We repeat last week’s analysis of the current state of the economy and the stock market in case you missed last week’s analysis. In summary, we continue to believe the U.S. and Global economies are slowly improving. We also believe the recent stock market decline is a market correction. This is a normal occurrence within a bull market. Most investors should continue to hold their current positions. However, we remain watchful and wary of any unexpected development which could derail this fragile economy and stock market. If any such development occurs, we intend to communicate with you as soon as possible. Click here for more information about corrections.
Monthly Archives: June 2010
Real Life Situations
Question: My son just announced his engagement. They plan to be married at the end of this year or early next year. Does it matter for their income taxes when they marry? Are there any other income tax issues?
Answer:
If you’re planning a wedding near year-end, put the romance aside for a moment to consider the tax consequences. The tax law still includes a “marriage penalty” that forces some pairs to pay more combined tax as a married couple than as singles. The “marriage penalty” could be substantial if both partners have high earnings. But, there are some situations when tying the knot saves on taxes. This is another situation when running the numbers is needed for a definite answer.
And, whether you have one job between you or two or more, revise withholding at work to reflect the tax bill you’ll owe as a couple
Feel free to contact me if you or someone you know has this type of situation. Tax laws can be tricky; thus, the above answer cannot be applied to all circumstances because the slightest variation could cause a different outcome.
Motivational Quote of the Week
“A good goal is like a strenuous exercise – it makes you stretch.”
–Mary Kay Ash
Technology Breakthroughs That Could Make A Difference
1. Apple’s Biggest News: An Open Standard for Video Calls – Apple’s new video calling system, FaceTime, with live mobile video calls between users, interoperable across different phones and carriers, could be a force for major changes in the way we experience the Web and the world. Analyst Alfred Poor estimates that 3.2 million consumers will have access to mobile video chat in 2010, which will grow almost 50-fold in the next five years, to an estimated 142 million consumers. As Kevin Kelly of Wired magazine wrote, “we are witnessing the birth of a new culture around video communication – we are in the midst of becoming ‘people of the screen.”
Source: NYTimes.com
2. Next Generation CT Scanners View Whole Organs in Real Time – Next-generation CT scanners now allow doctors to image an entire organ in less than a second or create a detailed 3-D movie of an organ in real time, with about half the radiation dose and half the contrast media. Using Toshiba’s Aquilion One, for example, UT Southwestern physicians said they will be able to accurately diagnose a stroke or heart attack in about 20 minutes. Currently, doctors often perform a battery of tests to confirm a heart attack — an EKG, CT angiography, nuclear testing and catheterization — which can take hours or even days.
Source: EurekAlert!
A Special Show
“Your Financial Choices” airs on WDIY Wednesday evenings, from 6-7 p.m. The show is hosted by Valley National’s Laurie Siebert CPA, CFP®. This week, Host Laurie Siebert, CPA, CFP® will be joined by guest, Ray Holton, retired long-time editor of The Morning Call and Tom Riddle, President of Valley National Financial Advisors. We will discuss how we can learn from studying the immense changes of the last 25 years.
Laurie will take your calls on this subject and other financial planning topics at 610-758-8810. 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/Phillipsburg area; and, it is broadcast on FM 93.7 in the Fogelsville/Macungie 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
Personal Notes
During Valley National’s 25th anniversary luncheon on Thursday my staff surprised me with a terrific gift – an impressive, framed group picture of the members of “Steel Curtain” which was autographed by each of the 4 legendary players:
#75 – “Mean” Joe Greene
#68 – L.C. Greenwood
#63 – Ernie Holmes (now deceased)
#78 – Dwight White (now deceased)
These four comprised the Pittsburgh Steelers defensive line for much of the 1970’s. Many football enthusiasts consider the 1976 Steeler defense as the best ever NFL defense. And, the Steel Curtain was its backbone.
The Correction Is Here – Now What?
Photo courtesy AFP/Getty Images
With U.S. stocks falling more than 10% from their April peak, the market has officially entered correction territory for the first time since the cyclical bull market began in March 2009.
The Greek debt crisis and flagging confidence in Europe more generally have been the catalysts that punctured investor confidence. Europe is staring at the prospect of either further financial instability or at best a period of severe fiscal austerity that will likely serve to depress economic growth.
Either way, Europe’s turn for the worse has caused most analysts to ratchet down their expectations for global growth in 2010.
Outside Europe there also is plenty to worry about. The developing world has grown at a fast clip, but it is now facing rising inflation and is reining in stimulus policies. China, India and Brazil have all moved to tighten lending or raise interest rates. While U.S. policymakers are not expected to raise rates anytime soon, there have been plenty of unsettling headlines, from uncertainty about the impact of the crude-oil spill in the Gulf of Mexico to the details of financial sector reform legislation.
Whether this confluence of events will continue to drive the market lower in the near term is impossible to know, but there are two things investors may want to keep in mind.
First, the global economy went into this period of financial market volatility in much better shape than in early 2009. The strength of the economic recovery during the past year, particularly in the United States and Asia, has continually surprised on the upside. While that momentum will undoubtedly slow, it does not automatically mean a reversal back to global recession.
Second, while the stock market correction so far has been abrupt and painful, it has actually been relatively typical of what might have been expected to happen given historical patterns. Consider:
Timing of correction was typical. It’s been about 14 months since the current bull market began on March 9, 2009, which is in the neighborhood of the average length of time that has passed from the start of prior bull markets to a first correction (17 months, see table).
