2013 First Quarter Client Commentary

The Only Thing That Is Constant Is Change.”
Heraclitus, Greek philosopher active around 500 BC best known for his doctrines that things are constantly changing and that opposites coincide.

PLANNING COMMENTARY

Certainty has arrived, at least to the extent we may expect in this political environment.

In true political fashion, Washington came to agreement at the last minute on how to stave off the majority of the tax provisions set to go into effect this year that would have led to what has been termed the “fiscal cliff.” The bill, called the American Taxpayer Relief Act, was first passed by the Senate, then later by the House on January 1 and signed into law by President Obama on January 2. From our perspective, the best part of the bill is that it introduces some much-needed certainty in the rules of the game for all taxpayers. There are many aspects of the bill, although key provisions include:

  • Permanent extension of the Bush-era income, qualified dividend and capital gain tax rates for couples with income under $450,000 (and individuals with income under $400,000). Taxable income over these limits is subjected to a 39.6% rate (versus 35%) and dividends and capital gain tax rates of 20% (versus 15%).
  • Permanent repeal of the personal exemption phaseout and the itemized deduction limitation (otherwise known as the “Pease limitation”) for couples with income under $300,000 (and individuals with income under $250,000). Taxpayers with income above these limits will again be subjected to the phaseout and limitation.
  • Provided a permanent “patch” to the Alternative Minimum Tax.
  • Allowed the payroll tax holiday that reduced Social Security tax to 4.2% (from 6.2%) to expire.
  • Permanently extends the existing federal estate tax system as-is, except that it raises the top federal estate tax rate to 40% (from 35%).
  • Extends through 2013 a provision that allows tax-free distributions from IRAs for charitable purposes (otherwise known as a “charitable rollover”).
  • Any amounts within Qualified Retirement Plans such as 401ks may now be converted to Roth accounts within the same plan, regardless of whether the amounts are eligible for distribution.

While the bill provides some certainty for tax rules moving forward, it also introduces a great deal more complexity for planning purposes. The income tax and estate tax changes for wealthy Americans will need to be managed alongside the additional taxes already coming into effect this year by passage of the Affordable Care Act (otherwise known as “Obamacare”), including the 3.8% Medicare “surtax” on certain investment income.

All of these changes make planning around the new tax rules, particularly for wealthy Americans, even more important. Moving forward, the stakes have been raised yet again when it comes to decision making and harnessing opportunities. The rewards for good decision making have become richer yet the penalty paid for making uninformed decisions or missing opportunities has never been higher.

Our wealth planning division will be working harder than ever to ensure our clients capture every opportunity available to protect their families’ income and balance sheet in a world that is becoming more challenging every day.


INVESTMENT COMMENTARY

profile-picAlthough we had much uncertainty and periods of heightened volatility, 2012 ended up being a rather good year for stock market investors in the U.S and internationally. Due to uncertainty surrounding the outcome of the November elections along with the December 31 “fiscal cliff” deadline, returns were significantly higher for international stocks versus U.S. stocks in the 4th quarter. We’re now seeing somewhat of a relief rally in U.S. markets since a resolution on future tax policy was reached. It will be interesting to see how the markets react over the next two months as our political leaders wrestle and debate over spending cuts, entitlement plan reform and the debt ceiling. If we begin to see slightly better than expected economic growth, rising inflation expectations and/or credit risk concerns, interest rates could begin to move higher. We generally remain invested in shorter-maturity bonds (on-average) in client fixed income portfolios for some price stability and flexibility.

With our final Investment Committee meeting of the year, we decided to increase portfolio allocations to emerging market equities. We believe that the stock markets of many emerging countries are positioned for improving returns after experiencing rather mediocre performance over the past three years. Emerging countries are forecasting economic growth rates that are two to four times higher than the growth rates estimated for the U.S., Europe, and Japan. We believe higher economic growth rates will eventually be reflected in better performing stock markets. Our analysis also shows that, in relation to expected growth, emerging market equities seem to be reasonably valued at today’s price levels. So, we believe we are making these additional purchases at compelling prices.

The new target levels for emerging market equities range from a high of 22% down to a low of 5.5% of client asset allocations, as compared to prior targets of 18% and 4.5%. Please note that the actual percentage allocation is dependent upon the risk level of one’s portfolio. We will generally fund this increase in emerging market stocks by decreasing allocations to cash. As we buy additional shares of Vanguard, Lazard or JP Morgan emerging market funds, you may also see other trades placed as we work towards rebalancing security positions in your portfolio.

Financial Market Indices as of December 31, 2012 December 2012 Last 3 Months Last 12 Months Last 3 Years (annualized)
S&P 500 Total Return (US stocks) 0.9% -0.4% 16.0% 10.9%
MSCI Developed EAFE (foreign stocks) 3.2% 6.6% 17.9% 4.0%
MSCI Emerging Mkt. Equities (emerging country stocks) 4.8% 5.2% 15.1% 2.2%
Barclays Capital Aggregate Bond – Intermediate Term 0.0% 0.2% 3.6% 5.2%
Barclays Capital Municipal Bond Index -1.2% 0.7% 6.8% 6.6%

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The information in this material is only as current as the date indicated, and may be superseded by subsequent market events or for other reasons. While all information prepared in this document is believed to be accurate, any statements of opinion constitute only current opinions of Payne Wealth Partners, Inc., which are subject to change and which Payne Wealth Partners, Inc. does not undertake to update. Accordingly, you should not put undue reliance on these statements. The information does not attempt to examine all the facts and circumstances that may be relevant to an individual’s financial needs. Payne Wealth Partners, Inc. is not soliciting any action based on these statements.

Contact Our Offices

Payne Wealth Partners, Inc.
Keystone Financial Consulting
601 N Cross Pointe Blvd
Evansville, IN 47715
Phone: 812-477-6221
Toll Free: 888-477-6221
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