The
Markets
Are central banks throwing a progressive party?
You know, the kind of party where folks travel from
house to house feasting and drinking and enjoying the proffered hospitality. For
years pundits have speculated about what will happen to the U.S. stock market
party when the spiked punch bowl of quantitative easing is gone. Last week, they
got an unexpected answer: Come on over to Japan’s house.
On Wednesday, the U.S. Federal Reserve announced October
marked the end of its third round of quantitative easing (QE). Since late 2008,
the Fed has purchased trillions of dollars of government and mortgage-backed
bonds in an effort to spur economic growth (by increasing liquidity and lending)
and head off deflation. In October, The
New York Times reported, “The good news is that economy has been growing
remarkably steadily since the middle of 2009… Still, the pace of growth has
been perpetually disappointing for anyone expecting or betting on a return to
the pre-crisis trend.”
Not long after the Fed announced QE closing time, Japan’s
central bank, Bank of Japan (BOJ), startled stock markets with a Godzilla-sized
surprise – it was expanding an already significant quantitative easing program.
As if that weren’t enough, the President of Japan’s Government Pension
Investment Fund (the world’s largest pension fund) said the fund’s assets were
being reallocated. Instead of having 60 percent invested in bonds, it would
keep 35 percent in bonds and move the balance to stocks. The news electrified
stock markets. Barron’s reported:
“Stocks soared around the globe while the yen plunged
against the dollar and the euro. Extending the previous week’s surge, the major
U.S. equity gauges ended at records on Friday, while stocks in Tokyo jumped
more than 7 percent on the week to the highest level since November 2007. Not
to be left out, European stocks gained 3 percent, their best weekly showing
since last December.”
Barron’s also pointed out the real effect of a falling yen was
to export deflation to Japan’s trade partners. The drop in the value of the yen
on Friday translated into a $1,500 price cut on a $60,000 Lexus or Acura,
increasing competition for luxury German automobiles.
So, what’s the next stop for revelers at the central
bank fête? The New York Times speculates
it may be the Eurozone.
Data as of 10/31/14
|
1-Week
|
Y-T-D
|
1-Year
|
3-Year
|
5-Year
|
10-Year
|
|
Standard &
Poor's 500 (Domestic Stocks)
|
2.7%
|
9.2%
|
14.9%
|
17.2%
|
14.1%
|
6.0%
|
|
10-year Treasury
Note (Yield Only)
|
2.3
|
NA
|
2.5
|
2.2
|
3.4
|
4.1
|
|
Gold (per ounce)
|
-5.6
|
-3.1
|
-12.1
|
-12.2
|
1.9
|
10.5
|
|
Bloomberg Commodity Index
|
1.0
|
-6.4
|
-6.0
|
-7.7
|
-2.4
|
-2.6
|
|
DJ Equity All REIT Total Return Index
|
2.0
|
23.6
|
18.3
|
15.2
|
18.9
|
8.7
|
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.
Why are people worrying about deflation? Deflation is a general decline in prices. For anyone
who has been struggling to make ends meet that may not sound all bad. In fact,
it’s not always bad. According to the Federal
Reserve Bank of St. Louis, between 1876 and 1879, prices in the United
States fell by about 5 percent per year, on average, while the economy grew at
a 7.6 percent clip.
Of course, deflation is not
always good either. Financial crises in the United States during 1890, 1893,
1907, and the early 1930s were followed by periods of lower economic growth and
deflation. The Economist described
the harmful effects of deflation like this:
“It is a
pernicious threat, all the more so because, at its onset, it seems almost
benign… The belief that money made tomorrow will be worth less than money today
stymies investment; the belief that goods bought tomorrow will be cheaper than
goods bought today chokes consumption… Wages, incomes, and tax revenue all
stall, undermining the ability of households, businesses, and governments to
pay their debts – debts which, in real terms, will grow more burdensome under
deflation.”
Deflation is a greater threat
in Europe than in the United States. The European
Central Bank’s most recent bulletin distinguished between deflation (a
significant and persistent decline in prices that becomes entrenched in
expectations) and disinflation (a process of decelerating inflation that may
lead to negative inflation rates but is a temporary state of affairs). Italy,
Spain, Greece, Sweden, and Israel experienced negative inflation in September,
according to The Economist. It
reported, “The IMF [International Monetary Fund] recently put the odds of
deflation in the euro zone – defined as two quarters of falling prices in a
12-month span – at 30 percent in the coming year.”
