2014 First Quarter Client Commentary

2014 First Quarter Client Commentary

2013 Brought Big Changes in Wealth Planning

Last year brought about major changes in the wealth planning space for high net worth families.  Among the most significant changes, on January 2, 2013 the American Taxpayer Relief Act was signed into law.  Interestingly, this bill allowed and/ or created tax increases for almost every American (as an example, this bill allowed the payroll tax holiday to end raising Social Security taxes on every working American).  In addition to a number of tax increases focused on high income and high net worth ID-100143637families, the bill also provided permanency to the federal estate tax system which had been a point of uncertainty for years (particularly since 2010 when the estate tax was repealed entirely for a year).

The bill also provided a one-year extension to the Charitable IRA Rollover and provided a permanent “patch” to the Alternative Minimum Tax.  Note that as of 12/31/2013, the Charitable IRA Rollover has once again expired.  While there have been a number of bills introduced to make it permanent, none have passed the House and Senate for the President’s signature.

At the state level, the Indiana inheritance tax was repealed when Governor Mike Pence signed the biennial state budget into law.  Included in the state budget was an immediate and retroactive repeal effective 1/1/2013, of the long-standing tax system.  For some high net worth families, this transfer tax system represented an even greater tax cost to their family than the federal estate tax.  This was also a significant consideration for these families when determining whether to become a resident of another state (most consider Florida, which does not have an inheritance or estate tax) upon retirement (this decision is now more contingent upon income taxes).  The budget also set in motion two slight decreases in state income taxes to first take effect in 2015.

While we have seen significant changes in the economy, income and estate taxes, investment markets and the financial world as a whole over the past year, change is likely to continue- perhaps at an even faster pace.  Some of the developments in 2013 were positive for high net worth families, such as the repeal of the Indiana inheritance tax and making permanent the federal estate tax rules (this is good for planning purposes as it introduces certainty).  Yet others represent a continued attack on wealth as America struggles to find financial balance and ways to pay ever-increasing financial obligations driven by growing entitlements and subsidies.

As the world around us continues to evolve and change, our wealth planning process must advance as well.  This process improvement comes in the form of enhanced modeling capabilities to identify more planning opportunities, better clarity when communicating strategy concepts with our clients and faster execution of these strategies.  As we move into 2014 we are focused more than ever on continuously improving our wealth planning capabilities to serve our clients in this changing, challenging world.

Progression in the Market

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U.S. stock markets finished the year in record fashion.  Higher equity prices were the result of solid earnings growth in most sectors and also multiple expansion.  Multiple expansion refers to an increasing Price-to-Earnings ratio (P/E) which indicates that investors are willing to pay more for a given dollar of earnings than previously.  A gradually improving economy throughout the year led to increasing investor confidence, and with this higher confidence came an expansion in P/E multiples.  Even though multiples increased, it is important to note that S&P 500 index is currently trading at 15.4 times forward earnings which is just slightly above its long-term average of 14.9.  Given this, it doesn’t appear to us that stock prices are over-valued.   However, 2013 was a low-volatility year, so we wouldn’t be surprised to see the stock market pause for a while or even pull-back from its current level.

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Bond prices, on the other hand, continue to be challenged with the threat of higher interest rates.  In December, the Federal Reserve (Fed) finally decided to slow the pace of Quantitative Easing by reducing their bond buying program by $10 billion per month (from $85 billion down to $75 billion) starting in January.  This initial step to reduce the amount of monetary stimulus running through our financial system has been anticipated by the markets since May.  A falling unemployment rate, resilient economic growth and an upcoming leadership change at the Fed likely convinced the Federal Open Market Committee that now was an appropriate time to begin reducing stimulus.  Although the Fed is cutting back on buying long-term bonds, they have made it clear that they will continue to keep the Fed Funds Rate near zero (0 to 0.25% range) until we see more consistent economic growth and an unemployment rate approaching 6%.

In today’s environment, we continue to allocate a lower percentage of portfolios to bond investments relative to the range allowed in client Investment Policy Statements.  Along with this lower allocation comes a higher weighting to bond funds holding shorter-term maturity securities.  We have also allocated money to mutual fund managers who will adjust portfolio durations as market conditions change, invest across all types of fixed income markets, and when appropriate, sell-short bonds that appear to be overpriced.

As we enter 2014, we’d share the following thoughts which are influencing how we think about investing:

  •       We expect further improvement in the U.S. economy, and we also believe global growth should increase.
  •       We expect the U.S. housing market to continue to improve – aided by low mortgage rates and high affordability.
  •       Growth we’ve see in household wealth over the past five years continues to increase consumer confidence and consumer spending.
  •       Business equipment spending is expected to pick-up this year.  This should create jobs and push the unemployment rate lower.
  •       Even though the Fed has started to remove stimulus, we think they will proceed in a slow and measured manner.  We also think that they are still more concerned about deflation than inflation; thus, monetary policy should continue to be supportive for risk investments.
  •       Relative to bond yields, stocks still look inexpensive, yet we don’t expect returns to be as strong as they were in 2013.
  •       Even though the U.S. markets led the way in 2013, it is very important to remain diversified and maintain International exposure.
  •       The emerging market big picture seems favorable because of demographics.  In coming years we expect labor growth, productivity growth and solid economic growth.

The Payne Wealth Partners team is more focused than ever on helping our clients identify opportunities and act upon them in an appropriate manner to improve their circumstances.

As always, we appreciate the trust and confidence you have placed in us.  Thank you for your business.


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.

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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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