Schwartz Financial Weekly Commentary 5/12/14

 

Schwartz Financial Weekly Commentary

May 12, 2014

 

The Markets

 

“Gonna take a sentimental journey…Gonna set my heart at ease…Gonna make a sentimental journey…To renew old memories.” If you’re a fan of Ella Fitzgerald or Frank Sinatra, then you probably recognize these lyrics. Although we rarely think of them as such, the ups and downs of stock and bond markets are sentimental journeys. They reflect the thoughts and attitudes of investors toward particular companies, investments, and markets. Investopedia explains it like this:

 

“Market sentiment is the feeling or tone of a market, or its crowd psychology, as revealed through the activity and price movement of the securities traded in that market. For example, rising prices would indicate a bullish market sentiment, while falling prices would indicate a bearish market sentiment. Market sentiment is also called "investor sentiment" and is not always based on fundamentals.”

 

The American Association of Individual Investors (AAII) measures investor sentiment by polling their membership each week. The long-term average is 39 percent bullish, 30.5 percent neutral, and 30.5 percent bearish. Last week, 28.3 percent of its members were bullish, 28.7 percent were bearish, and 43 percent were neutral.

 

According to Yahoo! Finance, that’s the highest level of investor neutrality in more than a decade and may indicate a sharp move up or down is coming soon. “Going back to 2005, AAII neutral sentiment has pushed to 38 on four distinct prior occasions… Looking at the S&P 500 a month later showed greater than 4 percent moves each time over the subsequent 30 days.”

 

The article, which was published last week, failed to mention the AAII neutral sentiment measure has surpassed 38 on eight occasions since the start of 2014. A quick inspection of S&P 500 pricing indicates markets have moved by 1 to 6 percent during the subsequent month (although we are not yet 30 days from some of those dates). Regardless of the number of times investor neutrality has pushed to 38 or above, or the sharpness of the subsequent market moves, not all of those moves have been in the same direction so it’s hard to predict what this bout of neutral sentiment may indicate.

 

Data as of 5/9/14	1-Week	Y-T-D	1-Year	3-Year	5-Year	10-Year
Standard & Poor's 500 (Domestic Stocks)	-0.1%	1.6%	15.5%	11.7%	15.6%	5.6%
10-year Treasury Note (Yield Only)	2.6	NA	1.8	3.1	3.2	4.8
Gold (per ounce)	0.8	7.5	-11.9	-4.9	7.2	13.2
DJ-UBS Commodity Index	-0.7	8.0	0.3	-5.8	2.4	-0.9
DJ Equity All REIT TR Index	1.4	14.4	1.5	11.0	22.5	10.9

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.

 

double, double, toil, and trouble… During the twentieth century, the world’s population doubled not once, but twice. While it is not expected to double again in this century, according to The Economist, the number of older people is expected to double. By 2035, 13 percent of the world’s population – about 1.1 billion people – will be age 65 or older. Assuming no major diseases, disasters, or world wars, demographers at the United Nations predict the global population will reach nine billion by 2045. That’s a lot of people!

 

Demographic changes are likely to have a powerful effect on global economies. In the United States, the leading edge of the Baby Boom generation is entering retirement. According to National Geographic:

 

“The end of a baby boom can have two big economic effects on a country. The first is the “demographic dividend” – a blissful few decades when the boomers swell the labor force and the number of young and old dependents is relatively small and there is thus a lot of money for other things. Then the second effect kicks in: The boomers start to retire. What had been considered the enduring demographic order is revealed to be a party that has to end. The sharpening American debate over Social Security and last year’s strikes in France over increasing the retirement age are responses to a problem that exists throughout the developed world: how to support an aging population.”

 

The old-age dependency ratio, which compares the number of older people (above age 64) in a country to the working population (people aged 15 to 64), was 20:100 in the United States during 2012. By 2035, the United Nations predicts the ratio will be 44:100. How will our aging population affect economic growth? Some economists believe economic growth will slow in countries with high ratios; others say that older, well-educated people will work longer and retire later so aging will have little effect. A third group anticipates persistent economic stagnation. So, what can we expect? It all depends on “changes in the size of the workforce; changes in the rate of productivity growth; and changes in the pattern of savings.” Stay tuned!

 

Weekly Focus – Think About It

 

“It seems essential, in relationships and all tasks, that we concentrate only on what is most significant and important.”

