U.S. STOCKS HELD UP RELATIVELY WELL IN 2011
It was a weak year for equities, but foreign markets had it worse.
Presented by David McBride
2011 had a definite downside.Statistically, 2011 may end up being characterized as the year stocks stood still: the S&P 500 lost .003%, its smallest year-over-year change of any kind since 1947. Yet it was hardly a placid year; every week seemed to feature big rallies and selloffs, and seemingly every time we checked in on a financial website or TV program, some new anxiety had emerged.1
If it wasn’t the debt crisis in the European Union, it was legislators on Capitol Hill. If it wasn’t the housing market, it was the job market (and in truth, the two were inescapably linked). Investors were jittery, and as emotions affect stocks as much as earnings and fundamental indicators, the great broad index of the American stock market wound up generating a less than thrilling return.
However, there was also an upside. Is the glass half-empty or half-full at this point? That’s a good question. Bulls were heartened by the way U.S.stocks held up in 2011. Comparatively speaking, the rest of the world may be marveling at how well we did:
Now look at how these foreign indices fared in 2011, according to performance data from the Wall Street Journal’s website:
The DJIA was a member of the “fortunate five,” one of just five consequential benchmarks around the world that managed a 2011 advance. The others? Indonesia’s Jakarta Composite (+3.2%), Malaysia’s Kuala Lumpur Composite (+0.8%), the Manila Composite in the Philippines(+4.1%) and Venezuela’s Caracas General (+79.1% in a nation where inflation is running at 26%).4,5
So the evidence points to a degree of decoupling taking place last year. Stateside, investors may have been distracted and troubled by news about EU debt and a slowdown in manufacturing in the Asia-Pacific region, but there was still some residual confidence, which was bolstered in the fourth quarter by some positive news about consumer spending and retail sales, a declining jobless rate, a bit of life in what had seemed a moribund real estate market, and banks being more open to commercial loans.6
Will our relative good fortune continue? In 2012, will Wall Street pay more attention to domestic indicators and earnings than the headaches plaguing other economies?
We are all interconnected, of course; financially, the world is a small place. It is very possible that the big market swings characteristic of 2011 will repeat in 2012; currently, few things move the market up or down like news from the EU. However, with many of the EU economies veering toward recession and emerging markets cooling down, a U.S. economy that might realize but a small percentage of growth may start to look very strong indeed to the rest of the world, and that offers hope that our financial markets may perform better next year than some analysts expect.
This material was prepared by Peter MontoyaInc., and does not necessarily represent the views of the presenting Representative or the Representative’s Broker/Dealer. This information should not be construed as investment advice. Registered Principal, Securities offered through Cambridge Investment Research, Inc. a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., Registered Investment Advisor. Financial Planning offered through McBride Financial Services, Inc, a Licensed Investment Advisor. MFS and Cambridgeare not affiliated. Cambridgedoes not offer tax advice.
Citations.
1 - blogs.wsj.com/marketbeat/2011/12/30/for-the-sp-500-2011-bascially-never-happened/ [12/30/11]
2 - blogs.wsj.com/marketbeat/2011/12/30/data-points-u-s-markets-71/ [12/30/11]
3 - www.cnbc.com/id/45824871 [12/30/11]
4 - online.wsj.com/mdc/public/page/2_3022-intlstkidx.html [12/30/11]
5 – www.cnbc.com/id/45807143 [12/28/11]
6 - money.msn.com/market-news/post.aspx?post=7a929e98-4d99-44cb-98c9-a0ef1c3151c4 [12/30/11]
THE LATEST ON SOCIAL SECURITY
Benefits increase for 2012. Ideas for reform are numerous.
Presented by David McBride
Social Security gets its first COLA since 2009. As moderate inflation has made a comeback, the federal government has decided to boost Social Security benefits by 3.6% for 2012. This means an average increase of $39 per month for 55 million Social Security recipients ($467 for all of 2012). Also, more than 8 million Americans who get Supplemental Security Income will get $18 more per month ($216 for 2012).1
There are two things to note in the fine print.
