Update on year-end tax planning and new income tax legislation for “extenders” – the tax bill was killed before it even left the Senate Committee based upon input from the White House. Congress must regroup to first settle the differences between the White House’s goals and the Senate Democrats. Then the parties must reconcile their differences. In short, this tax bill’s future remains unclear. Stay tuned for further updates.
The bad guys are still trying to rob innocent Americans by masquerading as IRS agents. I have heard from 3 different clients who have either received a phone call or an email recently demanding immediate payment of income tax or penalty. DO NOT FALL VICTIM to these attempts. Legitimate IRS agents do not use this type of communication.
Most of the time the U.S. stock market looks to 3 factors (call them the “pillars” that support the stock market) to support its upward trend – let’s grade each of the pillars.
CONSUMER SPENDING: We grade this factor to A- (very favorable)
THE FED AND ITS POLICIES: We continue to grade this factor an A+ (extremely favorable) because the FED cannot do much more than it is doing to support the stock market and asset prices.
BUSINESS PROFITABILITY: This factor’s grade is a B+ (above average). We are coming to the end of the third quarter earnings season. As reported by FactSet, 487 companies from the S&P 500 have reported to date and 77% have reported earnings above the mean estimate. The blended earnings growth rate is 7.9%, telecom services reporting the most improved growth for the quarter while consumer discretionary is the only sector to report a year-over-year decline. On a valuation basis, the current forward 12-month price to earnings ratio is 16.0. The 5-year average price to earnings ratio is 13.5, 10-year average 14.1, and 15-year average is 16.2. We are by no means undervalued, but the markets are not overvalued. Continued earnings growth can support price multiple expansion moving forward.
OTHER CONCERNS: The “Heat Map” is indicating the U.S. stock market is in good shape ASSUMING no international crisis. We have added the risk of an EBOLA pandemic to the “powder keg” in the Middle East to the situations to be watched. On a scale of 1 to 10 with 10 being the highest level of crisis, we rate these collectively as a 2. Risks continue to lurk, and they deserve our ongoing attention.
NOTE: there is no change from the previous Weekly Commentary.
Industrial production decreased 0.10 percent in October from the prior month. This comes after a notable jump in September of 0.80 percent. The producer price index, or average change in price of goods and services sold by manufacturers and producers in the wholesale market, rose 0.20% in October and stands at 1.5% year over year. The US Markit Manufacturing purchasing managers’ index decreased to 54.7 in November from 55.9 in October. Export sale volumes decreased which aligns with weakening European and Chinese economies. One important takeaway from these numbers was a robust rise in payroll numbers.
China’s central bank slashed one-year loans by commercial banks 0.4 percent to 5.6 percent and the one-year savings was lowered by 0.25 percent to 2.75. This is the first rate cut since July 2012 and will probably be the first step of many by China’s central bank to increase lending and combat slowing growth in China. China now joins the party of other global central banks providing accommodative monetary policy to promote economic growth.
Last week, U.S. Stocks and Foreign Stocks and Bonds all increased. During the last 12 months, STOCKS outperformed BONDS.
Returns through 11-21-2014
1-week
Y-T-D
1-Year
3-Years
5-Years
10-Years
Bonds- BarCap Aggregate Index
.1
5.3
4.9
2.7
4.1
4.7
US Stocks-Standard & Poor’s 500
1.2
13.7
17.3
22.7
16.0
8.1
Foreign Stocks- MS EAFE Developed Countries
1.0
-2.0
0.7
13.6
6.3
5.3
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, due to the Thanksgiving Holiday, a pre-recorded show will be broadcast.
No live telephone calls will be possible due to the pre-recorded show. 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; and, it is broadcast on FM 93.7 in the Fogelsville and 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 www.wdiy.org.
The 150th playing of Lafayette vs Lehigh football game was a tremendous milestone for both schools. The administrations of both schools took a significant financial risk, overcame many logistical challenges, and pulled off a great show. It was a tribute to the schools on a national level.
Since I have a degree from both schools, I could not lose regardless of the final score. Which school do I really favor? Well, that depends upon the topic because I feel I learned my social skills at Lafayette, and I learned my trade at Lehigh!
With another strong close last week, the U.S. stock market has produced a melt-up, soaring 13% from its Oct. 15 lows in little more than a month. Both major indexes finished at all-time highs Friday. There is a palpable sense among market participants that equities will likely rally through to year end, historically a bullish period for stocks.
Beaten-down sectors such as materials and energy led the way. Trading activity was lackluster. The rally’s proximate causes were monetary-easing developments in China and Europe on Friday. Yet there appears to be a growing appreciation for what the big decline in oil prices might mean for the U.S. economy.
Should that drop in energy prices be sustained, says Jason Weisberg, a partner at Seaport Securities, it will have “collateral benefits” across many sectors. It’s good for corporate margins—excluding energy firms—and is an effective tax cut for consumers, he says. “A significant cost in people’s lives has gone down and they will be able to spend on things they have put off,” adds Weisberg, who’s betting on a good fourth quarter of consumer spending.
The Chinese central bank surprised investors Friday by reducing one-year benchmark lending rates—the first drop in more than two years—in an attempt to stimulate faster growth. The same day European Central Bank president Mario Draghi said the ECB was prepared to do more to expand asset purchases, which inject liquidity into eurozone economies. The ECB said it started buying asset-backed securities to encourage banks to make loans and spur economic growth.
Last week the Dow Jones Industrial Average jumped 175 points or 1% to 17,810.06 and the S&P 500 index rose 24 2,063.50. Both were new highs. The Nasdaq Composite index rose 24 or 0.5% to 4712.97. The Russell 2000 index finished at 1172.42, little changed. The small-cap index has outperformed the big caps since mid-October’s lows.
It was another central-bank-fueled run, says Keith Bliss, director of sales at broker-dealer Cuttone. “Any time you’ve got one of the top five central banks signaling easing, the trade is simple, up.” It’s clear to investors, too, that the big central banks, including the Federal Reserve, will remain accommodative.
There’s been a change in investment direction, adds Michael Marrale, head of research, sales, and trading at Investment Technology Group. “A lot of cash left the market in the massive de-risking” by both institutional and individual investors in the October decline, he says. Some, but not all, has come back, and the focus now is U.S. small caps instead of European and emerging-market names, Marrale says.