--Soren Aabye Kierkegaard, Danish philosopher and theologian

 

Value vs. Growth Investing (5/9/14)

Name	1-Week	YTD	4-Week	13-Week	1-Year	3-Year	5-Year
US Market	-0.24	1.97	0.05	4.54	17.90	14.02	18.06
Large Cap	-0.03	2.27	0.56	4.98	17.55	14.33	17.10
Large Core	0.70	3.39	0.40	6.45	17.41	16.33	17.82
Large Growth	-0.44	0.69	0.57	1.97	19.40	14.89	18.62
Large Value	-0.30	2.84	0.70	6.81	15.91	11.87	15.02
Mid Cap	-0.63	2.20	-0.84	3.79	19.23	13.53	20.66
Mid Core	0.20	4.08	-0.01	4.85	18.87	14.46	21.81
Mid Growth	-1.54	-1.08	-2.41	-0.66	15.90	10.42	19.31
Mid Value	-0.45	4.00	0.08	7.84	23.36	15.85	20.83
Small Cap	-1.47	-1.86	-2.77	1.97	17.58	11.99	20.14
Small Core	-0.95	-0.11	-2.30	3.79	17.60	11.19	19.63
Small Growth	-2.78	-6.93	-4.85	-3.09	16.87	10.48	19.31
Small Value	-0.75	1.40	-1.27	5.15	18.21	14.33	21.37
US Core	0.48	3.28	0.13	5.94	17.69	15.62	18.80
US Growth	-0.81	-0.17	-0.38	1.11	18.52	13.67	18.84
US Value	-0.36	2.97	0.43	6.90	17.60	12.84	16.60

 ©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:

 

Handling Distributions During Emotionally Difficult Times

 

 

Upon inheriting a traditional Individual Retirement Account (IRA) or assets from another retirement plan, you’ll need to make important decisions by deadlines that can easily slip by during emotionally difficult times.

 

These decisions will hinge on personal circumstances and factors that can be complex. Failing to act on time could have long-term repercussions and cost you serious money.

 

Start by getting together your paperwork – including the beneficiary designation form for the inherited account. If you’re inheriting assets in a retirement plan account, you’ll need the “plan document” from the employer.

 

 You’ll also need to hunt down your deceased benefactor’s last Form 8606, which will indicate whether part of your withdrawals from the plan will include tax-free return of non-deductible contributions. You may need help sorting out your options, but you must always keep the following deadlines in mind:

 

Within nine months from date of death, file a disclaimer if you so choose. Suppose you’ve inherited the IRA from your late husband. Meeting this deadline allows you, as primary beneficiary, to give up all or part of your interest in the IRA. But why forfeit those assets?

 

 It could help reduce estate taxes and leave more to your child or grandchild. When you disclaim an IRA, assets pass to a contingent beneficiary such as your child or maybe a charity.

 

Dec. 31 of the year of death is the date by which you may need to take a distribution. If the IRA owner had started taking required distributions after turning 70½ but did not take the distribution for the year he or she died, you must withdraw the full required amount or pay a penalty of 50 percent of the amount that should have been withdrawn.

 

Sept. 30 of the year following the death is the deadline for splitting the IRA into separate shares or accounts if multiple primary beneficiaries were named on the account. This is advantageous if a non-spouse inherits the IRA: He or she can take withdrawals over his or her individual life expectancy, which could reduce the size and tax consequences of mandatory distributions.

 

This date also ends the period during which beneficiaries can disclaim or cash out their portions of the account. A charity is likely to withdraw its share because it won’t be taxed. Beyond this date, the IRA document’s rules – which may be less favorable than IRS rules, particularly for non-spouses – govern how the inherited account will be paid out to beneficiaries.

 

However, this is not a deadline for the surviving spouse to decide whether to leave the IRA in the deceased’s name or place the assets in the survivor’s account. A spouse can make that choice at any time.

 

Oct. 31 of the year following death is the deadline for the trustee (if a trust is beneficiary) to send the IRA custodian either a copy of the trust document or a certification of the trust’s beneficiaries and their rights to the IRA.

 

Dec. 31 of the year following death is the deadline by which many inheritors must take their first distribution from the account or suffer the 50 percent penalty. If an account that has co-beneficiaries is not split by this date, the younger inheritors will forever have to receive larger than necessary withdrawals. This could deplete the account faster than otherwise.

 

If you’ve inherited a Roth rather than traditional IRA, keep in mind a few things.

 

All Roth IRA contributions are non-deductible, and all of the contributions are basis and can be withdrawn tax-free. The earnings also can be withdrawn tax-free as long as the account was held for more than five years (including the time it was held by the person from whom you inherited it). Say, for example, you inherit a Roth IRA in 2009 from your uncle. He first contributed to it in 2007 and died in 2009. All distributions or contributions are tax-free whenever they are withdrawn, but the income is not tax-free until 2012 when the Roth IRA will have been held for more than five years.

 

The bottom line: Know there are deadlines, act in a timely manner and seek professional advice if needed.

 

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, a registered principal offering securities and advisory services through Independent Financial Group, LLC., a registered broker-dealer and investment advisor.  Member FINRA-SIPC. Schwartz Financial and Independent Financial Group are unaffiliated entities.

 

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.

 

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