"Efficiency is doing things right. Effectiveness is doing the right things." Peter Drucker
With the S&P 500 index up over 9.00% year-to-date, where do we go from here?
Last week marked the three year anniversary of the March 2009 stock market lows. I hope that since those unpleasant days we have learned a crucial lesson: no matter how dramatic the market volatility, quality investments will recover over time. Those who resisted selling their stocks are nearly back to 2007 highs. Despite the severe trauma of 2008, the financial world did not end, and economic growth is recovering, albeit slowly.
Since the 2009 lows, the S&P 500 index has risen over 100%, and corporate operating earnings have risen just under 100%. During this same time period, however, revenues per share have risen only 1%. How can this be? Answer: Cost cutting. During the recession corporations cut jobs and leveraged retained employees to do more with less. However, this can only occur for so long, and it seems we have reached the productivity ceiling. Over 200,000 jobs per month have been added over the past six months - the highest total since 2006. Corporations now need to hire staff to produce revenue gains, and thus unemployment rates have declined a bit to 8.30% (versus 9.00% a year ago). Job growth is often viewed as one of the best leading economic indicators. This important improvement in our economy has certainly bolstered economic growth estimates as well as stock investments.
We seem to be in a sweet spot right now - an improving economy, low inflation, a lull in global debt issues, loosening monetary policy worldwide, and rising stock prices. Of course, things can change, and many are fearful of a repeat of the last two years, which started strongly but saw stock prices decline mid-year on economic concerns.
In any event, while the world still has a lot of problems, global capitalism seems to be on much stronger footing than it was just three years ago.
I admit that I've enjoyed this run in equities. And it is possible that 2012 is the year when a sustained recovery takes hold. However, I'm not the only one concerned that investor sentiment has gotten too bullish too fast, and that we may see an equity correction.
As a wealth advisor, there is always something to worry about. It's our job to worry - hopefully so that you don't!
Greek Haircut - A Tragedy?
Last week over 80% of Greece's private sector creditors agreed to a bond swap on $233 billion of Greek bonds - essentially a negotiated default. It should be noted that bondholders agreed to surrender over 53% of their bond value in order to avoid a total default, and so that Greece might secure a second round of international bailout aid. It makes perfect sense that getting some of your money back is better than getting nothing. While a cataclysmic total default was avoided, Greece still faces Herculean challenges as it restructures its crushing debt load and implements unpopular austerity measures in a recessionary environment.
The larger implications of this haircut are troubling for European bond investors as a whole.
It's the Election, Stupid!
If history is our guide, election year patterns can pose a challenge for stock investors. According to Ned Davis Research, in typical presidential election years stocks start well but slip in the spring due to election uncertainty. By early autumn people get more comfortable with the November outlook and return to their stock investments.
Tax Increases in 2013?
Higher taxes are not a certainty for 2013, but they are something to discuss now. The 2001-2003 tax cuts are set to expire at the end of this year. The expiration will have impact multiple areas of the US tax code, but I will only highlight a few at this time.
For one, the long term Capital Gains tax rate would increase from 15% to 20%. For those with large unrealized gains, an obvious way to lessen a future burden would be to sell appreciated assets in 2012 at the 15% rate. For example, if you have a $100,000 unrealized gain, would you prefer to pay $15,000 or $20,000 in capital gains taxes? If you have an investment that you want to maintain that has substantial unrealized gains, consider selling it in 2012 to be taxed at the 15% rate, and then buying it back immediately.
The expiration will also significantly lower the Estate Tax Exemption from the current $5 million to $1 million in 2013. Additionally, the estate tax rate is scheduled to jump from 35% to 55%. Assuming that this occurs, I anticipate a lot more estate planning discussions in 2013!
The Delicate Balance
Many advisors attempt to always communicate the strongest possible message of optimism and faith, and in many ways I find that encouraging. If someone is optimistic about the future, they are more likely to work hard to make that future a reality. That being said, in communications I strive to offer a pragmatic stance, striking a realistic balance between the poles of absolute optimism and pessimism.
Lately, my father-in-law has been considering corrective eye surgery using a technique known as "monovision." This procedure corrects the dominant eye for long distance vision, and the non-dominant eye for short distance vision. While this may seem a bit unorthodox, the brain quickly adjusts to this paradox, and perceived vision improves.
As we discussed this, I drew the parallel between how we see the physical world and how we view our financial world. I could not help but note that the long distance vision (or longer term view) is reserved for the dominant eye! Likewise, your longer term view is the most important to your financial success. Properly weighing pessimism versus optimism, and short versus long term views, remains a delicate but worthwhile balance.
Best wishes,
Dickson
"Even the geniuses will never be able to tell us what the future holds. In the end, what matters is the quality of our decisions in the face of uncertainty." Peter Bernstein