Early bull market’s gains were above average. The stock market gained 80% before the recent correction. Historically, the first correction in a bull market has come after average gains of 57%, implying the current bull market was overdue for a correction on a price appreciation basis.
The pace of the stock market’s correction is quick. The main factor that has differentiated this recent correction is that it has taken place at a fairly swift pace compared to history. It took 24 days for the market to surpass the 10% decline threshold, which is about half the time it has historically taken on average for a correction to occur (54 days).
No one can predict how long a decline will last.
Since 1982, with few exceptions, market declines have been relatively brief. Earlier market declines have lasted longer. After the 1929 crash, it took investors 16 years to restore their investments if they invested at the market high. In 2000, it took about 5 years. But after the 1987 crash, it took about 23 months to get back. In 1990, it took about 8 months. All cases assume dividends were reinvested.
Investment implications
The investment strategy we discussed in the 4/5/2010 Weekly Commentary appears to still make sense: conservative investors should gradually increase their stock market exposure over the upcoming 12 -24 month period so that the end result is that the portfolio achieves the balance as designed in our Asset Allocation models.
The use of dollar cost averaging is one way to gradually increase stock market exposure especially in employment related savings programs like 401(k), 403(b), and 457 Plans. For a description of dollar cost averaging strategy, click: http://www.investopedia.com/terms/d/dollarcostaveraging.asp
Source of statistics: Fidelity Research and American Funds
The Markets This Week
STOCKS REBOUNDED LAST WEEK FROM their lowest level of 2010, momentarily quelling, but not dispelling, growing concerns the U.S. economy is heading toward a double-dip recession.
With both the artificial high from last year’s monetary goosing and pent-up demand fading fast, investors must decide if the economy is weathering an inevitable soft patch sprinkled with feta and imported from Europe — or something worse.
The week began ominously: The Standard & Poor’s 500 skidded Monday to 1050, its lowest close this year. The rest of the week looked a lot better, however. Some help came from China, which reported a 50% jump in exports in May. In addition, the European Central Bank raised its forecast for economic growth this year to 1% from 0.8% (although it trimmed its 2011 outlook to 1.2% from 1.5%). Drama-free auctions of government debt by Spain and Italy helped the Dow Jones Industrial Average snap its three-week losing streak; the blue chips ended the week up 279, or 2.8%, to 10,211. The S&P 500 had its best week since early March. The Nasdaq Composite Index rose 24, or 1.1%, to 2244, while the Russell 2000 gained 15, or 2.4%, to 649.
Of the many things worrying investors — Europe, China, an oilier Gulf Coast and a bossier Washington — only Europe poses systemic risk, says one Wall Street strategist. So it’s instructive that the pan-European Stoxx Europe 600 index has rebounded for the third straight week.
Because stocks are liquid and the largest asset class, and occupy the junior rung of the capital structure, they’re “most conveniently sold” when investors flee risk. But “markets cannot remain in a state of crisis forever,” says the Wall Street analyst. Stocks and corporate bonds, for instance, are both issued by the same companies, yet stocks now look cheap relative to bonds, with the gap between stocks’ earnings yield and investment-grade bond yields widening to the highest level since 1980.
An expert, who is a global head of equity strategy, thinks a double dip in the economy might be priced into the market. The MSCI World Index, for example, has retreated to 11.4 times projected profits; the multiple was lower only between October 2008 and March 2009, when the world was bracing for Armageddon.
IN HONOR OF SUMMER, HERE’S a gazpacho of trading bits:
— Technology companies have gobs of cash, and greater relevance to a thriftier future that prizes productivity, yet they weren’t spared in the correction and are down 6% this year. To take advantage of the sector’s increased volatility — and increased option premiums — bulls might screen for cash-rich companies most likely to buy back shares. Tech companies’ cleaner balance sheets and potential buybacks might limit the severity of any stock slides (Source: Barrons Online).
The Numbers
U.S. Stocks and Foreign stocks both rose this week while bonds were little changed. During the last 12 months, STOCKS have substantially outperformed bonds.
|
Returns through 6-11-2010 |
1-week |
Y-T-D |
1-Year |
3-Years |
5-Years |
10-Years |
|
Bonds- BarCap Aggregate Index |
-.1 |
4.2 |
10.2 |
7.4 |
5.4 |
6.4 |
|
US Stocks-Standard & Poor’s 500 |
2.6 |
-1.2 |
17.9 |
– 8.2 |
.2 |
-1.0 |
|
Foreign Stocks- MS EAFE Developed Countries |
1.2 |
-13.8 |
.7 |
-15.1 |
-1.4 |
-2.1 |
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. Assumes dividends are not reinvested.
25 Years Ago
JUNE, 1985.
The Great Communicator was President of the United States.
The Dow Jones index closed above 1300 for the first time ever.
Investors worried whether the scourge of the 1970’s, inflation, would return.
The highest income tax rate equaled 50%.
The COLD WAR was in full throttle mode.
Valley National was established and my wife thought I was crazy.
Twenty-five years have passed since then. I’m not crazy and proud to say that my vision for helping fulfill clients’ financial and life goals is still my mission. Valley National’s goal and service model continues to be serving individual’s and closely-held business’s need for financial and estate planning, income tax preparation, investments, and risk management. For over twenty-five years and today, I continue to assemble the team and technology to meet those goals and your goals and I thank you for allowing me to do what I love.
Our radio show, “Your Financial Choices” will explore the last 25 years in the financial services world and in the Lehigh Valley and how we can learn from those experiences, on a special show – Wednesday, June 16, 2010. It would be great if you can join us – see below for details on tuning into the show.