Weekly Focus –
Think About It
“And so it began: a growing
realization that the vampire genre is positively swollen with economic
questions. And the zombie genre? Maybe more so. Economic issues take center stage
in many undead narratives – and when they don’t, they’re still lurking in the
shadows.”
--Economics
of the Undead, A collection of essays
***Please remember to vote tomorrow
Election Day***
Value
vs. Growth Investing (10/31/14)
|
2.82
|
10.22
|
2.69
|
4.84
|
16.33
|
19.70
|
17.07
|
|
|
2.71
|
10.96
|
2.34
|
5.02
|
17.18
|
19.64
|
16.27
|
|
|
2.82
|
12.66
|
3.69
|
7.52
|
17.61
|
22.02
|
17.46
|
|
|
2.65
|
12.60
|
2.64
|
5.85
|
19.64
|
20.06
|
17.35
|
|
|
2.67
|
7.64
|
0.65
|
1.74
|
14.26
|
17.06
|
14.08
|
|
|
2.77
|
9.50
|
3.03
|
4.23
|
15.30
|
20.11
|
19.19
|
|
|
3.07
|
12.26
|
3.42
|
4.85
|
17.28
|
20.93
|
20.41
|
|
|
2.88
|
7.89
|
3.54
|
5.49
|
14.44
|
17.09
|
18.40
|
|
|
2.34
|
8.57
|
2.10
|
2.29
|
14.34
|
22.44
|
18.75
|
|
|
4.22
|
4.40
|
5.58
|
4.67
|
10.32
|
18.90
|
18.60
|
|
|
4.10
|
5.94
|
5.36
|
4.50
|
11.81
|
18.98
|
17.81
|
|
|
4.40
|
0.59
|
5.31
|
5.39
|
5.75
|
17.37
|
18.75
|
|
|
4.15
|
6.60
|
6.06
|
4.13
|
13.39
|
20.33
|
19.18
|
|
|
2.96
|
12.09
|
3.75
|
6.76
|
17.13
|
21.60
|
18.14
|
|
|
2.80
|
10.85
|
2.98
|
5.75
|
17.65
|
19.28
|
17.73
|
|
|
2.71
|
7.76
|
1.29
|
2.01
|
14.21
|
18.38
|
15.38
|
©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:
2015
Pension Plan and IRA Contributions Announced by IRS
On October 23, 2014, the IRS announced the 2015 pension
plan and IRA limitations.
·
The
elective deferral limit for employees who participate in 401(k), 403(b), most
457 plans, and the federal government's Thrift Savings Plan is increased to
$18,000. The catch-up contribution limit for employees aged 50 and over for
these plans increases to $6,000.
·
The
limit on annual IRA contributions remains unchanged at $5,500. The additional
catch-up contribution limit for individuals aged 50 and over also remains
unchanged at $1,000.
·
The
deduction for taxpayers making contributions to a traditional IRA is phased out
for singles and heads of household who are covered by a workplace retirement
plan and have modified AGI between $61,000 and $71,000. For married couples
filing jointly, in which the spouse who makes the IRA contribution is covered
by a workplace retirement plan, the income phase-out range is $98,000 to
$118,000. For an IRA contributor who is not covered by a workplace retirement
plan and is married to someone who is covered, the deduction is phased out if
the couple's income is between $183,000 and $193,000. For a married individual
filing a separate return who is covered by a workplace retirement plan, the
phase-out range remains $0 to $10,000.
·
The
AGI phase-out range for taxpayers making contributions to a Roth IRA is
$183,000 to $193,000 for married couples filing jointly (an increase from the
2014 range of $181,000 to $191,000). For singles and heads of household, the
income phase-out range is $116,000 to $131,000, up from $114,000 to $129,000.
For a married individual filing a separate return, the phase-out range is not
subject to an annual cost-of-living adjustment and remains $0 to $10,000.
·
The
limitation for Section 415(c)(1)(A) defined contribution plans is increased to
$53,000.
·
The
limitation under Section 408(p)(2)(E) regarding SIMPLE retirement accounts is
increased $500 to $12,500.
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,
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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.
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