Will the “super committee” of 12 make cuts to the program?It’s uncertain; the deadline for the long-term budget reform plan from Congress falls on November 23, and the bipartisan and Joint Select Committee on Deficit Reduction (a.k.a. the “supercommittee”) has been meeting more or less in secret, with AARP and other lobbyists pressuring them not to cut Social Security and Medicare.5
How might Social Security address its long-term shortfall?Proposals abound, from simple fixes to radical reforms.
Perhaps a fix lies somewhere within these proposals; unmodified or altered, alone or in combination.
How much retirement income do you have these days?With Social Security’s future still a question mark, you may be thinking about where your retirement income will come from in the years ahead. A chat with the financial professional you know and trust may be worthwhile before 2012 arrives.
This material was prepared by Peter MontoyaInc., and does not necessarily represent the views of the presenting Representative or the Representative’s Broker/Dealer. This information should not be construed as investment advice.
Registered Principal, Securities offered through Cambridge Investment Research, Inc. a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., Registered Investment Advisor. Financial Planning offered through McBride Financial Services, Inc, a Licensed Investment Advisor. MFS and Cambridgeare not affiliated. Cambridgedoes not offer tax advice. The information in this email is confidential and is intended solely for the addressee. If you are not the intended addressee and have received this email in error, please reply to the sender to inform them of this fact. We cannot accept trade orders through email. Important letters, email, or fax messages should be confirmed by calling (480) 830-6600. This email service may not be monitored every day, or after normal business hours.
Citations.
1 - businessweek.com/ap/financialnews/D9QFGU602.htm [10/19/11]
2 - money.cnn.com/2011/10/19/pf/taxes/social_security_tax/ [10/19/11]
3 - montoyaregistry.com/Financial-Market.aspx?financial-market=will-you-have-an-adequate-retirement-cash-flow&category=3 [10/21/11]
4 - articles.cnn.com/2011-09-26/politics/politics_gop-paul-ryan_1_ryan-plan-paul-ryan-government-spending/3?_s=PM:POLITICS [9/26/11]
5 - cbpp.org/cms/index.cfm?fa=view&id=3308 [10/21/10]
6 - savingthedream.org/how-it-affects-you/retirees/ [10/21/11]
7 - investors.com/NewsAndAnalysis/Article/586464/201109291833/Cains-Chilean-Model.htm [10/12/11]
8 - money.usnews.com/money/blogs/planning-to-retire/2010/05/18/12-ways-to-fix-social-security [5/18/10]
8 - money.usnews.com/money/blogs/planning-to-retire/2010/05/18/12-ways-to-fix-social-security [5/18/10]
FINANCIAL MISSTEPS MADE BY MARRIED WOMEN
Plan to avoid these common money blunders.
Presented by David McBride
A recent survey found that over 60% of women feel they are better at handling money than men are.1However, married women sometimes find themselves in perplexing financial situations – conditions that might be avoided with a little planning and/or foresight. With vigilance, you can plan to steer clear of these mistakes.
Not saving enough for retirement after marriage. If your spouse earns a huge salary and has invested avidly, you may have less impetus to save for retirement yourself. Your IRA, 401(k) or 403(b) may start to seem more supplemental than primary. Yet what happens if the relationship ends someday and you personally end up with a retirement savings shortfall? Keep contributing to your own retirement accounts.
Dipping into retirement savings once married. If your spouse is really wealthy or has much greater net worth than you do, your retirement nest egg may seem minor in comparison. Your spouse may tell you that with all the investments and savings that you collectively possess, you taking a loan out of your 401(k) won’t be that bad. Well, drawing down your own retirement savings could look like a very bad move 20 or 30 years from now. Who knows what changes life could have in store? Resist the temptation to siphon off your retirement savings.
Trusting a reckless spouse with your finances. When you love someone who is cavalier with money, look out. Beware of ceding financial control or your financial say in such a situation. If you marry someone with severe debt problems, don’t think that you will be financially immune from the effects of those problems. If your spouse is a wastrel or has a terrible credit rating, do not “hand over the keys” to the household finances. Watch what goes on with the bank accounts, investment accounts and credit cards among you– keep communication open and encourage transparency.
