If it wasn’t clear that the world’s central banks had begun to shift away from easy-money policy, last week should leave little doubt. This discussion came a week after Fed Chief Janet Yellen openly questioned whether asset valuations have gotten too high for their own good. The S&P 500 now trades at 17.6 times 12-month forward earnings, and while we can debate how much easy money has helped inflate those prices, there’s little doubt that it’s played a role.
Did You Know? TAX TIP
If you have any old U.S. Savings Bonds tucked away somewhere, now might be the time to review them for the current interest rate, maturity date and accrued interest. One advantage of owning U.S. Savings bonds (Series I or EE) is the tax deferred treatment of the interest. However, if you have owned the bonds for a long time, there could be significant interest accrued which is taxed as ordinary income upon liquidation.
One lesser known advantage is the tax free treatment when used for college education expenses upon meeting certain IRS requirements. You might think, “But my children don’t have any current education expenses.” Fortunately, a 529 education savings plan falls under the scope of “qualified” education expenses. Therefore, qualifying bond proceeds used to fund a 529 plan will exempt the interest from tax. An additional benefit is available for those living in a state which gives tax deductions for 529 education plan contributions. This strategy has income limitations and additional requirements per IRS and state guidelines, so please contact your advisor to review if you qualify for the tax free treatment of the interest and state deduction.
For more information, visit treasurydirect.gov.
Update – Washington
The U.S. stock market has jumped since the November 8th election. We identified 4 initiatives on which the U.S. stock market is speculating to be successfully accomplished early in the Trump administration. What will happen next? It’s still to be determined!
The 4 initiatives will have a tremendous influence on the “Heat Map” which forms the basis of our forward looking view of the U.S. economy. We consider the success or failure of the 4 initiatives to be “leading” indicators for the Heat Map.
Below are the 4 Trump administration initiatives upon which the stock market is speculating and what progress, if any, has been made:
- Tax cuts and tax reforms benefiting most individuals and businesses- NO PROGRESS RECENTLY. CUMULATIVE PROGRESS TOWARD GOAL: 0%
- Infrastructure spending of up to $1 Trillion over the upcoming 7 to 10 years. NO PROGRESS RECENTLY. CUMULATIVE PROGRESS TOWARD GOAL: 0%
- Affordable Care Act amendment, reform or reorganization. ON ITS SECOND ATTEMPT, THE HOUSE OF REPRESENTATIVES PASSED LEGISLATION TO REVISE IT. THE SENATE HAS FAILED TO BRING THE BILL FORWARD TO A VOTE. CUMULATIVE PROGRESS TOWARD THIS GOAL IS 20%.
- Roll back of government regulations and Executive Orders considered to be difficult for businesses. ROLL BACKS HAVE CONTINUED. CUMULATIVE PROGRESS TOWARD GOAL: 40%
As the action happens in Washington on these 4 initiatives, don’t be surprised if the political “tug and pull” contest results in a wilder than normal stock and bond market.
We will continue to report in future issues on the progress on each initiative.
The “Heat Map”
Most of the time, the U.S. stock market looks to 3 factors (call them the “pillars” which support the stock market) to support its upward trend – let’s grade each of the pillars.
CONSUMER SPENDING: This grade is a B+ (favorable).
THE FED AND ITS POLICIES: This factor is rated C- (Below average). In the minutes from the June Federal Open Market Committee meeting, the Federal Reserve members expressed their desire to begin shrinking its balance sheet before the end of the year, while the European Central Bank’s minutes contained discussions of ending its pledge to buy more bonds if the economy weakened. Rate hikes, meanwhile, are suddenly on the table in countries besides the U.S.
BUSINESS PROFITABILITY: This factor’s grade is A- (very favorable). Earnings should be good: S&P 500 earnings are expected to grow by 8% during the second quarter, according to Thomson Reuters I/B/E/S.
OTHER CONCERNS: The “Heat Map” is indicating the U.S. stock market is in OK shape ASSUMING no international crisis. On a scale of 1 to 10 with 10 being the highest level of crisis, we rate these international risks collectively as a 6 (an increase due to North Korea concerns). These risks deserve our ongoing attention.
The Numbers
Last week, Foreign Stocks and Bonds decreased. U.S. Stocks increased slightly. During the last 12 months, STOCKS outperformed BONDS.
|
Returns through 7-7-2017 |
1-week |
Y-T-D |
1-Year |
3-Years |
5-Years |
10-Years |
|
Bonds- BarCap Aggregate Index |
-.4 |
1.9 |
-1.3 |
2.5 |
2.0 |
4.5 |
|
US Stocks-Standard & Poor’s 500 |
.1 |
9.5 |
18.0 |
9.3 |
14.8 |
7.0 |
|
Foreign Stocks- MS EAFE Developed Countries |
-.5 |
13.2 |
21.6 |
.8 |
8.7 |
.8 |
Source: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized excluding dividends.
