Schwartz Financial Weekly Commentary 1/14/13

The Markets

Why were investors turning to stocks? Was it the generally strong performance of stock market indices during 2012 or something else? Theories were abundant. Some speculated that the surge signaled:

 

• Renewed confidence in the American economy
• Relief that capital gains and dividend taxes remained constant for middle income Americans
• Faith in the ability of the American government to get things done
• Lack of attractive investment alternatives as the average yield on high-yield bonds fell below 6% for the first time ever

 

There also was much discussion during the week about the contradictory messages coming from the Federal Reserve. The Evan’s Rule, which was named after the head of the Chicago Federal Reserve Bank, was established late in 2012. It ties interest rate guidance to employment and inflation targets rather than calendar dates; a change many had interpreted to mean that monetary policy would remain accommodative into 2014.

 

Interest rates are just one tool the Fed has been using to encourage economic growth. It also has been engaging in quantitative easing (QE) which is purchasing Treasuries on the open market to inject capital into the economy and encourage growth. Last week’s Federal Open Market Committee meeting notes indicated there was discussion among Fed members about ending quantitative easing earlier than expected, possibly before 2014.

 

So, which is it? Will policy remain accommodative or will it start to tighten? We may not know for sure for some time. The good news, according to Barron’s, is that tightening monetary policy would not be all bad news. “The end of quantitative easing would mean that the Fed sees sustainable economic growth in the U.S. – and globally.”

 

Data as of 1/11/13	1-Week	Y-T-D	1-Year	3-Year	5-Year	10-Year
Standard & Poor's 500 (Domestic Stocks)	0.4%	3.2%	13.9%	8.7%	1.0%	4.7%
DJ Global ex US (Foreign Stocks)	1.0	3.0	19.0	4.3	-0.9	10.6
10-year Treasury Note (Yield Only)	1.9	NA	1.9	3.8	3.8	4.1
Gold (per ounce)	0.6	-2.1	1.4	12.9	13.2	16.7
DJ-UBS Commodity Index	0.6	-0.4	-3.2	-0.8	-6.1	2.0
DJ Equity All REIT TR Index	0.7	2.4	20.6	18.7	7.8	12.2

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.

 

Sage investment advice… Almost two decades ago, the CFA Institute published an article that included a letter from a father who was a financial professional to his daughter. His missive included some timeless and practical advice about investing. Among the thoughts he shared with his daughter were the following principles for investing:

 

·         A fool and his money are soon parted. Pay close attention to financial matters because investment capital is a perishable commodity when not managed properly.

 

·         There is no free lunch. Risk and return are interrelated. Generally, the greater the risk, the greater the potential return and vice versa.

 

·         Know thyself. Be honest in assessing your risk tolerance because it’s easy to underestimate the stress of a high-risk portfolio when markets move south.

 

·         Don’t put all your eggs in one basket. Diversification helps determine potential rates of return and manage exposure to risk. Make sure you have a well-diversified and well-allocated portfolio.

 

·         Take the long view. Make a plan and stay with it. Don’t let short-term market fluctuation or media-fueled frenzies cause you to panic. Investment decisions should result from a rational trade-off of risk and return. Unfortunately, those decisions often reflect fear and anxiety about current events.

 

·         Remember the value of common sense. Investing is not a competitive sport. It should be an effort to achieve a pre-determined financial goal within a specific risk-tolerance framework. No system works all of the time and you should not expect it to.

 

Sound financial advice may prove particularly important during 2013. During the fourth quarter of 2012, markets were volatile as Congress argued fiscal cliff issues. The solution – The American Taxpayer Relief Act of 2012 – resolved matters related to taxation, but left spending issues to be hammered out in the future. As a result, we may see additional volatility during the first few months of this year. If you begin to experience fear and anxiety when listening to news reports or checking market performance, just review the principles above!

 

Weekly Focus – Think About It

 

If you want to be successful, it's just this simple. Know what you are doing. Love what you are doing. And believe in what you are doing.