Forfeiting some or all of your financial identity. You may have taken your spouse’s name, but that does not mean you need to give up your own credit card for a shared one, merge your personal checking account into a joint one, and so forth. If you don’t use a credit card for several months or years, you won’t have to pay a fee but it could show up as “inactive” on your credit report. The credit card issuer may move to close the account, and losing the credit history of that card could hurt your credit score. Retain individual savings and investment accounts and individual credit cards.2
Divorcing with an “equal” rather than equitable financial settlement. If a divorce happens, the impulse may be to amicably split things “50/50” … or, the focus may be on keeping custody of your kids or keeping your home with your financial potential a distant second. However, you must keep your financial future in mind.
Quite often, a woman will be instrumental in building a business or professional practice with her spouse – but she may not be a part of that successful company or professional entity after a divorce. If you divorce and have helped your spouse build a business to greater or lesser degree, you may not only find yourself out of work but taking a job that pays less or having to learn new skills to compete in the job market. Your earnings potential and retirement savings potential may be affected. If you should divorce, seek an equitable settlement that considers your future financial potential; this is even more important than retaining material wealth or real property from the marriage.
Losing touch with your career path. If you have happily put a career aside to raise kids, keep in mind that you might find yourself returning to work sooner rather than later. Life events, economic necessity, personal desire and growing children may all be factors. Yet a long, total absence from the workplace can make it difficult to step back in – the technology or outlook of any given field can change radically across a few short years. Try to keep a foot (or at least a toe) in your career via consulting or networking efforts.
The takeaway: look out for your financial well-being. It is okay to emphasize (and plan for) your own financial destiny when you are married. In fact, it is both wise and appropriate to do so.
This material was prepared by Peter MontoyaInc., and does not necessarily represent the views of the presenting Representative or the Representative’s Broker/Dealer. This information should not be construed as investment advice.
Registered Principal, Securities offered through Cambridge Investment Research, Inc. a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., Registered Investment Advisor. Financial Planning offered through McBride Financial Services, Inc, a Licensed Investment Advisor. MFS and Cambridgeare not affiliated. Cambridgedoes not offer tax advice.
Citations.
1 http://www.synovate.com/news/article/2009/03/global-survey-shows-six-in-ten-women-consider-themselves-financially-independent.html [02/03/2009]
2 articles.moneycentral.msn.com/Banking/YourCreditRating/unused-credit-cards-can-hurt-you.aspx [5/14/10]
3 montoyaregistry.com/Financial-Market.aspx?financial-market=finding-a-financial-consultant&category=5 [9/15/11]
AVOIDING FINANCIAL CATASTROPHE
How can you prepare, financially, for a disaster?
Provided by David McBride
Wildfires, hurricanes, terrorist attacks, floods, earthquakes… there are many disasters, both man-made and natural, that could happen without warning. For many, preparedness is a way of life. If you’ve lived all your life on a fault line, for example, then making your home and belongings earthquake-ready may be a no-brainer. But are you totally prepared? Are you financially prepared?
You’ll need more than nails and two-by-fours… it’s hard to “board up” something that you can’t physically see or touch. For most of us, our “net worth” is simply a number and not a “FortKnox” of dollar bills and coins stashed in our basement. So, how do you protect what you can’t see? While I can’t possibly cover every angle of disaster preparedness in this article, the following constitutes a good starting point …
Your job. It’s important to find out how your job could be affected in the event of a disaster. If we look at those affected by Hurricane Katrina, for example, in many cases they had no job to return to … even if they could. Find out now if your employer has a disaster plan, and what that plan is. If the company shuts down, will you be able to collect unemployment compensation? If the shut-down is temporary, will you continue to collect a paycheck? If not, can you use sick time or vacation time in the interim? The answers to these questions can vary from employer to employer, so find out now what YOUR employer’s policies are. The more you know in advance, the better you can prepare.
Your cash flow. Even if you consider yourself to be very wealthy, you could still experience serious financial woes in the days following a disaster. For example, what if all power goes out in your area? If there’s no power, it’s likely that ATMs and merchants bank card processing equipment will not operate. Banks may be closed. How would you pay for any immediate needs? While you may have a disaster kit in your basement that includes food, water and clothing, does it include any money? Consider adding a small (but sufficient) amount of cash to your kit, as well as quarters (for pay phones) and traveler’s checks. If you’re unsure how much cash to include, a good rule of thumb is to consider how much money you and your family would require over a seven-day power-outage.
