A unique opportunity for IRA owners
In 2010, anyone may convert a traditional IRA to a Roth IRA. No income limits will stand in the way of the conversion.1 Should you do it? Here’s why it may (or may not) make sense for you to go Roth next year.
Why you might want to consider it. A Roth IRA permits tax-free growth and tax-free income distributions in retirement (assuming you are age 59½ or older and have held your Roth account for 5 years or longer). You can contribute to a Roth IRA after age 70½, without having to take mandatory withdrawals. While contributions to a Roth IRA aren’t tax-deductible, the younger you are, the more attractive a Roth IRA may seem.2
However, older investors have reason to go Roth as well – especially if they don’t really need to withdraw IRA assets. Under present tax law, converting an untapped traditional IRA to a Roth will shrink the size of your taxable estate, and careful estate planning could foster decades of tax-free growth for those IRA assets.3
Currently, if you name your spouse as the beneficiary of your Roth IRA, your spouse can treat the inherited IRA as his or her own after you die and forego withdrawals. So those Roth IRA assets can keep compounding untaxed across the rest of your spouse’s life.
If your spouse then names a son or daughter as a beneficiary, that heir has the choice to make minimum withdrawals according to his or her life expectancy, all while the assets continue to compound tax-free. Currently, withdrawals from an inherited Roth IRA are not subject to income tax.3
Why you may want to think twice about it. The IRS regards a traditional IRA-to-Roth IRA conversion as a distribution from a traditional IRA – a taxable event.4 You’ll need to pay taxes on the entire amount of the conversion. Do you have the money to do that?
Keep in mind, however: with the market down, many IRA values are lower than they have been for years. That translates to paying less tax on gains. It is also worth remembering that tax rates could increase in the years ahead – another reason why now may be a good time to convert. (You could simply do a partial Roth IRA conversion if converting the full amount would send you into a higher tax bracket.)4
You may be tempted to use the current IRA assets to pay the conversion tax, but should you? If you’re younger than 59½, you’re looking at a 10% penalty on the amount you withdraw, and you’ll lose the chance for tax-free compounding of those assets within the Roth IRA.5
Why you might want to fund a Roth IRA this year. In 2009, any withdrawals from a traditional IRA can be used to fund a Roth IRA.6 Interesting. Why is this so?
In years past, mandatory withdrawals from a traditional IRA typically couldn’t be deposited into a Roth IRA. But the federal government has suspended mandatory IRA withdrawals for 2009.7 Any IRA withdrawals made in 2009 are thereby elective withdrawals. So, if your adjusted gross income (AGI) is $100,000 or less, you have an option to fund a Roth IRA with a withdrawal from a traditional IRA – at least through the end of 2009.6
In 2009, you can fund a Roth IRA with after-tax contributions to a 401(k), 403(b) or 457 retirement savings plan. This year, you can take those contributions and convert them to a Roth IRA tax-free, provided your AGI is $100,000 or less. More good news: there is no limit to the conversion amount.1
A potential tax break for those who convert in 2010. If you do a Roth conversion during 2010, you can choose to divide the taxes on the conversion between your 2011 and 2012 federal returns.8
Be sure to consult your tax advisor before you convert. This is a very good idea before you arrange any rollover, trustee-to-trustee transfer, or same-trustee transfer of your IRA assets. In any year, you should fully understand the potential tax impact of a Roth conversion on your finances and your estate. Also, remember that while the income limit on Roth IRA conversions will go away in 2010, the income limits on Roth IRA contributions still apply next year and for the foreseeable future.8
Stephanie Shinn is a Representative with KMS Financial Services, Inc. and may be reached at 253.627.8101 or sjs@purcellas.com.
These are the views of Peter Montoya Inc., not the named Representative nor Broker/Dealer, and should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.
Citations.
1 kiplinger.com/magazine/archives/2009/01/sweet-deal-on-roth-ira-conversion.html [1/09]
2 thestreet.com/print/story/10505164.html [5/26/09]
3 smartmoney.com/personal-finance/retirement/estate-planning-with-a-roth-ira-7966/ [1/22/09]
4 smartmoney.com/personal-finance/retirement/roth-iras-you-wanted-to-know-7967/ [1/9/08]
5 smartmoney.com/personal-finance/retirement/roth-iras-to-convert-or-not-7965/ [1/10/08]
6 online.wsj.com/article/SB123033785000236433.html [12/26/08]
7 usnews.com/blogs/planning-to-retire/2008/12/23/president-bush-signs-pension-relief-bill.html [12/23/08]
8 kiplinger.com/columns/ask/archive/2009/q0601.htm [6/1/09]
Friday, June 5, 2009
Friday, May 15, 2009
Monthly Economic Update for May, 2009
The month in brief. If the economy was downtrodden, the stock market sure was upbeat – at the end of April, blue chips were wrapping up their best two months since 2003. As headlines and nightly news relayed anxiety about banks and automakers, Wall Street advanced powerfully. The three major indexes gained between 7.3 and 12.4% in April. Statistics indicated gloom, but confidence returned to consumers and investors.
Domestic economic health. New concerns about the viability of automakers and the capitalization of banks surfaced; in April, Wall Street rode through these concerns remarkably well. The big news, of course, was Chrysler LLC entering bankruptcy proceedings April 30 at the instruction of the White House. Fiat said yes to a partnership and a 20% stake in the U.S. automaker, but Chrysler bondholders (notably about 40 hedge funds) said no to slashing $6.9 billion in debt to $2.25 billion.
The Federal Reserve unveiled some details about bank stress tests in late April. The tests were evaluations: could 19 major U.S. thrifts potentially survive two financial scenarios, or would they need more capital to do so? Scenario one assumed a 2009 with -2.0% GDP, 8.4% unemployment, and a 14% drop in home prices. Scenario two plugged in -3.3% GDP, 8.9% joblessness and a 22% decrease in home values. We get the results May 7. Any undercapitalized banks will be directed to sell assets or draw on private-sector sources of capital before turning to the government.
