Investment Commentary – Headwinds and Rate Hikes
“In investing, what is comfortable is rarely profitable”
– Rob Arnott
(Founder of Research Affiliates, a $169 Billion investment strategy firm)
Over the course of the first quarter, the S&P 500 stock index has struggled to regain its upward momentum from 2014. This broad index has waffled back-and-forth over the past several months, generating a rather meager 0.89% return. It seems that slightly weaker economic data, combined with uncertainty around Federal Reserve policy, has tempered investor optimism. International stocks (especially in Europe and Japan) have rebounded quite nicely in the first quarter after very dismal performance last year. When looking at more specific asset classes in the U.S., growth-oriented equity strategies out-performed value-focused approaches to stock selection. This can be seen in the chart above by comparing the Lipper Growth to the Lipper Value indices. Bonds fared well in the first quarter with the Barclays U.S. Aggregate Index up 1.61%.
It seems that investors have been focused on several key issues – the collapse in oil prices, the continued strength in the U.S. dollar, and the divergent monetary policies of central banks around the world.
Oil. Oil! Oil?
The sharp decline in oil prices has caused concern. In the near-term, earnings in the energy sector are declining, payrolls are being reduced and capital spending budgets are being slashed. Ultimately, we believe the fall in energy prices should enhance consumer spending and result in a net benefit for the economy, not just in the U.S., but also for other countries who are significant importers of petroleum products. Recent activity would suggest the price per barrel is trying to find a bottom, yet we wouldn’t be surprised to see continued volatility over the course of this year as market forces work to correct the current supply/demand imbalances. We should also be mindful of the ever-present geopolitical wild-card, as evidenced by the recent conflict between Saudi Arabia and Yemen, which caused a swift upward shift in the direction of oil prices.
The Fed and the Dollar
The Federal Reserve recently signaled to the markets that it was preparing to raise interest rates by removing the word “patient” from their official monetary policy statement. The big question now remains, WHEN?
Coming into this year, the consensus among economists was that the Fed would make a move in June. However, we believe that the recent weakness in export growth and energy prices may have bought the Fed some time. The sharp rise in our currency over the past 12 months has impacted both earnings expectations and economic data and has served to moderate economic growth. Multinational companies who generate a significant amount of their sales from outside the U.S. are seeing reduced profits as they convert foreign sales back into the stronger U.S. dollar. This has weighed on stock prices and investor sentiment. Time will tell, but we may see the first rate hike in September instead of June as many had previously expected. We are ever mindful that bond investments broadly will be at the mercy of the Federal Reserve going forward.
Foreign Central Banks
Stock prices in Europe and Japan have moved higher this year based upon an improving outlook for economic growth. Very aggressive monetary easing policies from the Bank of Japan and the European Central Bank have had a hand in better equity market performance. Monetary easing has led to both the Euro and the Yen declining in value. This, in turn, signals an improving sales outlook for companies who export products to the U.S. because their goods are now less expensive to U.S. consumers.
History suggests that U.S. stocks may react negatively to the first interest rate hike; however, they generally weather a tightening cycle pretty well when the rate increases are in response to economic strength. And, while oil and a rising dollar may continue to be a headwind for the global markets in the coming quarters, it is always the unforeseen risks that disrupt the markets more. Therefore, we believe the best approach is for investors to remain balanced and diversified.
As always, we welcome your questions and comments concerning your investments, and we certainly appreciate the trust and confidence you have placed in us. Thank you for your business!
Authored by: Chad A. Sander,CFP®
Direct Phone: 812-602-6302
Wealth Planning Commentary – Tax Freedom Day
The best time to plant a tree was 20 years ago. The second best time is now.
Tax Freedom Day® for the 2015 tax year is April 24th, 114 days into this year. This day is a measure of when the nation, as a whole has earned enough money to just pay its entire tax bill (including Federal, State and Local taxes). To put it another way, as Americans we will spend about 31% of our working year generating the income necessary to pay our taxes (on average). Perhaps an even more alarming statistic- as Americans we will spend more on taxes in 2015 than we will on food, clothing and housing combined! (Pomerleau, 1)
Historically, Tax Freedom Day® has fallen as early as January 20 in the early 1900s, however starting around 1960 it has steadily increased (particularly if you include deficit spending). (Pomerluea, 2)
Statistics like these, along with being in the midst of the final rush to finish tax return filings for 2014, should make us stop and think about the significant financial impact taxes have for every hard-working American family. The focus is often on today’s impact- 2014 tax returns, 2015 Tax Freedom Day®, this quarter’s estimated tax payment and the like. However, the current year’s tax cost is only a drop in the bucket when compared to a lifetime of tax, particularly if you feel future taxes will likely increase.
Tax planning in its most beneficial form is performed with long-range planning at its core. Instead of focusing solely on today’s tax cost we should be examining our future tax cost to identify opportunities for tax reduction. As Wealth Planners, we want to reduce the current tax burden for clients, but the biggest impact we have on tax cost is found when implementing strategies to deal with lifetime tax cost. Ongoing planning identifies opportunities that can potentially reduce income and estate taxes over one’s lifetime and the next generation’s lifetime, while in many of these cases the current tax year savings are actually immaterial.
For many Americans, Tax Freedom Day® is just another reminder of the significant cost that tax represents in their financial lives. For others, it is a reminder that there is an opportunity to cut down on that cost over a certain time horizon if thoughtful planning is occurring to identify tax reduction opportunities.
Posted: April 10, 2015
Authored by: N. Perry Moore, CBEC™, CFP®, ChFC®
Direct Phone: 812-602-6306
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- Pomerleau, K. (2015, April 2). America will Pay More in Taxes in 2015 than it Will Spend on Food, Clothing, and Housing Combined. Retrieved April 9, 2015, from http://taxfoundation.org/blog/america-will-pay-more-taxes-2015-it-will-spend-food-clothing-and-housing-combined
- Pomerleau, K. (2015, March 30). Tax Freedom Day® 2015 is April 24th. Retrieved April 9, 2015, from http://taxfoundation.org/article/tax-freedom-day-2015-april-24th