The Markets
The man with his finger on the pulse says the U.S. economy faces
two main risks. We have no control over one of those risks and the other, well,
we do have some control, but whether our politicians will appropriately
exercise that control is a big question.
Federal Reserve Chairman Ben Bernanke faced Congress last
week and he delivered a rather subdued outlook in his semi-annual monetary
policy report. He said our economy faces two major headwinds:
1. The
Euro-area fiscal and banking crisis and its potential spillover effects on our
economy.
2. The
unsustainable path of the U.S. fiscal situation (e.g., the “fiscal cliff”).
Source: Federal Reserve
The U.S. has little control over the euro-area situation so
we’re at the mercy of European leaders to make bold and tough decisions to get
their houses in order. The second item, though, is clearly within our control.
The so-called fiscal cliff, in which a series of tax hikes
and spending cuts will take effect in 2013 if Congress takes no further action,
could throw the economy back into a recession. The Congressional Budget Office
estimates if no policy changes are made, then our 2013 federal budget deficit
will decline by about $600 billion. On the surface, that sounds great. However,
such a huge shock to our system in a short period of time could be problematic.
So, will Congress agree to adjust the legislation for the
benefit of the economy? We’ll see.
For his part, Bernanke said the Federal Reserve “is prepared
to take further action as appropriate to promote a stronger economic recovery
and sustained improvement in labor market conditions in a context of price
stability.” It’s good to know that the Fed is ready to help if needed.
Data as of 7/20/12
|
1-Week
|
Y-T-D
|
1-Year
|
3-Year
|
5-Year
|
10-Year
|
|
Standard
& Poor's 500 (Domestic Stocks)
|
0.4%
|
8.4%
|
2.8%
|
12.7%
|
-2.3%
|
5.2%
|
|
DJ
Global ex US (Foreign Stocks)
|
0.6
|
0.5
|
-16.9
|
3.3
|
-7.8
|
5.6
|
|
10-year
Treasury Note (Yield Only)
|
1.5
|
N/A
|
2.9
|
3.6
|
5.0
|
4.6
|
|
Gold
(per ounce)
|
-1.2
|
0.1
|
-0.6
|
18.3
|
18.3
|
17.2
|
|
DJ-UBS
Commodity Index
|
4.2
|
3.9
|
-11.1
|
6.3
|
-3.4
|
3.8
|
|
DJ
Equity All REIT TR Index
|
-1.1
|
16.0
|
9.5
|
31.4
|
2.7
|
12.1
|
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, 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.
IT’S BEEN ALMOST A YEAR since
August 5, 2011, the day the U.S. lost its coveted AAA credit rating from
Standard and Poor’s. So, how have the financial markets responded in the year
since? Quite well, actually.
It may not feel like it, but the broad U.S. stock market, as
measured by the S&P 500 index, rose 13.6 percent between August 5, 2011 and
last Friday, according to data from Yahoo! Finance. Despite all the angst from
the credit downgrade, the threat of a double-dip recession and the turmoil in
Europe, the stock market has hung in there.
The returns in the bond market are perhaps even more
startling. The 10-year Treasury yielded 2.56 percent on August 5, 2011 and by last
Friday, the yield had dropped to 1.46 percent, according
to Yahoo! Finance. Normally, you might expect interest rates to rise
after a credit downgrade since the ratings agency is essentially saying your
bonds are riskier than previously thought.
The U.S., though, is perhaps a “special” case. The day after
the credit downgrade, none other than Warren Buffett went on Bloomberg
television and said he thought the U.S. should be a “quadruple A” rating. And,
to this day, the U.S. dollar remains the world’s leading reserve currency as
more than 60 percent of the world’s foreign currency reserves are held in U.S.
dollars, according to BusinessWeek.
We shouldn’t get overconfident, though. While the U.S. has
tremendous assets, it might only take a few bad decisions from our leaders to
undo what took decades to build.
Weekly Focus – Think About It…
“There is nothing wrong with America that the faith, love of
freedom, intelligence, and energy of her citizens cannot cure.”