As for consumers, the latest rounds of data showed them spending a bit less, but also far more confident. Personal spending and personal income respectively fell 0.2% and 0.3% in March; disposable income was flat. Retail prices and retail sales were down in March: the Consumer Price Index decreased by 0.1% and the Commerce Department had retail sales slipping by 1.1%. Producer prices also fell 1.2%. CPI dropped 0.4% and PPI fell 3.5% from March 2008 to March 2009 - the first year-over-year drop in CPI since 1955 and the biggest 12-month fall in PPI since 1950. However, the numbers from the consumer confidence indexes were certainly something to smile about: the Reuters/University of Michigan index came in at a final April level of 65.1, its biggest gain in two years. The Conference Board’s April survey hit 39.2, trouncing the 29.7 figure economists polled by Bloomberg News had expected. In other news, unemployment climbed to 8.5% in March. The Fed said GDP for the first quarter was pretty miserable: -6.1%. However, the Fed also reported that consumer spending did not contract, maintaining a 2.0% annualized pace last quarter. The Fed left interest rates alone.
World financial markets. We saw gains across the globe – tremendous gains. The MSCI World Index was up 10.9% in April – its best month since January 1987. The MSCI Emerging Markets Index rose 16.3% last month, and that was its hottest month since December 1993.
In Europe, the DAX gained 16.8% in April, and the CAC 40 rose 12.6%. England’s FTSE 100 gained 8.1%, and Ireland’s ISEQ rose 19.5%. In Asia, the April data: Hang Seng, +14.3%; Shanghai Composite, +4.4%; Sensex, +17.5%; Nikkei 225, +8.9%; Singapore Straits Times Index, +13.0%; Australian All Ordinaries Index, +6.0%.
Housing & interest rates. The March numbers weren’t very encouraging. The Commerce Department said new home sales fell by 0.6% for the month, and the National Association of Realtors reported residential resales down by 3.0%. However, the inventory of unsold new homes shrank from 12.5 months worth to 10.7 months worth across the first quarter of the year.
Rates on conventional mortgages finished April down more than a percentage point from a year ago. 30-year FRMs ended the month averaging 4.78%, according to Freddie Mac; 5-year ARMs averaged 4.80%, 1-year ARMs averaged 4.77%, and 15-year fixed-rate loans averaged 4.48%.
May outlook. On Thursday, May 7 (after the markets close), we are supposed to learn the results of the stress tests. The government has put itself in a difficult place: if it reveals too much, the markets might react too wildly, and if it reveals too little, that could breed suspicion or pessimism. Now of course, the results could surprise us all and not be as bad as anticipated. Or they could be worse than presumed.
Pessimists say that the stock market ignored economic reality in April. Optimists see the potential for great gains across the balance of 2009. In fact, Anthony Bolton, Fidelity International’s president of investments, recently told Bloomberg Television that “All the things are in place for the bear market to have ended.” Let’s hope he’s right.
Domestic economic health. New concerns about the viability of automakers and the capitalization of banks surfaced; in April, Wall Street rode through these concerns remarkably well. The big news, of course, was Chrysler LLC entering bankruptcy proceedings April 30 at the instruction of the White House. Fiat said yes to a partnership and a 20% stake in the U.S. automaker, but Chrysler bondholders (notably about 40 hedge funds) said no to slashing $6.9 billion in debt to $2.25 billion.
The Federal Reserve unveiled some details about bank stress tests in late April. The tests were evaluations: could 19 major U.S. thrifts potentially survive two financial scenarios, or would they need more capital to do so? Scenario one assumed a 2009 with -2.0% GDP, 8.4% unemployment, and a 14% drop in home prices. Scenario two plugged in -3.3% GDP, 8.9% joblessness and a 22% decrease in home values. We get the results May 7. Any undercapitalized banks will be directed to sell assets or draw on private-sector sources of capital before turning to the government.
As for consumers, the latest rounds of data showed them spending a bit less, but also far more confident. Personal spending and personal income respectively fell 0.2% and 0.3% in March; disposable income was flat. Retail prices and retail sales were down in March: the Consumer Price Index decreased by 0.1% and the Commerce Department had retail sales slipping by 1.1%. Producer prices also fell 1.2%. CPI dropped 0.4% and PPI fell 3.5% from March 2008 to March 2009 - the first year-over-year drop in CPI since 1955 and the biggest 12-month fall in PPI since 1950. However, the numbers from the consumer confidence indexes were certainly something to smile about: the Reuters/University of Michigan index came in at a final April level of 65.1, its biggest gain in two years. The Conference Board’s April survey hit 39.2, trouncing the 29.7 figure economists polled by Bloomberg News had expected. In other news, unemployment climbed to 8.5% in March. The Fed said GDP for the first quarter was pretty miserable: -6.1%. However, the Fed also reported that consumer spending did not contract, maintaining a 2.0% annualized pace last quarter. The Fed left interest rates alone.
World financial markets. We saw gains across the globe – tremendous gains. The MSCI World Index was up 10.9% in April – its best month since January 1987. The MSCI Emerging Markets Index rose 16.3% last month, and that was its hottest month since December 1993.
In Europe, the DAX gained 16.8% in April, and the CAC 40 rose 12.6%. England’s FTSE 100 gained 8.1%, and Ireland’s ISEQ rose 19.5%. In Asia, the April data: Hang Seng, +14.3%; Shanghai Composite, +4.4%; Sensex, +17.5%; Nikkei 225, +8.9%; Singapore Straits Times Index, +13.0%; Australian All Ordinaries Index, +6.0%.
