What a great couple of weeks it has been in the stock markets! We just had the mid-term elections, an important Federal Reserve Meeting and the October 2010 monthly jobs report. Most were expecting this past week to be one where the markets took a breather and pulled back a bit. Instead, the markets powered higher to levels not seen since 2008 and better than our April 2010 highs. The NASDAQ market is up by double digits for the year and the DJIA and S&P500 indexes are near double digits. With the announced quantitative easing (QE2) by the Federal Reserve this week (simply translated, the government is going to print more money to avoid deflation), more funds will find their way to the stock markets. Therefore I believe that the markets are headed higher over the next 6-12 months (obviously, my crystal ball may be broken, but Federal Reserve Chairman Ben Bernanke came out and said that higher stock markets is one of his main objectives to stimulate spending and the economy.) Please read more about that below. If you read nothing else in this message, please at least read “The Bottom Line” below.
Quantitative Easing 2-It’s HUGE!
With inflation at historic lows and prices at risk of descending into deflation, Dr. Bernanke is determined to avoid Japan’s lost two decades due to inaction to stimulate inflation. In an environment of deflation (falling prices), spending stagnates because no one buys anything because they expect prices to be lower in the future. So yes, I said it: Dr. Bernanke wants to manufacture inflation, believe it or not. By printing greenbacks ($$$), we increase the money supply, cause the dollar to fall in value (and thereby increase exports), which in turn causes stocks and commodities to rise in price, which causes people to feel better about their investments and retirement plans, which in turn gives them the confidence to spend, which spurs more manufacturing and hiring and so on…you get the picture. Or at least that’s what he’s expecting and hoping to happen. This round of quantitative easing has been dubbed QE2 since it’s the second time since the great recession began that we’ve embarked on a similar stimulative program. This program will add $600 billion of money into the system at the rate of $75 billion for eight months to try and jump start inflation. If this doesn’t work, some analysts think that we should expect QE3 or even QE4, and by then, we may have as much as $2 trillion of money printing when all is said and done. A trillion here and a trillion there and soon you’re talking about some real money (remember when a billion used to be a huge sum of money?)
One impact of the new QE2 program hasn’t received much attention. That is, it almost guarantees that short-term interest rates will remain near zero for quite some time, perhaps for the next couple of years. Keep that in mind if you’re one of those people who collectively still have about $3 trillion invested in money-market funds. Has the memory of 2008 (-37% on the S&P500) kept you from earning +26.5% in 2009 and possibly +15% or so in 2010? Then Dr. Bernanke’s program is aimed squarely at you to get you to take some risk again. If you are still scared of the markets, then maybe you should be talking to us.
As expected, the value of the U. S. dollar dropped with the announcement of the QE2 program. Printing lots of money lowers the value of any currency, even the mighty greenback. On cue with the decline in the dollar, the value of oil, gold, and other commodities increased. The weaker dollar should help to boost American exports, reduce imports, and lessen our trade deficit with the rest of the world. Obviously, the rest of the world – our major trading partners – aren’t too happy about it. The risk of a worldwide “currency war” is higher as a result.
October Jobs Report-Much Better than Expected
The October 2010 jobs report was very positive and showed growth in jobs of about 151,000 (story below), but an unemployment rate that is still stubbornly high at 9.6%. This was far higher than the 60,000-90,000 jobs growth expected. Of course, at this rate it will take several years to get back to where we were in 2007, but this is indeed positive for a recovery that is likely to be disappointingly slow and painful for those who are still unemployed or are at risk of losing their homes. Nonetheless, I will repeat what I’ve said in the past: many of the 5M+ jobs lost over the past three years are gone and will never be coming back due to technology advances, outsourcing and higher productivity. Although many would like to see a return to 5-6% unemployment, we may be stuck with 7-8% unemployment as the norm in the future.
There have been numerous positive economic reports over the past several weeks that have all but put speculation of a double-dip recession to rest. As I’ve said several times since the spring and summer, every recovery from a recession as deep as the one we’ve experienced has felt like a jobless one and real estate prices take much longer than expected to recover. There was one report on CNBC the other day that said that Florida had an 18-year supply of condos on the market, and if you hurry you just might get one, but only if you can pay cash since most lenders are not loaning money against them. Obviously, the housing market is not coming back any time soon, and talks of 2020 as the soonest timeframe are abound. I personally believe that’s far too pessimistic, and that by 2013, the lower supply of homes (due to low current new home construction rates) will necessitate increased building and help boost prices once again.