--Dwight D. Eisenhower, 34th president of the United States
Value vs. Growth Investing (7/20/12)
|
0.36
|
9.40
|
0.63
|
-1.08
|
3.76
|
15.58
|
0.23
|
|
|
0.50
|
10.22
|
0.83
|
-0.25
|
6.20
|
14.54
|
-0.04
|
|
|
0.04
|
10.36
|
0.91
|
-0.50
|
8.02
|
13.98
|
1.43
|
|
|
1.04
|
14.44
|
1.31
|
-0.49
|
8.42
|
16.28
|
2.05
|
|
|
0.36
|
6.16
|
0.22
|
0.22
|
1.99
|
13.40
|
-3.86
|
|
|
0.24
|
7.07
|
-0.08
|
-3.77
|
-2.55
|
18.09
|
0.37
|
|
|
0.51
|
8.03
|
-0.02
|
-3.02
|
1.16
|
19.80
|
1.37
|
|
|
0.08
|
7.80
|
-0.12
|
-4.63
|
-6.29
|
18.04
|
0.62
|
|
|
0.15
|
5.41
|
-0.10
|
-3.75
|
-2.48
|
16.32
|
-1.19
|
|
|
-0.85
|
7.30
|
0.60
|
-2.23
|
-3.18
|
18.16
|
1.67
|
|
|
-0.90
|
7.20
|
1.03
|
-2.83
|
-5.92
|
17.02
|
0.24
|
|
|
-0.63
|
7.45
|
0.51
|
-2.11
|
-3.76
|
17.10
|
1.91
|
|
|
-1.01
|
7.26
|
0.25
|
-1.72
|
0.46
|
20.40
|
2.62
|
|
|
0.06
|
9.71
|
0.74
|
-1.13
|
5.74
|
15.46
|
1.50
|
|
|
0.75
|
12.60
|
0.98
|
-1.44
|
4.47
|
16.80
|
1.81
|
|
|
0.22
|
6.09
|
0.16
|
-0.73
|
0.94
|
14.48
|
-2.86
|
©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:
Have You Heard the News?
On Thursday, June 28th,
the Supreme Court ruled on the healthcare law sponsored by President
Obama. The decision was a close one, but
in the end the vast majority of the law was affirmed as constitutional. 1 This means that it can now move forward
without further obstacles, at least until after the election. It also means profound changes will be taking
place in this country. It’s possible
that some of these changes might have an effect on you.
Just in case you don’t know, the law
I’m referring to is the “Affordable Care Act.”
It was passed by Congress back in 2010, then signed by President Obama
shortly after. Because the law sought to
make sweeping changes to the private health care industry as well as public
health programs, it started an intense debate that has continued to this day.
After the ruling, that debate is unlikely
to die any time soon.
Because of the changes that will now
take place, a lot of my clients have started asking me questions—what the law
is, what it does, and why all the fuss.
Part of my job as a financial advisor is to keep you informed about news
that could impact you, so I’ve decided to write down my response in Question
and Answer format. Please read the “Six
Questions and Answers about the Affordable Care Act” attached to this article. As you do, keep in mind that we all have
different political beliefs. It’s not my
intention to pass judgment on the law or the Supreme Court’s ruling. I simply want to present you with the facts
as best I can. Please feel free to check
the list of sources provided at the bottom.
Regardless of how you feel about the
healthcare law, it’s possible it could affect your finances. There’s no telling what will happen after the
election this November, but in the meantime, I believe we should act as if the
law is permanent. To that end, the best
thing to do is determine if we need
to make any changes. Since it will be a
year or more before much of the new law goes into effect, there’s time to plan
ahead. Change can be an unsettling thing
for people … but together we can find solid ground.
So let’s talk. To discuss the financial ramifications of the
Affordable Care Act, please call my office at 215-886-2122. I look forward to hearing from you.
Six Questions and Answers about the Affordable Care
Act
Q: What is the Affordable Care Act, and why was it created?
A: To quote the Supreme Court’s ruling,
the Affordable Care Act is designed to “increase the number of Americans
covered by health insurance and decrease the cost of health care.”1 Why?
Because according to the US Census Bureau, 49.9 million Americans were
uninsured in 20102, and a 2009 study found that almost 45,000 people
die every year due to a lack of coverage.3 The number is disputable, but no matter what
political party you belong to, everyone agrees that it’s easier to pay for
health care if you have insurance
than if you’ve got none. Where people disagree, however, is over what role, if
any, the government should have in tackling the issue.
Another argument for the bill was
because some estimates suggest that overhauling the nation’s health care could
reduce the national deficit by $210 billion over the next 10 years. The thinking here is that the government
would spend about $1 trillion to provide subsidized insurance to low- and
middle-income families during the next decade.
But the law has a combination of cost-cutting measures as well as tax
increases (we’ll cover those in a minute), that proponents believe will result
in a lower deficit.4
Q: So what exactly does the Affordable Care Act do?
A: There are far too many provisions in
the law to list here, but a few of the most talked-about aspects are as
follows: 5
-
The
individual mandate. This
is a requirement that all Americans have or buy health insurance. In effect it means that anyone without health
insurance will have to pay a fine.
However, there are exceptions for people who belong to certain
religions, or fall in specific income levels.
Starts in 2014.
-
The
employer mandate. This
will require all businesses with over 50 full-time employees provide health
insurance. Starts in 2014.
-
Guaranteed
coverage for children with pre-existing conditions. This means that no insurance company can deny
coverage to a child who has a pre-existing medical condition. Basically, this ensures that all children in
the United States will have health care coverage. Starts
now.