Housing & interest rates. The March numbers weren’t very encouraging. The Commerce Department said new home sales fell by 0.6% for the month, and the National Association of Realtors reported residential resales down by 3.0%. However, the inventory of unsold new homes shrank from 12.5 months worth to 10.7 months worth across the first quarter of the year.
Rates on conventional mortgages finished April down more than a percentage point from a year ago. 30-year FRMs ended the month averaging 4.78%, according to Freddie Mac; 5-year ARMs averaged 4.80%, 1-year ARMs averaged 4.77%, and 15-year fixed-rate loans averaged 4.48%.
May outlook. On Thursday, May 7 (after the markets close), we are supposed to learn the results of the stress tests. The government has put itself in a difficult place: if it reveals too much, the markets might react too wildly, and if it reveals too little, that could breed suspicion or pessimism. Now of course, the results could surprise us all and not be as bad as anticipated. Or they could be worse than presumed.
Pessimists say that the stock market ignored economic reality in April. Optimists see the potential for great gains across the balance of 2009. In fact, Anthony Bolton, Fidelity International’s president of investments, recently told Bloomberg Television that “All the things are in place for the bear market to have ended.” Let’s hope he’s right.
Wednesday, March 18, 2009
HOW FAST THE MARKETS RECOVER
Don’t let the headlines get you down. Look at how the markets have rebounded.
provided by Stephanie Shinn
The stock market is amazingly resilient. The sky is not falling, despite what the pessimists would have you believe. Yes, the Dow Jones Industrial Average entered bear market territory in early July. But you might be surprised at how fast the stock market can change … for the better. Looking back, the market has recovered remarkably – and quickly – from some notable downturns.
2001-2002. After the four-day closure of the stock market following 9/11, the Dow fell 685 points (the biggest single-day drop ever) to 8920 on September 17. It kept falling, losing 14.26% in a week to close at 8,235 on September 21. But what happened next? A huge gain. The Dow closed 2001 at 10,021 – a 21% rebound in less than three months.
There were more challenges ahead. On October 9, 2002, the Dow had fallen to 7,286. But on Halloween, the Dow sat at 8,397 – a 10.6% gain in 22 days.
As for the people who panicked and bailed out of the stock market, they ended up kicking themselves: in 2003, the DJIA gained 25.3%, the S&P 500 26.4%, and the NASDAQ 50%.
1987. October 19 was Black Monday: in a contagion of selling exacerbated by unchecked computer technology, the Dow lost 22.6% in one day, falling to 1,738, a 508-point loss.3 (That would be akin to a 2,300-point one-day drop today.) The S&P 500 lost 20.4%.4 By comparison, the initial “Black Monday”, the stock market crash of 1929, represented a 12.8% market loss.
Then the recovery kicked in. During the next two trading days, the Dow gained nearly 300 points – and it closed 1987 at 1,939, gaining back all of the loss and ending up 2% for the year. By January 1990, the DJIA was at 2,800.
If you were fortunate enough to invest $1,000 in the S&P 500 index at the close of Black Monday and reinvested your dividends, you would have wound up with about $10,800 20 years later. If you had invested in the Dow stocks a week before Black Monday, you would have lost 30% on your investment in the crash … but if you held on, your investment would have gained 462% over the next 20 years.
1974. With investors fretting over rising inflation and the energy crisis, the Dow loses 30% of its value during the first three quarters of the year. Suddenly, the Dow gains 16% in October. In early December 1974, the Dow is at 577; in July 1976, it hits 1,011.
I hope these examples give you some encouragement and confidence when it comes to the market right now. The Dow, S&P and NASDAQ have been through some rough periods, but the important thing is to look at how they have climbed across the decades.
On August 12, 1982, the Dow was at 777. On January 14, 2000, it was at 11,722.98. That’s a 1,500% gain in 17½ years. This is why people stay in the market through the downturns. This is what the market is capable of achieving. There are periodic descents, but history is definitely on an investor’s side.
What should you do now? That’s a good question. If you would like to talk about how to invest in light of this recent market, and what financial moves you might make that could help you manage risk and take advantage of a rebound, then talk with a qualified financial advisor today.
Stephanie Shinn is a Representative with KMS Financial Services, Inc. and may be reached at 253.627.8101 or sjs@purcellas.com.
These are the views of Peter Montoya Inc., not the named Representative nor Broker/Dealer, and should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.
provided by Stephanie Shinn
The stock market is amazingly resilient. The sky is not falling, despite what the pessimists would have you believe. Yes, the Dow Jones Industrial Average entered bear market territory in early July. But you might be surprised at how fast the stock market can change … for the better. Looking back, the market has recovered remarkably – and quickly – from some notable downturns.
2001-2002. After the four-day closure of the stock market following 9/11, the Dow fell 685 points (the biggest single-day drop ever) to 8920 on September 17. It kept falling, losing 14.26% in a week to close at 8,235 on September 21. But what happened next? A huge gain. The Dow closed 2001 at 10,021 – a 21% rebound in less than three months.
There were more challenges ahead. On October 9, 2002, the Dow had fallen to 7,286. But on Halloween, the Dow sat at 8,397 – a 10.6% gain in 22 days.
As for the people who panicked and bailed out of the stock market, they ended up kicking themselves: in 2003, the DJIA gained 25.3%, the S&P 500 26.4%, and the NASDAQ 50%.
1987. October 19 was Black Monday: in a contagion of selling exacerbated by unchecked computer technology, the Dow lost 22.6% in one day, falling to 1,738, a 508-point loss.3 (That would be akin to a 2,300-point one-day drop today.) The S&P 500 lost 20.4%.4 By comparison, the initial “Black Monday”, the stock market crash of 1929, represented a 12.8% market loss.
Then the recovery kicked in. During the next two trading days, the Dow gained nearly 300 points – and it closed 1987 at 1,939, gaining back all of the loss and ending up 2% for the year. By January 1990, the DJIA was at 2,800.