Year-end Tax Planning & 2010 Roth IRA Conversions
I’ve delayed my year-end tax planning letter this year due to all the uncertainty about what will be happening with the expiration of the Bush-era tax cuts. My expectation is that with President Obama extending an olive branch to the newly Republican controlled House of Representatives, we will see a two-year extension for everyone, not just the poor and middle-class. The president doesn’t want to be responsible for counter-acting the QE2 program with increased taxes, especially during such a feeble recovery. Look for my year-end tax planning letter in a week to ten days. For all my financial planning clients, I am making appointments or encouraging you to send in your year-end pay stubs and financial estimates so we can get your tax planning underway before mid-December. This is a complimentary and year-round service for all our financial planning and money management clients.
2010 is the only year that you can convert all or part of your traditional or rollover IRA and spread the resultant income over 2011 and 2012. If you decide to do so and the value of your converted assets goes down by October 15, 2011 (and you’ve extended your 2010 tax return), you can undo the conversion. Beginning in 2011 (and all years thereafter), you can convert your IRA but the two year spread of income is not available to you—you will have to report all conversion income in the year of conversion. The decision to convert your assets is a very important and complicated one, and should only be undertaken with a detailed analysis of your taxes and finances. Anyone who tells you to convert or not convert without a full evaluation or knowledge of your individual finances and future tax rates is not giving you an informed decision. Please discuss with me or your tax advisor if a Roth conversion in 2010 makes sense for you.
The Bottom Line
You may hate what’s happening in Washington, what the Federal Reserve is doing, how high the unemployment rate is, how terrible the housing market is, how much Washington’s spending, how we are debasing our beloved greenback, how inflation is going to be hyperbolic, and how this country is going to heck in a hand-basket. But if you focus on those things you will miss out on what is likely to be a continuation of the current stock market rally. The government has told us that it wants the stock market to go higher and you may have heard the expression that “You can’t fight the Fed.” For the next 6-12 months, perhaps longer, money will find its way into the stock market and surely push prices higher. Sure there will be bumps along the way, periods of sideways movement, and some corrections, but I believe that the ultimate direction is upward.
We can debate whether the government will be successful in its objectives, but that won’t increase the value of your investments, IRA or 401(k). If you are on the sidelines, or are considering investing money in the markets, I urge you to talk to a planner or advisor who can help you sooner rather than later. It’s not often that the government tells you that it will help and actually does help you make money on your investments. I believe that we’ll look back on this time period in hindsight and realize what an great investment opportunity it was.
Of course, my prognostication would not be complete without a proper disclaimer: my crystal ball is in the shop, so any forward looking statements I make should be discounted and evaluated in the context of your own financial plan and should be discussed with your financial planner. As we all know, anything can happen and usually does to trip up the smart and dumb money in the markets. But right now, the smart money tells me that the best place to be right now is in high quality equities, bonds and commodities. If you have money on the sidelines waiting to be invested, you can put it to work now if it’s planned to be invested for the long term (five or more years) or wait for an inevitable short-term market correction to get in. However, the thing about dips lately is that they’ve been quite shallow and are bought up quickly. If you’re concerned, you can start slow, invest a little and invest a little more on inevitable corrections.
In my role as a fiduciary planner, I will also plainly disclose that encouraging you to invest (more) money in the stock or bond markets is a direct conflict-of-interest for me (at least for my clients and prospects) since I charge fees based on assets managed. However, regardless of how or where you invest, I just want to see you participating and getting your share of the government’s current “asset re-inflation program.”
In Closing
Finally, as you can no doubt tell, I still haven’t figured out how to be brief in these newsletters. While I’ve tried to explain in as few details as possible what is going on, I’m willing to discuss in depth any of the topics discussed above with you in person or on the phone. If you or anyone you know is struggling with their financial plans or just deciding to get back into this market, we can help them get back on track. It is not too late to get in, and this rally, in my opinion, is not even close to being over. Please call me at (615) 395-2010 or (734) 447-5305, visit my web site or send me an e-mail. I’m happy to help.
