I’m writing to update you on current market conditions and other noteworthy items. We promised to give you our thoughts more frequently and to try to avoid lengthy letters. So here it goes.
Year-to-date returns in most clients’ accounts are up substantially. As we suggested, a lack of black swans is creating an environment where the drumbeat of slow steady growth is getting louder; and while many are jumping on the wagon to get “caught up”, we thankfully are not.
We added to US equities three times in the last quarter based on methodical portfolio and macroeconomic analysis – not based on market timing. Because we held the line on protecting assets in last year’s eventful and volatile markets, our returns over the last 13 months have, we feel, been strong – especially on a risk-adjusted basis and especially in light of the Fed’s zero short-term rate policy and historically low long-term rates.
And, despite the temptation to sell now and wait for the big correction, we think we need to take this opportunity to take profits and more normally weight portfolios – reduce overweighting in large cap value and bonds and rebalance to add global and mid-cap exposure.
The issue of what areas will do best in the year ahead seem to be based on credit conditions. Do they favor “risk on” or “risk off” assets?
We see credit improvement on three fronts.
One, consumers are expanding revolving credit use – probably because of an improving job picture.
Two, fear is subsiding that Europe’s financial crisis will cause a global meltdown. Ironically, Greece’s fiscal pain may be spurring other nations to fund a solution and avoid the nasty repercussions if it spreads. There’s even talk of market-based labor reforms in Europe – not just austerity. I wonder if it will spur spending and tax reform here before it’s too late.
Three, serious discussion is underway about reflating the housing market with more quantitative easing and potentially meaningful foreclosure forbearance. Stabilizing housing prices and lower refinanced monthly payments should help consumers boost the economy.
So, if the trends continue, we need to more evenly weight the areas we minimized last year – the “risk on” assets like financials, Europe, and commodities. To be sure, we have a disaster plan in place should certain events interrupt or reverse these trends. However, we know our job is to focus on what is, not what ifs.
Before closing, I want to quickly mention a couple of other items.
You may have noticed that year-end LPL Financial reports show ex-dividend payments as a decline in market value. They add back the capital gains and dividends in the dividend column. So while December was essentially flat from a performance standpoint, it would appear that accounts had a large decrease in market value that month. This wasn’t so glaring in prior years because either the year-end was up sharply or funds didn’t pay a lot of gains out because they had stored capital loss carryforwards from the financial crash years. However, in every period a dividend or gain is paid, it negatively impacts the “increase or decrease in market value” entry. And gains and dividends paid are a hugely positive event. Please see this LPL Market Value Letter of Explanation that explains this in more detail.
Finally, I want to remind you of the income and estate tax uncertainty that surrounds our planning this year.
Provisions such as making tax-free distributions from IRAs to charities, deducting state taxes on your federal returns and relieving many from the Alternative Minimum Tax (AMT) were not extended last year. Also looming large are the Bush-era tax cuts and the expansion of the Federal Gift & Estate Tax Credit. Both are set to expire this year. Because of the current deficits, and polarization of Congress and the White House, we expect the debate will probably extend into the 11th hour. The final resolution may largely depend on the outcome of the elections and the politicized dynamics of the so called “lame duck” Congress. Just when you thought it couldn’t get any better! Right.
Alright, so I did okay on the reporting more often but not the lengthy letter. Either I like to talk or there’s a whole lot going on, probably both. Thanks for the trust and confidence. Talk with you soon.
Sincerely,
Donald J. Miller, CFP®
LPL Registered Principal
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Stock investing involves risk including loss of principal. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. Mid-capitalization companies are subject to higher volatility than those of large-capitalized companies. The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings.
This entry was posted
on Wednesday, February 22nd, 2012 at 5:38 pm and is filed under Market Commentary.
You can follow any responses to this entry through the RSS 2.0 feed.
Responses are currently closed, but you can trackback from your own site.
February 2012 Market Update
I’m writing to update you on current market conditions and other noteworthy items. We promised to give you our thoughts more frequently and to try to avoid lengthy letters. So here it goes.
Year-to-date returns in most clients’ accounts are up substantially. As we suggested, a lack of black swans is creating an environment where the drumbeat of slow steady growth is getting louder; and while many are jumping on the wagon to get “caught up”, we thankfully are not.
We added to US equities three times in the last quarter based on methodical portfolio and macroeconomic analysis – not based on market timing. Because we held the line on protecting assets in last year’s eventful and volatile markets, our returns over the last 13 months have, we feel, been strong – especially on a risk-adjusted basis and especially in light of the Fed’s zero short-term rate policy and historically low long-term rates.
And, despite the temptation to sell now and wait for the big correction, we think we need to take this opportunity to take profits and more normally weight portfolios – reduce overweighting in large cap value and bonds and rebalance to add global and mid-cap exposure.
The issue of what areas will do best in the year ahead seem to be based on credit conditions. Do they favor “risk on” or “risk off” assets?
We see credit improvement on three fronts.
One, consumers are expanding revolving credit use – probably because of an improving job picture.
Two, fear is subsiding that Europe’s financial crisis will cause a global meltdown. Ironically, Greece’s fiscal pain may be spurring other nations to fund a solution and avoid the nasty repercussions if it spreads. There’s even talk of market-based labor reforms in Europe – not just austerity. I wonder if it will spur spending and tax reform here before it’s too late.
Three, serious discussion is underway about reflating the housing market with more quantitative easing and potentially meaningful foreclosure forbearance. Stabilizing housing prices and lower refinanced monthly payments should help consumers boost the economy.
So, if the trends continue, we need to more evenly weight the areas we minimized last year – the “risk on” assets like financials, Europe, and commodities. To be sure, we have a disaster plan in place should certain events interrupt or reverse these trends. However, we know our job is to focus on what is, not what ifs.
Before closing, I want to quickly mention a couple of other items.
You may have noticed that year-end LPL Financial reports show ex-dividend payments as a decline in market value. They add back the capital gains and dividends in the dividend column. So while December was essentially flat from a performance standpoint, it would appear that accounts had a large decrease in market value that month. This wasn’t so glaring in prior years because either the year-end was up sharply or funds didn’t pay a lot of gains out because they had stored capital loss carryforwards from the financial crash years. However, in every period a dividend or gain is paid, it negatively impacts the “increase or decrease in market value” entry. And gains and dividends paid are a hugely positive event. Please see this LPL Market Value Letter of Explanation that explains this in more detail.
Finally, I want to remind you of the income and estate tax uncertainty that surrounds our planning this year.
Provisions such as making tax-free distributions from IRAs to charities, deducting state taxes on your federal returns and relieving many from the Alternative Minimum Tax (AMT) were not extended last year. Also looming large are the Bush-era tax cuts and the expansion of the Federal Gift & Estate Tax Credit. Both are set to expire this year. Because of the current deficits, and polarization of Congress and the White House, we expect the debate will probably extend into the 11th hour. The final resolution may largely depend on the outcome of the elections and the politicized dynamics of the so called “lame duck” Congress. Just when you thought it couldn’t get any better! Right.
Alright, so I did okay on the reporting more often but not the lengthy letter. Either I like to talk or there’s a whole lot going on, probably both. Thanks for the trust and confidence. Talk with you soon.
Sincerely,
Donald J. Miller, CFP®
LPL Registered Principal
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Stock investing involves risk including loss of principal. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. Mid-capitalization companies are subject to higher volatility than those of large-capitalized companies. The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings.
This entry was posted on Wednesday, February 22nd, 2012 at 5:38 pm and is filed under Market Commentary. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.