If you were fortunate enough to invest $1,000 in the S&P 500 index at the close of Black Monday and reinvested your dividends, you would have wound up with about $10,800 20 years later. If you had invested in the Dow stocks a week before Black Monday, you would have lost 30% on your investment in the crash … but if you held on, your investment would have gained 462% over the next 20 years.
1974. With investors fretting over rising inflation and the energy crisis, the Dow loses 30% of its value during the first three quarters of the year. Suddenly, the Dow gains 16% in October. In early December 1974, the Dow is at 577; in July 1976, it hits 1,011.
I hope these examples give you some encouragement and confidence when it comes to the market right now. The Dow, S&P and NASDAQ have been through some rough periods, but the important thing is to look at how they have climbed across the decades.
On August 12, 1982, the Dow was at 777. On January 14, 2000, it was at 11,722.98. That’s a 1,500% gain in 17½ years. This is why people stay in the market through the downturns. This is what the market is capable of achieving. There are periodic descents, but history is definitely on an investor’s side.
What should you do now? That’s a good question. If you would like to talk about how to invest in light of this recent market, and what financial moves you might make that could help you manage risk and take advantage of a rebound, then talk with a qualified financial advisor today.
Stephanie Shinn is a Representative with KMS Financial Services, Inc. and may be reached at 253.627.8101 or sjs@purcellas.com.
These are the views of Peter Montoya Inc., not the named Representative nor Broker/Dealer, and should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.
Tuesday, January 6, 2009
WHAT WILL 2009 BRING?
Can the markets rebound?
It’s time to leave 2008 behind. We’ve heard the sound bites. We’ve seen the headlines. It’s all yesterday’s news. Let’s turn our attention to 2009. There is reason to be optimistic. We have a new administration and a huge new stimulus/infrastructure plan that may bode well for the economy. We have the Federal Reserve and the Treasury working to thaw the credit markets. We have economists sensing the beginnings of a recovery later this year. Here are some thoughts as we enter 2009.
Eyes on the first few days. Traditionally, stock market analysts have looked closely at the first few trading days of a new year for a clue as to how the markets will do the rest of the year. When a new President takes office after a bearish year, the interest in these first few days is heightened. If the market performs well or poorly, the thinking goes, it “sets the tone” for the first quarter and the year. Many economists would say this is bunk, and that macroeconomic forces will ultimately shape stock market performance rather than a few market days. Traders would reply by saying that the impulses of investors don’t always correspond to macroeconomic forces.
They can also point to some telling statistics. Read Stock Trader’s Almanac, and you’ll discover that a positive January has led to a positive year for stocks more than 90% of the time.
Historically, Januarys have been bullish on Wall Street. But as the Almanac notes, every January in which stocks have lost ground has “preceded a new or extended bear market, or flat market.” So keep watching.
Stocks up 20.04%. What? What kind of statistical manipulation is that? It’s no trick; it’s reality. On November 20, the S&P 500 closed at 752.44. It ended 2008 at 903.25. So the broad stock market gained 20% in less than 30 trading days at the end of 2008. Hopefully, you didn’t miss that.
Sure, you say, this is just a bear market phenomenon. It could be. But consider these hopeful signs. Our current recession began in December 2007, according to the National Bureau of Economic Research. It is now entering its fourteenth month. The two worst downturns in post-WWII history have lasted 16 months. (The old joke is that a recession is over just about the time that NBER confirms it.) Most economists doubt the recession will last through the end of 2009.
We’re not living in 1931. You’ve probably read articles that compare and contrast the current economy to the 1930s. Well, we haven’t gone that far back. Sure, we’re seeing a lot of short sales and foreclosures. But we’re not seeing every other bank shuttered, soup lines on the corner, or one out of every four Americans looking for work. The economy is down, but not out.
What we’ve done, in a sense, is to go back a few years. Mortgage rates, oil futures, retail gas prices, home prices, inflation – they are all in the ballpark of what we saw in 2003 or 2004 (and mortgage rates are lower than that). Keep in mind that in the last 2-3 years, you had the real estate market at its peak, the stock market setting records, and a commodities market that was on fire. Inevitably, all that cooled off. Severely, yes – but inevitably. Recessions are part of the natural economic cycle.
When do things turn bullish? Well, a few things have to occur to pave the Street for another extended bull run. One, the federal government stimulus and rescue plans have to take effect. Two, banks have to start lending more readily. Three, the real estate market has to show new signs of life. Improvements in corporate earnings, joblessness and consumer spending will also help.
We might be poised for great things. In recent times, powerful bull markets have emerged from low points in stocks and consumer confidence. You can point to 2003, after Black Monday in 1987, and 1982. Moreover, some of the best long-term investing opportunities have emerged from extended bear markets or tepid markets.
Consider this: The Leuthold Group, an institutional research firm based in Minneapolis, just concluded that the annual returns of the S&P 500 from 1998 to 2008 averaged -0.93% per year, not including dividends. (This study wrapped up at the end of November 2008.) As the research notes, “when 10-year annual returns [of the stock market] fall to 1% or less, the next 10 years produce an average cumulative return of 183%”. So there’s some hope for you.
What should you do in 2009? Talk about it with your financial advisor. The start of the year is a good time to review and revisit your financial plan and your long-range investment strategy.
Stephanie Shinn is a Representative with KMS Financial Services, Inc. and may be reached at 253.627.8101 or sjs@purcellas.com.
Past performance is not necessarily indicative of future results.
These are the views of Peter Montoya Inc., not the named Representative nor Broker/Dealer, and should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.
It’s time to leave 2008 behind. We’ve heard the sound bites. We’ve seen the headlines. It’s all yesterday’s news. Let’s turn our attention to 2009. There is reason to be optimistic. We have a new administration and a huge new stimulus/infrastructure plan that may bode well for the economy. We have the Federal Reserve and the Treasury working to thaw the credit markets. We have economists sensing the beginnings of a recovery later this year. Here are some thoughts as we enter 2009.