I’ve included a few links below to stories that I thought you might be interested from the past week. If you have any feedback on this newsletter, its length or the frequency that it is published please let me know. Have a great and profitable week!
| Market Update For Week Ending 11/5/2010 |
| Index |
Close |
Net Change |
% Change |
YTD |
YTD % |
| DJIA |
11,444.08 |
+325.59 |
2.93 |
+1,016.03 |
9.74 |
| NASDAQ |
2,578.98 |
+71.57 |
2.85 |
+309.83 |
13.65 |
| S&P500 |
1,225.85 |
+42.59 |
3.60 |
+110.75 |
9.93 |
| Russell 2000 |
736.59 |
+33.24 |
4.73 |
+111.20 |
17.78 |
| International |
1,671.56 |
+55.15 |
3.41 |
+90.77 |
5.74 |
| 10-year bond |
2.53% |
-0.08% |
|
-1.28% |
|
| 30-year T-bond |
4.12% |
+0.12% |
|
-0.57% |
|
|
International index is MSCI EAFE index. Bond data reflect net change in yield, not price. Indices are unmanaged and you cannot directly invest in an index. Market Wrap
An unusually eventful week in the global markets left global equity benchmarks surging and Treasury yields mixed. On Wall Street, the growth-sensitive small-cap Russell 2000 fared best among major benchmarks, up 4.73% on the prospect of continued Federal Reserve action to stimulate the U.S. economy. The broad S&P 500 gained 3.6% and the blue-chip Dow industrials surged 2.93%, while the technology-rich NASDAQ added 2.85%. Foreign shares kept pace, up 3.41% in dollar-denominated terms. News that the Federal Reserve will buy up to $600 billion more short-term Treasury securities sent money down the yield curve in the bond markets, pushing 10-year yields down and 30-year yields higher. For more, please read:
http://money.cnn.com/2010/11/05/markets/markets_newyorkGlobal Markets Applaud The Fed
Wednesday’s news that the Federal Reserve had decided to step back into the bond market to buy up to $600 billion in Treasury securities won worldwide applause from stock markets, although the move was controversial in some quarters. Called “quantitative easing,” the bond-buying campaign aims to suppress long-term interest rates by creating a new source of demand for Treasury debt. The hope is that this will both encourage banks to keep lending and drive return-hungry investors into potentially higher-yielding vehicles like stocks. For more on the Fed’s maneuver and varied reactions to it, please read:
http://www.forbes.com/2010/11/04/europe-briefing-fed-markets-equities-600-billio
n-asia.html
Job Report Better Than Expected
The week was so filled with data and announcements that the normally closely watched monthly payrolls report seemed almost like a footnote to some market watchers. Still, news that the U.S. economy added 151,000 jobs in October came as a welcome surprise for economists who had expected a much gloomier number. The August and September reports were also revised to reflect apparently better-than-suspected conditions in the job market during those months. For more on the latest economic numbers and what they tell us, please read:
http://www.cnbc.com/id/40024584 |
Best regards,
Sam
Sam H. Fawaz CPA, CFP®
YDream Financial Services, Inc.
(734) 447-5305
(615) 395-2010
http://www.ydfs.com
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Sam H. Fawaz CFP®, CPA is president of YDream Financial Services, Inc., a registered investment advisor. Sam is a Certified Financial Planner (CFP®), Certified Public Accountant and registered member of the National Association of Personal Financial Advisors (NAPFA) fee-only financial planner group. Sam has expertise in many areas of personal finance and wealth management and has always been fascinated with the role of money in society. Helping others prosper and succeed has been Sam’s mission since he decided to dedicate his life to financial planning. He specializes in entrepreneurs, professionals, company executives and their families.
All material presented herein is believed to be reliable, but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment advisors before making any investment decisions. Opinions expressed in this writing by Sam H. Fawaz are his own, may change without prior notice and should not be relied upon as a basis for making investment or planning decisions. No person can accurately forecast or call a market top or bottom, so forward looking statements should be discounted and not relied upon as a basis for investing or trading decisions. This message was authored by Sam H. Fawaz CPA, CFP and is provided by YDream Financial Services, Inc.
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