Schwartz Financial Weekly Commentary 8/4/14

Schwartz Financial Weekly Market Commentary

August 4, 2014

 

The Markets

 

Last week, investors took a long look at the crazy quilt of information and events around the world and decided they didn’t like what they were seeing.

 

Geopolitical tensions puckered a lot of seams: Conflict in Ukraine was embroidered with additional sanctions against Russia, difficulty investigating the downed commercial airliner in Ukraine, and escalating anti-American rhetoric in Russia. Violence continued to roil through Middle East and North Africa. In Libya, hostilities escalated, causing many western countries to withdraw diplomats and leading Tunisia to close its border with the country.

 

Financial and economic issues overseas, including ongoing issues with one of Portugal’s largest banks, and worries that European companies will be negatively affected by sanctions against Russia, marred investors’ views, too. In addition, controversy swirled around Argentinian bonds. In the midst of a legal battle over bond repayment, the country missed a June interest payment. The ‘credit event’ triggers a payout of about $1 billion for investors who hold insured Argentine debt.

 

Positive news in the U.S. offered some padding. The U.S. economy continued to recover and gross domestic product increased by 4 percent (annualized) during the second quarter which was a remarkable improvement after first quarter’s contraction. Reuters reported, “Consumer spending growth, which accounts for more than two-thirds of U.S. economic activity, accelerated at a 2.5 percent pace… Despite the pick-up in consumer spending, Americans saved more in the second quarter… which bodes well for future spending.”

 

The Federal Reserve issued a midweek statement confirming economic recovery was continuing apace. It caused some investors to throw what one expert called a ‘taper’ tantrum. Barron’s said, “As the Fed's easy money policies reverse, people are forced to focus more on what they're paying for investments. If last week is any indication, investors didn't like what they saw in their portfolios.”

 

By Friday, U.S. markets had experienced their worst week in two years. As investors adjust to the idea of rising interest rates, markets may experience additional volatility.

 

Data as of 8/1/14	1-Week	Y-T-D	1-Year	3-Year	5-Year	10-Year
Standard & Poor's 500 (Domestic Stocks)	-2.7%	4.2%	12.8%	14.4%	13.9%	5.7%
10-year Treasury Note (Yield Only)	2.5	NA	2.7	2.7	3.6	4.5
Gold (per ounce)	-0.3	7.5	-1.8	-7.3	6.1	12.7
Bloomberg Commodity Index	-1.7	1.1	0.7	-7.9	-0.6	-1.4
DJ Equity All REIT Total Return Index	-1.5	16.0	12.3	11.9	20.5	9.4

S&P 500, Gold, Bloomberg 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 Total Return 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.

 

Just as some science fiction novels describe parallel universes, the Congressional Budget Office (CBO) report entitled The 2014 Long-Term Budget Outlook described alternate realities for the United States, including futures that will be determined by the decisions of our policymakers today and in the future.

 

The CBO reported, “Between 2009 and 2012, the federal government recorded the largest budget deficits relative to the size of the economy since 1946, causing its debt to soar.” A deficit occurs when the government spends more than it takes in. One consequence of recent deficits is the federal debt (the amount of money the United States owes its creditors) is now equal to about 74 percent of the U.S. economy’s gross domestic product (GDP). That’s the highest percent ever except for a short period around World War II.

 

If nothing changes – meaning laws governing taxes and spending remain the same, and the economy recovers as anticipated – deficits are expected to remain relatively low from 2015 through 2018. However, after that, the CBO projects government spending on healthcare programs and interest payments will grow and the federal debt could be 106 percent of GDP by 2039.

 

In an alternate universe, “certain policies that are now in place but are scheduled to change under current law would be continued, and some provisions of law that might be difficult to sustain for a long period would be modified. With those changes to current law, deficits, excluding interest payments, would be about $2 trillion higher over the next decade than in CBO’s baseline.” In that scenario, the debt of the United States balloons, swelling to about 180 percent of GDP by 2039.