Eyes on the first few days. Traditionally, stock market analysts have looked closely at the first few trading days of a new year for a clue as to how the markets will do the rest of the year. When a new President takes office after a bearish year, the interest in these first few days is heightened. If the market performs well or poorly, the thinking goes, it “sets the tone” for the first quarter and the year. Many economists would say this is bunk, and that macroeconomic forces will ultimately shape stock market performance rather than a few market days. Traders would reply by saying that the impulses of investors don’t always correspond to macroeconomic forces.
They can also point to some telling statistics. Read Stock Trader’s Almanac, and you’ll discover that a positive January has led to a positive year for stocks more than 90% of the time.
Historically, Januarys have been bullish on Wall Street. But as the Almanac notes, every January in which stocks have lost ground has “preceded a new or extended bear market, or flat market.” So keep watching.
Stocks up 20.04%. What? What kind of statistical manipulation is that? It’s no trick; it’s reality. On November 20, the S&P 500 closed at 752.44. It ended 2008 at 903.25. So the broad stock market gained 20% in less than 30 trading days at the end of 2008. Hopefully, you didn’t miss that.
Sure, you say, this is just a bear market phenomenon. It could be. But consider these hopeful signs. Our current recession began in December 2007, according to the National Bureau of Economic Research. It is now entering its fourteenth month. The two worst downturns in post-WWII history have lasted 16 months. (The old joke is that a recession is over just about the time that NBER confirms it.) Most economists doubt the recession will last through the end of 2009.
We’re not living in 1931. You’ve probably read articles that compare and contrast the current economy to the 1930s. Well, we haven’t gone that far back. Sure, we’re seeing a lot of short sales and foreclosures. But we’re not seeing every other bank shuttered, soup lines on the corner, or one out of every four Americans looking for work. The economy is down, but not out.
What we’ve done, in a sense, is to go back a few years. Mortgage rates, oil futures, retail gas prices, home prices, inflation – they are all in the ballpark of what we saw in 2003 or 2004 (and mortgage rates are lower than that). Keep in mind that in the last 2-3 years, you had the real estate market at its peak, the stock market setting records, and a commodities market that was on fire. Inevitably, all that cooled off. Severely, yes – but inevitably. Recessions are part of the natural economic cycle.
When do things turn bullish? Well, a few things have to occur to pave the Street for another extended bull run. One, the federal government stimulus and rescue plans have to take effect. Two, banks have to start lending more readily. Three, the real estate market has to show new signs of life. Improvements in corporate earnings, joblessness and consumer spending will also help.
We might be poised for great things. In recent times, powerful bull markets have emerged from low points in stocks and consumer confidence. You can point to 2003, after Black Monday in 1987, and 1982. Moreover, some of the best long-term investing opportunities have emerged from extended bear markets or tepid markets.
Consider this: The Leuthold Group, an institutional research firm based in Minneapolis, just concluded that the annual returns of the S&P 500 from 1998 to 2008 averaged -0.93% per year, not including dividends. (This study wrapped up at the end of November 2008.) As the research notes, “when 10-year annual returns [of the stock market] fall to 1% or less, the next 10 years produce an average cumulative return of 183%”. So there’s some hope for you.
What should you do in 2009? Talk about it with your financial advisor. The start of the year is a good time to review and revisit your financial plan and your long-range investment strategy.
Stephanie Shinn is a Representative with KMS Financial Services, Inc. and may be reached at 253.627.8101 or sjs@purcellas.com.
Past performance is not necessarily indicative of future results.
These are the views of Peter Montoya Inc., not the named Representative nor Broker/Dealer, and should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.
Tuesday, November 18, 2008
PRESIDENTIAL ELECTIONS AND STOCKS
How has the market reacted to elections and new administrations?
Some interesting statistics from election years past and present.
Is an election year good for stocks? Well, let’s look at some data. Keep in mind, it’s only data – and as the old saying goes, past performance is no indication of future results. But the statistics concerning the Dow Jones Industrial Average sure are interesting. It is time to compare and contrast.
The Dow through Election Day. America has now seen 28 presidential elections since the first publication of the DJIA on May 26, 1896. In 20 of those 28 election years, the Dow posted a Y-T-D gain through Election Day. Would that it was true this year. When the market opened on November 4, 2008, the Dow was down 29.71% from its close on the final day of 2007.
The Dow in “election season”. Between Labor Day and Election Day, the Dow rose an average of 1.92% in the 27 election years between 1896 and 2004. When the incumbent President was a Republican, the Dow’s average gain between Labor Day and Election Day in those election years was approximately +0.6%.1 This year certainly did not live up to statistical expectation: the Dow closed at 11,543.96 on August 29 (the last market day before Labor Day) and opened at 9,323.89 on the morning of November 4 for a loss of 19.23% over that period.
The Dow immediately after a Presidential election. The short-term statistic is positive: on average, the DJIA has gained 1.90% between Election Day and New Year’s Day in the 27 election years past. Here are two statistics seemingly at odds with each other: when a Republican President is in office during an election year, the DJIA gain has averaged approximately 4.6% between Election Day and New Year’s Day. But when a Democrat is elected (regardless of what party holds the White House), the Dow has averaged roughly a -0.9% loss between the first Tuesday in November and New Year’s Day.
On Election Day 2008, the Dow gained 305.45 or 3.28%. However, a day later, all the gain had been lost in the wake of troubling indicators.
The Dow after a new President takes office. The DJIA has gained an average of 4.85% during the first year of a presidency. But when a Democrat is elected, that average gain has been approximately 6.0%. Historically, when a Democrat replaces a Republican in the White House, the average gain has been approximately +13.7% - but that statistic is skewed, because the Dow gained 64% in the year after Roosevelt replaced Hoover. Put 1933 aside, and the average such gain is approximately 1.2%.
