carries a cat by the tail learns something he can learn in no other way.”

--Mark Twain, American author and humorist

Value vs. Growth Investing (3/15/13)

Name	1 week	YTD	4 week	13 week	1 year	3 year	5 year
US Market	0.70	10.34	2.91	11.62	14.06	13.47	6.91
Large Cap	0.59	9.51	2.89	10.47	13.40	12.83	5.96
Large Core	0.71	11.60	3.31	12.05	17.10	13.97	7.17
Large Growth	0.24	6.56	1.92	7.94	8.01	12.35	6.90
Large Value	0.84	10.75	3.51	11.71	15.66	12.25	3.65
Mid Cap	0.85	12.39	2.89	14.30	15.48	15.11	8.85
Mid Core	0.80	12.28	2.55	13.90	16.16	17.21	9.98
Mid Growth	0.08	10.39	2.18	12.47	10.99	14.38	7.30
Mid Value	1.68	14.59	3.97	16.58	19.53	13.65	9.16
Small Cap	1.36	13.04	3.20	16.10	16.72	14.84	10.57
Small Core	1.53	13.02	3.50	16.24	16.09	14.02	9.67
Small Growth	0.57	11.82	2.93	15.18	14.06	15.51	10.11
Small Value	1.92	14.23	3.14	16.79	20.11	14.94	11.82
US Core	0.79	11.85	3.16	12.74	16.93	14.71	8.04
US Growth	0.23	7.64	2.04	9.28	8.96	13.05	7.25
US Value	1.09	11.76	3.58	13.03	16.72	12.72	5.31

©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:

What Tax-Advantaged Alternatives Do I Have?

A strong savings program is essential for any sound financial strategy.

We take Benjamin Franklin’s saying to heart, “A penny saved is a penny earned,” and we save our spare cash in savings accounts and certificates of deposit.

Investors who’ve accumulated an adequate cash reserve are to be commended. But as strange as it sounds, it is possible to save too much. Although this may not sound like much of a problem, it can be if you save too much of what you should be investing.

You see, many investors simply put their savings into the most convenient and stable financial instrument they can find. Often that turns out to be certificates of deposit (CDs). The benefits of CDs are that they are FDIC insured (up to $250,000 per depositor, per federally institution) and generally provide a fixed rate of return.

Unfortunately, placing all your savings in taxable instruments like certificates of deposit can create quite an income tax bill.

In an effort to help provide stability, some investors inadvertently produce a liability. It’s a bit like turning on all the taps in your house just to make certain the water is still running. Sure, you’ll know that the water is still running, but a lot of it will go down the drain. The solution is simply to turn off some of the taps.

A number of financial instruments can help you to defer or eliminate income taxes. By shifting part of your cash reserves to some of these instruments, you can keep more of your money working for you and turn off the taps that hamper your money’s growth.

You can consider a number of tax-advantaged investments for at least a portion of your savings portfolio.

One possibility is a fixed annuity contract. A fixed annuity is a retirement vehicle that can help you meet the challenges of tax planning, retirement planning, and investment planning. Fixed annuity contracts accumulate interest at a competitive rate. And the interest on an annuity contract is usually not taxable until it is withdrawn. Most annuities have surrender charges that are assessed in the early years of the contract if the owner surrenders the annuity before the insurance company has had the opportunity to recover the cost of issuing the contract. Also, annuity withdrawals made prior to age 59½ may be subject to a 10% federal income tax penalty. The guarantees of fixed annuity contracts are contingent on the claims-paying ability of the issuing insurance company.

Another tax-exempt investment vehicle is a municipal bond. Municipal bonds are issued by state and local governments and are generally free of federal income tax. In addition, they may be free of state and local taxes for investors who reside in the areas in which they are issued.

Municipal bonds can be purchased individually, through a mutual fund, or as part of a unit investment trust. You must select bonds carefully to ensure a worthwhile tax savings. Because municipal bonds tend to have lower yields than other bonds, the tax benefits tend to accrue to individuals with the highest tax burdens. If you sell a municipal bond at a profit, you could incur capital gains taxes. Some municipal bond interest could be subject to the federal alternative minimum tax. The principal value of bonds may fluctuate with market conditions. Bonds redeemed prior to maturity may be worth more or less than their original cost. Investments seeking to achieve higher yields also involve a higher degree of risk. Bonds are subject to the same inflation, interest-rate, and credit risks. As interest rates rise, bond prices typically fall, which can adversely affect a bond performance.

A number of other tax-advantaged investments are available. Consult with your financial professional to determine which types of tax-advantaged investments may be appropriate for you.

 

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.

 

* This newsletter was prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with the named broker/dealer.

                           

* 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.

 

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