 

A more attractive alternative requires deficit reduction measures. Depending on the amount of deficit reduction, the federal debt could diminish and be 42 to 75 percent of GDP by 2039. We can only hope the United States isn’t the country to answer an economic question recently discussed by The Conference Board: How high can debt-to-GDP ratios rise before crippling a nation?

 

Weekly Focus – Think About It

 

“The most difficult thing is the decision to act, the rest is merely tenacity.”

--Amelia Earhart, American aviation pioneer

 

Value vs. Growth Investing (8/1/14)

Name	1-Week	YTD	4-Week	13-Week	1-Year	3-Year	5-Year
US Market	-2.63	4.84	-2.81	2.49	14.60	16.69	17.10
Large Cap	-2.62	5.36	-2.19	2.85	15.18	16.86	16.24
Large Core	-2.76	4.73	-2.54	1.84	12.64	18.73	16.80
Large Growth	-2.11	6.07	-2.11	4.88	21.10	17.09	17.36
Large Value	-3.01	5.31	-1.92	1.80	11.83	14.85	14.65
Mid Cap	-2.64	4.79	-3.81	1.97	14.31	16.62	19.59
Mid Core	-2.45	7.00	-3.25	3.17	16.63	17.82	20.58
Mid Growth	-2.66	1.80	-4.25	1.43	10.93	12.80	18.29
Mid Value	-2.82	5.89	-3.95	1.32	15.73	19.41	19.89
Small Cap	-2.60	-0.61	-6.57	0.11	9.28	14.84	18.33
Small Core	-2.60	1.05	-6.44	0.62	10.61	14.09	17.85
Small Growth	-2.64	-5.04	-7.65	-0.45	6.23	13.50	17.19
Small Value	-2.57	2.13	-5.64	0.16	10.88	16.98	19.93
US Core	-2.68	4.92	-2.96	2.02	13.29	18.25	17.69
US Growth	-2.25	4.46	-2.90	3.84	17.96	15.97	17.59
US Value	-2.94	5.21	-2.58	1.60	12.59	15.92	16.08

 ©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:

 

Tax Benefits of Home Ownership

With the price of homes once again on the rise, it makes sense to once again review the benefits of home ownership.  When it comes to tax savings it really is home sweet home. Here are some of the popular tax benefits of owning your own home and how to get the most out of your home's tax advantaged status.

 

Mortgage interest. Interest paid on your home mortgage is still tax deductible. This deduction is taken on Schedule A as an itemized deduction. Certain upward limits apply.

 

Property taxes. Property taxes paid on your home are also tax deductible as an itemized deduction.

 

Home Equity. Most homeowners can take out a second mortgage on the "equity" in their home. In most cases, this interest expense is also tax deductible. Many use home equity loans for purchasing autos, boats, and the like since interest on traditional loans is not tax deductible.

 

Idea: Consolidate credit card debt within a home equity loan or home equity line of credit if your home is worth more than your outstanding mortgage balance. You have the double advantage of deducting the interest on your tax return PLUS you avoid the higher interest rate on your credit card. A word of caution however, if you default on a payment your house is now the collateral.

 

Capital Gains Exclusion. When you sell your home, up to $500,000 for joint filers ($250,000 for single taxpayers) of the increased value over what you paid for the home can be excluded from tax. To take advantage of this capital gains exclusion you must make the home your principal residence in two of the last five years.

 

Idea: The capital gain exclusion on home sale can be used more than once. For example, you could sell your qualified main home and take the exclusion. If you then made a second (vacation) home your new main home you could also take the gain exclusion once again. You would need to meet the IRS ownership and use rules to qualify. Special allocation rules might apply if this second home was also rental property.

 

Second home benefits. A second home (cabin or vacation home) can also benefit from interest and property tax deductibility as long as total mortgages do not exceed certain limits.

Should you have any questions regarding your situation please feel free to call my office.

 

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.

 

* To unsubscribe from our “market commentary” please reply to this e-mail with    “Unsubscribe” in the subject line, or write us at “mike@schwartzfinancial.com”.