As for the S&P 500 … TheStreet.com columnist Scott Rothbort tracked S&P 500 data going back to 1950 and found that the price-only return of that index in a post-presidential election year has averaged +3.06%.6 On the other hand, a research report released November 5 by the Zero Alpha Group (an international network of financial advisory firms) indicates that the S&P 500 has gained approximately 15.8% during Democratic administrations (as compared to about 11.2% during Republican administrations).
These are the views of Peter Montoya Inc., not the named Representative nor Broker/Dealer, and should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.
Some interesting statistics from election years past and present.
Is an election year good for stocks? Well, let’s look at some data. Keep in mind, it’s only data – and as the old saying goes, past performance is no indication of future results. But the statistics concerning the Dow Jones Industrial Average sure are interesting. It is time to compare and contrast.
The Dow through Election Day. America has now seen 28 presidential elections since the first publication of the DJIA on May 26, 1896. In 20 of those 28 election years, the Dow posted a Y-T-D gain through Election Day. Would that it was true this year. When the market opened on November 4, 2008, the Dow was down 29.71% from its close on the final day of 2007.
The Dow in “election season”. Between Labor Day and Election Day, the Dow rose an average of 1.92% in the 27 election years between 1896 and 2004. When the incumbent President was a Republican, the Dow’s average gain between Labor Day and Election Day in those election years was approximately +0.6%.1 This year certainly did not live up to statistical expectation: the Dow closed at 11,543.96 on August 29 (the last market day before Labor Day) and opened at 9,323.89 on the morning of November 4 for a loss of 19.23% over that period.
The Dow immediately after a Presidential election. The short-term statistic is positive: on average, the DJIA has gained 1.90% between Election Day and New Year’s Day in the 27 election years past. Here are two statistics seemingly at odds with each other: when a Republican President is in office during an election year, the DJIA gain has averaged approximately 4.6% between Election Day and New Year’s Day. But when a Democrat is elected (regardless of what party holds the White House), the Dow has averaged roughly a -0.9% loss between the first Tuesday in November and New Year’s Day.
On Election Day 2008, the Dow gained 305.45 or 3.28%. However, a day later, all the gain had been lost in the wake of troubling indicators.
The Dow after a new President takes office. The DJIA has gained an average of 4.85% during the first year of a presidency. But when a Democrat is elected, that average gain has been approximately 6.0%. Historically, when a Democrat replaces a Republican in the White House, the average gain has been approximately +13.7% - but that statistic is skewed, because the Dow gained 64% in the year after Roosevelt replaced Hoover. Put 1933 aside, and the average such gain is approximately 1.2%.
As for the S&P 500 … TheStreet.com columnist Scott Rothbort tracked S&P 500 data going back to 1950 and found that the price-only return of that index in a post-presidential election year has averaged +3.06%.6 On the other hand, a research report released November 5 by the Zero Alpha Group (an international network of financial advisory firms) indicates that the S&P 500 has gained approximately 15.8% during Democratic administrations (as compared to about 11.2% during Republican administrations).
And what about your financial strategy? While the above data is fascinating to consider, the fact is that we can’t foretell the effect a new administration will have on our money. Long-term discipline is the most important factor in an investment strategy, and your financial advisor can help you to practice it.
Stephanie Shinn is a Representative with KMS Financial Services, Inc. and may be reached at 253.627.8101 or sjs@purcellas.com.
Stephanie Shinn is a Representative with KMS Financial Services, Inc. and may be reached at 253.627.8101 or sjs@purcellas.com.
These are the views of Peter Montoya Inc., not the named Representative nor Broker/Dealer, and should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.
Wednesday, October 22, 2008
IS IT TIME FOR A REBOUND?
Is now the right time to invest?
Up 936! Back above 9,000! The stock market is amazingly resilient – you can’t count it out. After last week’s series of plunges, Monday brought one of the best days in the history of the Dow Jones Industrial Average. The Dow rose 936 points – that’s an 11.08% gain in one day. The S&P 500 soared 194.74 to move up to 1,003.35 (+11.35%). The NASDAQ rose 11.81% to finish at 1,844.25.
A rebound was widely expected, but not as large as this. Of course, we had some major news developments that for once were more encouraging than discouraging.
All kinds of help coming. Assistant Treasury Secretary Neel Kashkari spoke Monday and said that the Treasury would buy shares in healthy banks as well as troubled ones as part of the $700+ billion rescue plan. The G-7 leaders met in Washington, D.C., and the European Central Bank, the Bank of England, and the Swiss National Bank announced a coordinated effort to provide as much short-term funding as possible to beleaguered lenders. The Bank of England pledged up to $63 billion to a trio of leading British banks in need. President Bush called for a meeting of the G-8 leaders "in the next few weeks" to plan further responses to the credit crisis.
Happy days are not quite here again … but it is time to buy? Some market analysts are wondering whether we have just seen the worst of a historic correction. Others say don’t bet on it and see a rocky quarter (or several) ahead for the markets. The last bear market (2000-2003), even factoring out 9/11, saw waves of dramatic short-term ascents and descents.
Last week, journalists started to flirt with the D-word when describing the possibilities of the economy. But in recent world history, major governments have acted ably to stave off catastrophe when severe recessions have hit. Investors, economists and market analysts alike have applauded the recent global actions, and their long-term prospects.
Long-term market watchers have noticed some “deep discounts” on some quality stocks, and they are not going unnoticed. Since late September, renowned investor Warren Buffett has bought a total of $8 billion worth of shares in General Electric and Goldman Sachs, and a New York Times piece last weekend noted stocks of some prime companies trading at or close to historical lows - five to nine times their annual profits per share. While some of these firms improved their standing Monday, it is still a buyer’s market in the eyes of many analysts – as of last weekend, the S&P 500 was trading at about 13 times its expected profits for 2009, compared to 30 times its expected profits in early 2000.