“Your Financial Choices”
The show airs on WDIY Wednesday evenings, from 6-7 p.m. The show is hosted by Valley National’s Laurie Siebert CPA, CFP®, AEP®. This week Laurie will discuss: “ROTH IRA’s- What you need to know”
Laurie will take your calls on this topic and other inquiries this week. Questions may be submitted early through www.yourfinancialchoices.com by clicking Contact Laurie. This show will be broadcast at the regular time. WDIY is broadcast on FM 88.1 for reception in most of the Lehigh Valley; and, it is broadcast on FM 93.9 in the Easton and Phillipsburg area– or listen to it online from anywhere on the internet. For more information, including how to listen to the show online, check the show’s website www.yourfinancialchoices.com and visit www.wdiy.org.
Motivational Quote of the Week
“The BEST view comes after the HARDEST climb.” – IQ Mag
The Markets This Week
Weebles wobble but they don’t fall down—and the same might be said of the stock market.
There was certainly a lot of wobbling, as the Nasdaq Composite, in particular, threatened to break down. The tech-heavy benchmark rose 0.2% to 6,135.08 last week despite closing on Thursday at its lowest level since May. The Dow Jones Industrial Average rose 64.71 points, or 0.3%, to 21,414.34, while the Standard & Poor’s 500 index ticked up to 2425.18.
Low bond yields and central-bank asset purchases have tamped down volatility in both the economy and the market, says Evercore ISI strategist Dennis DeBusschere, and that, in turn, has helped increase stock valuations. How much of a boost valuations have gotten, however, is unknown. The upshot: “That unwinding process runs the risk of increasing volatility and increasing headwinds for the market multiple,” DeBusschere says.
That doesn’t mean the market needs to drop, but it does put the onus on profit growth. With rates rising and multiples under pressure due to tighter monetary policy, it might take more than your run-of-the-mill earnings beat to send stocks higher, says UBS strategist Julian Emanuel, who will be closely watching Friday’s bank earnings; Citigroup (ticker: C), JPMorgan Chase (JPM), and Wells Fargo (WFC) are set to release. How the stocks react could go a long way toward determining whether the market can continue to push higher. “Friday could be the most important trading day of the year,” Emanuel says.
We got a preview of how that could play out last week, when Costco Wholesale (COST), which trades at 24.7 times 12-month forward earnings, reported what appeared to be top-notch same-store sales, but fell 2.5% over the last two days of the week.
The good news is that the weaker-than-expected economic data that seemed to be a permanent part of the landscape appear to have finally started to turn upward. Last week, for instance, the U.S. economy added 45,000 more jobs than predicted, says HighMark Capital Management Director of Research Todd Lowenstein, while the Institute for Supply Management’s manufacturing and services indexes were both stronger than expected. But more of that will be needed. “We could be stuck until the weight of data kicks in,” he says.
(Source: Barrons Online)
Heads Up!
It’s clear the Democrats and the Republicans will not work together during the current Administration. Thus, the passage of any meaningful fiscal legislation depends upon the Republicans unifying into one effective voting-block. This has not yet occurred as evidenced by the growing log-jam in Washington.
We are watching closely for actions which will unleash the log-jam. We will report them to you if noted. Meanwhile, there has been no progress toward the legislative goals listed below.
Update – Washington
The U.S. stock market has jumped since the November 8th election. We identified 4 initiatives on which the U.S. stock market is speculating to be successfully accomplished early in the Trump administration. What will happen next? It’s still to be determined!
The 4 initiatives will have a tremendous influence on the “Heat Map” which forms the basis of our forward looking view of the U.S. economy. I consider the success or failure of the 4 initiatives to be “leading” indicators for the Heat Map.
Below are the 4 Trump administration initiatives upon which the stock market is speculating and what progress, if any, has been made:
- Tax cuts and tax reforms benefiting most individuals and businesses. NO PROGRESS RECENTLY. CUMULATIVE PROGRESS TOWARD GOAL: 0%
- Infrastructure spending of up to $1 Trillion over the upcoming 7 to 10 years. NO PROGRESS RECENTLY. CUMULATIVE PROGRESS TOWARD GOAL: 0%
- Affordable Care Act amendment, reform or reorganization. ON ITS SECOND ATTEMPT, THE HOUSE OF REPRESENTATIVES PASSED LEGISLATION TO REVISE IT. CUMULATIVE PROGRESS TOWARD THIS GOAL IS 20%.
- Roll back of government regulations and Executive Orders considered to be difficult for businesses. ROLL BACKS HAVE CONTINUED. CUMULATIVE PROGRESS TOWARD GOAL: 40%
As the action happens in Washington on these 4 initiatives, don’t be surprised if the political “tug and pull” contest results in a wilder than normal stock and bond market.
We will continue to report in future issues on the progress on each initiative.