--Will Rogers, humorist and social commentator

 Value vs. Growth Investing (1/11/13)

Name	1-Week	YTD	4-Week	13-Week	1-Year	3-Year	5-Year
US Market	0.43	3.39	3.57	4.02	16.73	11.46	3.96
Large Cap	0.50	3.35	3.21	2.99	16.64	10.72	3.00
Large Core	0.47	3.27	3.09	4.64	18.00	11.57	4.13
Large Growth	0.72	3.21	2.76	1.88	18.39	11.06	4.40
Large Value	0.29	3.56	3.76	2.54	13.91	9.50	0.22
Mid Cap	0.34	3.53	4.48	7.04	17.13	13.21	5.97
Mid Core	0.40	3.52	4.00	7.82	17.95	15.01	7.74
Mid Growth	0.40	3.30	4.34	5.87	15.55	13.10	4.14
Mid Value	0.22	3.79	5.08	7.54	18.03	11.45	5.94
Small Cap	-0.05	3.47	4.89	6.55	16.46	13.38	7.71
Small Core	-0.17	3.18	4.90	7.46	16.09	12.32	7.57
Small Growth	0.71	3.77	5.32	5.44	15.36	14.45	6.07
Small Value	-0.64	3.51	4.49	6.77	18.05	13.37	9.55
US Core	0.41	3.32	3.41	5.46	17.91	12.40	5.18
US Growth	0.66	3.26	3.24	2.88	17.57	11.80	4.52
US Value	0.21	3.61	4.07	3.82	15.02	10.15	1.97

©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:

 

Even though tax rates did not increase for most,                 you probably will pay more in taxes

 

Even though your tax rate may have stayed the same, you really should plan to have an increased tax bill.

 

On January 2, 2013 President Barack Obama signed the American Taxpayer Relief Act (ATRA) into law. Chances are this was pretty good news for you. Although the ATRA does create a new 39.6% tax bracket, this bracket is only expected to impact about 2% of all taxpayers. But just because your ordinary tax rate doesn’t increase in 2013 doesn’t mean you won’t pay more tax this year. In fact, most estimates show that anywhere between 75% and 80% of all taxpayers will pay more tax in 2013 than they did in 2012. Here’s a few reasons why that could be the case for you.

2% Payroll Tax Increase
As part of the 2010 Tax Act passed several years ago, Congress created the so-called payroll tax holiday for 2011, dropping the Social Security tax on wages from 6.2% to 4.2% and on self-employment income from 12.4% to 10.4%. The tax break was later extended through 2012. ATRA did not extend this benefit, so expect your next paycheck to be a little lighter than it was last year. If you and your spouse are both working and each make $100,000, this change will cost you an extra $4,000 in taxes this year. That’s almost a full year’s IRA contribution.

3% Overall Itemized Deduction Limitation is Back
Another way you may pay more tax is through the reinstatement of the “Pease” limitation (named after Donald Pease - the congressman who helped create it), or so-called 3% “haircut.” The Pease limit is a limit on your overall itemized deductions that could reduce your itemized deductions by up to 80%. This is not a new provision, but it had been phased out of the law since 2010. The rule works by eliminating three cents of itemized deductions for every dollar of income you have over your particular threshold. If you’re a single filer the threshold is $250,000 of adjusted gross income (AGI) and if you’re married and file a joint return the threshold is $300,000 of AGI.

Personal Exemption Phase-Out is Back
Beginning in 2013, your personal exemptions ($3,900 for 2013) could, once again, be phased-out. This will impact you if you’re a single filer with more than $250,000 of AGI or a married-joint filer and have more than $300,000 of AGI. If you happen to be in the new 39.6% tax bracket, the loss of just a single exemption could mean over $1,500 in additional taxes. If you’re married with two children, the loss of your cumulative personal exemptions could cost you almost $6,200 in additional taxes for 2013.

And if you think that’s it, think again. There are a host of other ways you might pay more tax this year than last without seeing your ordinary rates increase, including the new 0.9% Medicare surtax and the 3.8% surtax on net investment income that begin to hit certain high income persons this year. Bottom line? Even if you’re tax rate didn’t increase this year, you might want to plan for a higher tax bill and adjust your plans accordingly.

 

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.

 

* Past performance does not guarantee future results.

 

* You cannot invest directly in an index.

 

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