An argument for perseverance. More than a few investors liquidated themselvperformance of the market recently. Patient investors hung on, keeping the historical, long-term performance of the market in mind. Whether the market pulls off an amazing rebound in the next few weeks or struggles over the next few quarters, this may be the time to invest in some solid companies rather than sit on the sidelines. Of course, any such investments should ultimately be made in light of your long-term financial goals - and with the help of a good financial advisor.
Stephanie Shinn is a Representative with KMS Financial Services, Inc. and may be reached at 253.627.8101 or sjs@purcellas.com
Up 936! Back above 9,000! The stock market is amazingly resilient – you can’t count it out. After last week’s series of plunges, Monday brought one of the best days in the history of the Dow Jones Industrial Average. The Dow rose 936 points – that’s an 11.08% gain in one day. The S&P 500 soared 194.74 to move up to 1,003.35 (+11.35%). The NASDAQ rose 11.81% to finish at 1,844.25.
A rebound was widely expected, but not as large as this. Of course, we had some major news developments that for once were more encouraging than discouraging.
All kinds of help coming. Assistant Treasury Secretary Neel Kashkari spoke Monday and said that the Treasury would buy shares in healthy banks as well as troubled ones as part of the $700+ billion rescue plan. The G-7 leaders met in Washington, D.C., and the European Central Bank, the Bank of England, and the Swiss National Bank announced a coordinated effort to provide as much short-term funding as possible to beleaguered lenders. The Bank of England pledged up to $63 billion to a trio of leading British banks in need. President Bush called for a meeting of the G-8 leaders "in the next few weeks" to plan further responses to the credit crisis.
Happy days are not quite here again … but it is time to buy? Some market analysts are wondering whether we have just seen the worst of a historic correction. Others say don’t bet on it and see a rocky quarter (or several) ahead for the markets. The last bear market (2000-2003), even factoring out 9/11, saw waves of dramatic short-term ascents and descents.
Last week, journalists started to flirt with the D-word when describing the possibilities of the economy. But in recent world history, major governments have acted ably to stave off catastrophe when severe recessions have hit. Investors, economists and market analysts alike have applauded the recent global actions, and their long-term prospects.
Long-term market watchers have noticed some “deep discounts” on some quality stocks, and they are not going unnoticed. Since late September, renowned investor Warren Buffett has bought a total of $8 billion worth of shares in General Electric and Goldman Sachs, and a New York Times piece last weekend noted stocks of some prime companies trading at or close to historical lows - five to nine times their annual profits per share. While some of these firms improved their standing Monday, it is still a buyer’s market in the eyes of many analysts – as of last weekend, the S&P 500 was trading at about 13 times its expected profits for 2009, compared to 30 times its expected profits in early 2000.
An argument for perseverance. More than a few investors liquidated themselvperformance of the market recently. Patient investors hung on, keeping the historical, long-term performance of the market in mind. Whether the market pulls off an amazing rebound in the next few weeks or struggles over the next few quarters, this may be the time to invest in some solid companies rather than sit on the sidelines. Of course, any such investments should ultimately be made in light of your long-term financial goals - and with the help of a good financial advisor.
Stephanie Shinn is a Representative with KMS Financial Services, Inc. and may be reached at 253.627.8101 or sjs@purcellas.com
Tuesday, October 7, 2008
WHAT DOES WARREN BUFFETT THINK?
Fresh perspectives on the economy from the wisest investor in the world.
Did you see Charlie Rose’s interview with Warren Buffett? On October 1, the two of them met in San Diego for a brief chat about the economy and the financial markets. Earlier that day Buffett had announced that his holding company, Berkshire Hathaway, would invest $3 billion in General Electric.1 The great investor was realistic about today’s economy – and also optimistic.
“It’s like a great athlete that’s had a cardiac arrest.” That’s Buffett’s view of the U.S. economy right now. What led to the heart attack? He puts it as simply as he can: “300 million Americans, their lending institutions, their government, their media, all believed that house prices were going to go up consistently. And that got billed into a $20 trillion residential home market.”
Everyone leveraged up, and when “you have a 20% fall in value of a $20 trillion asset, that’s $4 trillion. And when $4 trillion [in] losses lands in the wrong part of this economy, it can gum up the whole place.” Now, with so many major financial institutions trying to deleverage, “there is only one institution in the world that can leverage up in [a] countervailing force to that, and that’s the United States Treasury.”2
“An economic Pearl Harbor.” Dire words? Well, in Buffett’s view, that was what the last month or so on Wall Street had meant for the country. “In my adult lifetime, I don’t think I’ve ever seen people as fearful economically as they are right now. They are not wrong to be worried.” When something like this hits, he added, “You better spring into action with the best people you have.” He praised the initiative and vision of Treasury Secretary Henry Paulson – and FDIC Chairman Sheila Bair, in his view the unsung hero of the crisis. For the next administration, “it’s more important who the Treasury Secretary is than who the Vice President is.”
Will taxpayers get their money back? “I would bet on it.” Buffett feels that the Treasury Department’s plan to purchase hundreds of billions of mortgage-related assets will turn a profit given that they will buy them at market, and also “because the United States government has staying power and it has a low cost of borrowing.” The Bush administration’s plan is, in short, “the kind of stuff I love to do.” He noted that “if I could take 1% of that $700 billion pot and take the gain or loss from it and be their partner, and they would buy the stuff at market, I’d make a lot of money.”
