“There are costs and risks to a program of action, but they are far less than the long-range risks and costs of comfortable inaction.”John F. Kennedy (May 29, 1917 – November 22, 1963)
A study was recently published that calculates the average increase in tax American households would incur next year assuming politicians do nothing to stop the “fiscal cliff”- $3,500. At a time when the country is facing steep unemployment, significant economic uncertainty and volatile financial markets most would agree allowing the wholesale budget cuts and tax increases to occur beginning January 1, 2013 is not wise. The experts we follow (many of which we heard speak at the Notre Dame tax and estate planning institute) predict that sometime early next year politicians will come to an agreement and pass legislation designed to deal with these issues (although we still hope a resolution will come this year).
This outlook mirrors what occurred in 2010. When the clock struck 12:00 December 31st of 2009 the estate tax, which had been in place every year since 1916 and sporadically prior to that, was repealed entirely. Most practitioners believed politicians would act prior to the tax automatically lapsing, and they were wrong. Now, two years later, we face a similar change scheduled to occur automatically, short of intervention. The difference is that instead of repeal, the estate tax is instead slated to increase dramatically (per an increased estate tax rate and reduced exemption amounts) and is paired with a multitude of income tax increases. As to the specific compromises that will be reached, predictions are folly.
We are truly in unprecedented times as we evaluate the various tax regime changes that are occurring for high net worth families. While an average tax increase of $3,500 per American household may seem like a lot, it is a pittance compared to what high net worth families will likely soon be exposed to in the form of increased income and estate taxes. Our prediction is that in the future when looking back at 2012 we will see a year full of opportunity to reduce the increasing tax burdens that are coming for wealthy households. Our planning division will continue to work hard to help our clients identify these opportunities and, perhaps even more importantly, to act on them.
MARKET COMMENTS & OBSERVATIONS
Massive amounts of central bank accommodation in both Europe and the U.S. helped push riskier assets higher during the third quarter. The European Central Bank (ECB) and the Federal Reserve (Fed) announced new bond purchase programs with the ECB focused on sovereign debt and the Fed focused on buying mortgage-backed securities. Both of these initiatives are designed to keep interest rates (i.e. borrowing costs) low for an extended period of time. Investors responded favorably to this news by bidding up the price of stocks around the world. This can be seen in the “Last 3 months” column in the chart below.
The pace of economic growth has moderated somewhat. Given the uncertainty regarding future tax policy, Mideast tensions, federal budget cuts, healthcare costs and issues surrounding how governments around the world will ultimately reduce their debt burden, we remain guarded in our portfolio allocations as we move into the 4th quarter. With the word “guarded,” we mean that we are holding between 5% and 10% of portfolios (the actual percentage varies depending on client risk tolerance level) in money market funds to have cash available for future investment should we see a “risk-off” type of event and an increase in market volatility. As we consider future return opportunities for various asset classes, we remain committed to the positions we hold in emerging country stocks. We believe Latin American and Asian countries, and their stock prices, will benefit from higher economic growth rates over the next three to five years in comparison to developed countries. Furthermore, we think historically low valuations in European equities will provide future return opportunities from today’s price levels.
We have received many questions lately about how the results of the upcoming elections will affect the stock market. We understand that it is easy to get caught up in the emotion of campaigns. Unfortunately, we don’t have a crystal ball to tell us which party will hold the power in Washington after November 6th. We would caution you against listening to friends or neighbors who warn that if one or the other presidential candidate is elected the markets will crash. Consider that markets are constantly weighing information and setting prices based upon expectations. If a favored candidate wins, the market will have largely priced that into stock prices before election night. The future direction of the stock market will instead be driven by the health of corporate America as determined by corporate profit margins, cash flow and other fundamentals, and we’d point out that we find these to be somewhat attractive today.
Financial Market Indices as of September 30, 2012
Last 3 Months
Year to Date
Last 12 Months
|S&P 500 Total Return (US stocks)||2.6%||6.4%||16.4%||30.2%|
|MSCI Developed EAFE (foreign stocks)||3.0%||7.0%||10.6%||14.3%|
|MSCI Emerging Mkt. Equities (emerging country stocks)||5.8%||7.0%||9.4%||13.9%|
|Barclays Capital Aggregate Bond – Intermediate Term||0.2%||1.4%||3.4%||4.3%|
|Barclays Capital Municipal Bond Index||0.6%||2.3%||6.1%||8.3%|
IN THE NEWS
Payne Wealth Partners’ unique business model was featured in the August issue of NAPFA Adviser magazine. Creating a Sustainable Fee-Only Planning Firm.
Join us in congratulating Terry! He recently earned a Master of Science in Financial Services (MSFS) degree from The American College in Bryn Mawr, Pennsylvania.
On September 20th and 21st, Perry and Terry attended the annual Estate and Tax Planning Institute at Notre Dame University taught by the countries best estate and tax planners. This two day conference shared high-level wealth planning techniques that will increase the viable solutions Payne Wealth Partners provides.
Chad attended the Advent / Black Diamond Users Conference in Las Vegas on September 10th and 11th. Black Diamond is a leader in web-based client portfolio performance reporting software and is now backed by the financial resources of their new parent, Advent Inc. The conference discussed strategy for future reporting enhancements, and provided training for maximizing their current platform to enhance the client experience.
Chad and Bethany, members of the investment division, attended the Tamarac Users Conference in Seattle, WA on September 19th and 20th. Tamarac is the industry leading provider of sophisticated portfolio management, asset allocation and trading software for independent investment management firms. Their annual conference provides hands-on training, information on future technology enhancements, and an opportunity to provide feedback to their product development team.