ACTING IN AN UNCERTAIN WORLD
Fed Chairman Bernanke stated, “Under current law, on January 1, 2013, there’s going to be a massive fiscal cliff of large spending cuts and tax increases.”
Everyone has likely heard plenty about the inevitable tax and spending changes coming at the end of this year. Change will occur whether it is by default (in the event Congress and the President do nothing) or whether it is by our leaders’ own actions prior to midnight on 12/31/2012. When evaluating certain wealth planning strategies that have to do with income tax, estate tax, levels of projected growth and the like, a world rife with uncertainty can be challenging for the key financial decision maker in the average American household.
Even decisions as simple as whether to keep a balance on your Home Equity Line of Credit at very low rates (but adjustable rates) or move this balance onto a traditional fixed mortgage that offers interest rate “safety” become very complex. As of this writing, the national average for a 30 year conventional mortgage sold to Fannie Mae is 3.9%- close to the all-time historical low of 3.81%. What about charitable gifting? Should a high income family defer charitable gifting into 2013 or make several years’ worth of gifts this year in anticipation of possible tax law changes? Another example is the age-old question of whether one should pay down debt or invest free cash flow. Like any of these decisions the best answer is highly dependent upon the circumstances, but the 3.8% Medicare surtax (set to go into effect in 2013) and potential capital gain and dividend tax rate changes complicate things.
In our experience, perspective is invaluable when evaluating these financial decisions and others. As our country attempts to solve its fiscal crisis, baby boomers age, and the world faces economic and political challenges, thinking through these decisions in all possible scenarios becomes more valuable. In other words, good decision making increases in value as challenges and complexity presented by your environment increase. We will continue to work hard preparing updates to client wealth plans to evaluate all possible options in light of the ever-changing world in which we find ourselves.
MARKET COMMENTS & OBSERVATIONS
We saw most stock market indexes take a breather during April although many are still considerably higher for 2012. Out of the five financial market indices represented below, only the two bond indexes posted positive gains this past month. Stock prices have appreciated significantly this year thanks to continued easy money policies by central banks, healthy corporate balance sheets, better earnings, and a gradually improving economic picture.
Financial Market Indices as of April 30, 2012
Last 3 Months
Last 12 Months
|S&P 500 Total Return (US stocks)||-0.6%||7.1%||11.9%||4.8%|
|MSCI Developed EAFE (foreign stocks)||-1.8%||3.4%||8.9%||-12.4%|
|MSCI Emerging Mkt. Equities (emerging country stocks)||-1.5%||0.6%||12%||-14.8%|
|Barclays Capital Aggregate Bond – Intermediate Term||0.8%||0.6%||1.5%||5.8%|
|Barclays Capital Municipal Bond Index||1.2%||0.6%||2.9%||11.4%|
The Fiscal Cliff
It is looming on the horizon!!! As is captured in this month’s quote, Fed Chairman Bernanke emphasizes the significance of changes to occur on January 1, 2013. This is the date when the Bush-era tax cuts, the temporary payroll tax cut and extended unemployment benefits are all due to expire. To make matters worse – since the Congressional Super-Committee failed to reach consensus last year on reducing government spending we will also see $1.2 trillion of automatic spending cuts begin on the same date. Combining tax increases with spending cuts could push our economy back into recession. It is anticipated that economic output would be reduced by 3.5% next year if all these things come to pass.
This is a good example of how the world we live in today is much more challenged. As a result, we believe we need to be more nimble and opportunistic with the management of your investment portfolio. We remain hopeful that a more thoughtful approach is taken regarding spending and tax cuts by Congress and the President prior to meeting the fiscal cliff Chairman Bernanke speaks of. However, the risk of policy errors and continued political dysfunction, particularly in an election year, remains very high. Because of the investment implications, we will continue to monitor these issues closely as the year progresses.