“Financial weapons of mass destruction.” Buffett is no fan of derivatives. “They destroyed AIG. They certainly contributed to the destruction of Bear Stearns and Lehman.” He feels that if AIG had resisted the temptation of derivatives, it “would be doing fine today.” He later added that the Federal Reserve structured its $85 billion loan to AIG “very, very well … they have put themselves in a position where they are very likely to get their money back, maybe more … I mean I want to hire the guy that made that deal. He’d fit in well at Berkshire.”
The “choice” America is making. In Buffett’s assessment, the U.S. is “to some extent, making a choice between future inflation and getting off the floor. And we’re likely to have more inflation in the future as a consequence of the things we do to fight the present situation.” He cautions that “unemployment’s going to go up under any circumstances.”
“You want to be greedy when others are fearful.” Personally, Buffett sees many attractive opportunities right now. Cash reserves are certainly important, “but when people talk about cash being king, it’s not king if it just sits there and never does anything. There are times when cash buys more than other times, and this is one of [them].” In addition, Buffett reminds us of the inverse of his principle: “You want to be fearful when others are greedy. It’s that simple.”
“Oh, I think confidence will come back.” When Rose asked him what might “never be the same” about Wall Street or the American economy, Buffett replied optimistically. “We’ve got all the ingredients for a sensational future. It’s just that right now the athlete’s on the floor. But this is a super athlete.”
“I don’t want any viewer to [think] a magic wand exists in Congress,” he stated. “So they’re going to see some more bad news. But if we do this, we’re doing the right thing. And if [we do], the system will work over time.”
Play the video. See the entire interview at charlierose.com/shows/2008/10/1/1/an-exclusive-conversation-with-warren-buffett. Or go to cnbc.com/id/26982338/page/2/ for a full transcript.
Stephanie Shinn is a Representative with KMS Financial Services, Inc. and may be reached at 253.627.8101 or sjs@purcellas.com.
These are the views of Peter Montoya Inc., not the named Representative nor Broker/Dealer, and should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.
Did you see Charlie Rose’s interview with Warren Buffett? On October 1, the two of them met in San Diego for a brief chat about the economy and the financial markets. Earlier that day Buffett had announced that his holding company, Berkshire Hathaway, would invest $3 billion in General Electric.1 The great investor was realistic about today’s economy – and also optimistic.
“It’s like a great athlete that’s had a cardiac arrest.” That’s Buffett’s view of the U.S. economy right now. What led to the heart attack? He puts it as simply as he can: “300 million Americans, their lending institutions, their government, their media, all believed that house prices were going to go up consistently. And that got billed into a $20 trillion residential home market.”
Everyone leveraged up, and when “you have a 20% fall in value of a $20 trillion asset, that’s $4 trillion. And when $4 trillion [in] losses lands in the wrong part of this economy, it can gum up the whole place.” Now, with so many major financial institutions trying to deleverage, “there is only one institution in the world that can leverage up in [a] countervailing force to that, and that’s the United States Treasury.”2
“An economic Pearl Harbor.” Dire words? Well, in Buffett’s view, that was what the last month or so on Wall Street had meant for the country. “In my adult lifetime, I don’t think I’ve ever seen people as fearful economically as they are right now. They are not wrong to be worried.” When something like this hits, he added, “You better spring into action with the best people you have.” He praised the initiative and vision of Treasury Secretary Henry Paulson – and FDIC Chairman Sheila Bair, in his view the unsung hero of the crisis. For the next administration, “it’s more important who the Treasury Secretary is than who the Vice President is.”
Will taxpayers get their money back? “I would bet on it.” Buffett feels that the Treasury Department’s plan to purchase hundreds of billions of mortgage-related assets will turn a profit given that they will buy them at market, and also “because the United States government has staying power and it has a low cost of borrowing.” The Bush administration’s plan is, in short, “the kind of stuff I love to do.” He noted that “if I could take 1% of that $700 billion pot and take the gain or loss from it and be their partner, and they would buy the stuff at market, I’d make a lot of money.”
“Financial weapons of mass destruction.” Buffett is no fan of derivatives. “They destroyed AIG. They certainly contributed to the destruction of Bear Stearns and Lehman.” He feels that if AIG had resisted the temptation of derivatives, it “would be doing fine today.” He later added that the Federal Reserve structured its $85 billion loan to AIG “very, very well … they have put themselves in a position where they are very likely to get their money back, maybe more … I mean I want to hire the guy that made that deal. He’d fit in well at Berkshire.”
The “choice” America is making. In Buffett’s assessment, the U.S. is “to some extent, making a choice between future inflation and getting off the floor. And we’re likely to have more inflation in the future as a consequence of the things we do to fight the present situation.” He cautions that “unemployment’s going to go up under any circumstances.”
“You want to be greedy when others are fearful.” Personally, Buffett sees many attractive opportunities right now. Cash reserves are certainly important, “but when people talk about cash being king, it’s not king if it just sits there and never does anything. There are times when cash buys more than other times, and this is one of [them].” In addition, Buffett reminds us of the inverse of his principle: “You want to be fearful when others are greedy. It’s that simple.”
“Oh, I think confidence will come back.” When Rose asked him what might “never be the same” about Wall Street or the American economy, Buffett replied optimistically. “We’ve got all the ingredients for a sensational future. It’s just that right now the athlete’s on the floor. But this is a super athlete.”
“I don’t want any viewer to [think] a magic wand exists in Congress,” he stated. “So they’re going to see some more bad news. But if we do this, we’re doing the right thing. And if [we do], the system will work over time.”
Play the video. See the entire interview at charlierose.com/shows/2008/10/1/1/an-exclusive-conversation-with-warren-buffett. Or go to cnbc.com/id/26982338/page/2/ for a full transcript.
Stephanie Shinn is a Representative with KMS Financial Services, Inc. and may be reached at 253.627.8101 or sjs@purcellas.com.
These are the views of Peter Montoya Inc., not the named Representative nor Broker/Dealer, and should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.
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