-
Children
can stay on their parent’s plans until age 26. Starts
now.
-
Expansion
of Medicaid. This
involves broadening the eligibility requirements for people on Medicaid. It also stipulates that states opting out of
this expansion will be denied Medicaid funding from the Federal
government. However, the Supreme Court
found this last part unconstitutional.
More in a moment.
Q: So why is the bill so divisive?
A: There are a number of things that
have stirred up debate, but the single most contested part of the bill has been
the individual mandate. To put it simply, opponents of the
mandate claim that it is unconstitutional for the federal government to force
its citizens to buy anything, including health insurance. On the other side, those who back the mandate
argue that people who do not have insurance actually contribute to higher
premium prices. This is because sick
people without insurance can still be treated at some hospitals and care
centers. This care may be provided free
of charge for the sick person, but it still costs money—and the costs are
“often shifted to insured populations in the form of higher charges by
providers, which in turn leads to higher premiums.”6
Q: So what happened on Thursday, June 28th? What does the Supreme Court have to do with
anything?
A: First, a little bit of
background. Before the bill became a
law, it was voted on in Congress along strict party lines. Almost every Democrat voted for the bill;
almost every Republican voted against it.
In the end, the bill passed due to the Democrats holding a slim majority
in Congress.
The bill had been controversial from
the start, so it was all but guaranteed that it would be challenged in
court. That’s exactly what happened. According to the Supreme Court ruling,
“Twenty-six States, several individuals, and the National Federation of
Independent Business”1 filed a lawsuit in Federal District Court,
“challenging the constitutionality of the individual mandate and the Medicaid
expansion.”1 Eventually, the case came before the Supreme Court, who
agreed to review it late last year.
Since
then, the case has been watched closely.
The Supreme Court consists of nine justices, headed by Chief Justice
John Roberts. Four of the Justices,
including Roberts, are generally considered to have conservative leanings,
while another four are usually thought of as more liberal. The ninth Justice, Anthony Kennedy, is often
referred to as a swing vote, meaning he has no concrete political ideology.7 Because of this, many experts thought the
final decision would be a close one.
They were right.
On
Thursday, the Supreme Court finally released its ruling. The individual mandate was affirmed to be
constitutional, while the portion of the Medicaid expansion threatening states
with a denial of funding was stricken down as unconstitutional. The final
vote ended up being a 5-4 decision, with Chief Justice Roberts surprising many
by ruling in favor of the mandate.
Q: What was the thinking behind the Supreme Court’s
ruling?
A: The Supreme Court’s job was to
determine whether Congress has the right under the Constitution to impose a
legal mandate and expand Medicaid.
According to the ruling, the law was “affirmed in part and reversed in part.”1 The individual mandate was found to be
constitutional because Congress planned to enforce it by levying a financial
penalty on all those who do not have health insurance. According to Chief Justice Roberts, this
penalty is the same as a tax. Said
Roberts, “The individual mandate must be construed as imposing a tax on those
who do not have health insurance.”1
As the Constitution specifically grants Congress the power to “lay and
collect” taxes, the individual mandate is therefore constitutional.
The provision for expanding
Medicaid, however, is partly unconstitutional.
While Congress could expand Medicaid in general, they could not
“[threaten] States with the loss of their existing Medicaid funding if they [the
States] decline to comply with the expansion.”1 This is because the Constitution gives
Congress the power to “establish cooperative state-federal programs” but “a State
[must] voluntarily and knowingly accept the terms of such programs.”1 Since the Constitution does not give Congress
the authority to require states
accept the terms of such programs, they could not withdraw state funding.
Q: So how does this news affect my finances?
A: There are two basic ways:8
Individual mandate: First off is the requirement to have
health insurance. If you already have
insurance, then you don’t need to worry about this part of the law. But if you don’t, you will need to either buy
it or pay a penalty. In 2014, the
penalty will be $285 per family or 1% of income, whichever is greater. In 2015, the penalty increases to $965 or 2%
of income. By 2016, the number rises to
$2,085 per family, or 2.5% of income, whichever is greater. The only exemptions are for members of
certain religious groups, or those with very low incomes.
Medicaid payments: To help pay for the expansion of Medicaid,
individuals making more than $200,000 a year (or $250,000 if married) will
start having to pay an extra 0.9% of their income towards Medicaid taxes. (Currently, all workers in the US pay 1.45%
of their wages into Medicaid.) In
addition, a new 3.8% tax will be levied on investors. Starting next year, 3.8% of investment
income, whether from capital gains or dividends, will be paid into the Medicaid
program.
Sources:
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.
* Past performance does not guarantee
future results.
* You cannot invest directly in an index.
* Consult your financial professional
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