Your home. Although the events that followed Hurricane Katrina certainly increased awareness, many homeowners still do not realize that homeowners insurance does not cover all disaster damage. Pay close attention to what your policy does or does not cover. You may want to opt for disaster insurance or a disaster mortgage protection plan. There are also many things you can do around your home to help prevent or reduce disaster damage. In known natural disaster zones, you may choose to take advanced mitigation measures (like having your home anchored to its foundation, or building a “safe room” in your basement).
Your documents. Is a fireproof lockbox or safe sufficient? If a flood swept away your home, could it sweep away that safe or lockbox with it? Birth certificates, passports, deeds, titles and more can help you rebuild your life following a catastrophe. Consider enlisting the assistance of an online document back-up service to assure that you can access important information even if the originals are lost. You may also wish to have physical photocopies stored with an out-of-state relative or trusted friend.
Yourself. What if you are injured, disabled or killed as a result of a disaster? What if it happens tomorrow? It’s important to have your financial affairs in order, in case the unexpected occurs. Do you have insurance, including life and disability? Do you have an estate plan? What about a living will (advance health care directive)? And have you designated a health care proxy? It’s critical to have these things organized as soon as possible, because a disaster can strike at any time. It’s a good idea to enlist the assistance of a lawyer and a financial professional who can help you to plan your estate and draft the associated documents.
This material was prepared by Peter MontoyaInc., and does not necessarily represent the views of the presenting Representative or the Representative’s Broker/Dealer. This information should not be construed as investment advice.
Registered Principal, Securities offered through Cambridge Investment Research, Inc. a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., Registered Investment Advisor. Financial Planning offered through McBride Financial Services, Inc, a Licensed Investment Advisor. MFS and Cambridgeare not affiliated. Cambridgedoes not offer tax advice. The information in this email is confidential and is intended solely for the addressee.
IS NOW THE TIME TO BUY?
Some bulls see great opportunities in this correction.
Presented by David McBride
“The lower things go, the more I buy.” The legendary Warren Buffett said those words on August 9 in a chat with Fortune. Buffett is a buy-and-hold kind of guy, and even if you don’t buy into his approach, you have to admit stocks are cheap in the wake of the recent correction. For many investors, a downturn like this means picking up quality stocks at markdown prices, including dividend-paying stocks.1
Just how cheap are stocks in August? We have some compelling valuations out there. Just to give you some idea of where the broad market is at, the 12-month forward equity earnings yield of the MSCI World Index (according to Reuters) was just above 10% on August 12. This was the highest earnings yield since January 2009 – and more than five times the yield of the 10-year Treasury in mid-August.2
Domestically, Capital IQ data from August 12 shows that stocks in the S&P 500 are trading at a forward price-to-earnings ratio of around 12. Historically, the forward P-E ratio for the S&P 500 has averaged about 16. Judging by that yardstick, we have a buyer’s market right now.3
Returning to Buffett, the “oracle of Omaha” once famously said that you should “only buy something that you'd be perfectly happy to hold if the market shut down for 10 years.” The stock market is very much a long-term proposition. The last decade or so aside, taking a long view and sticking it out has had its merits.4
When you were in college, where was the Dow trading at? Where is it now? For most people, the answer would be “notably higher”.
Have you noticed how oil prices have fallen? The ripple effect of this development also bodes well for equities. Oil settled at $85.38 a barrel on the NYMEX August 12. Compare that to the $100 oil of February. Oil price cuts imply a stronger U.S.economy – with better corporate profits, lower energy costs, and improved tax receipts.5
Could a QE3 come along? The Federal Reserve hasn’t indicated this, but don’t rule it out considering that President Obama’s popularity is scraping new lows and he would like another term in office. Another monetary stimulus from the Fed would mean more cash, which could mean more money directed into gold or equities.
Fed policy could be a big factor in the market’s direction. On August 9, the Fed issued a remarkably definite statement, pledging to keep the federal funds rate at near-zero levels through mid-2013. Wall Street’s volatility might ebb when institutional investors conclude whether or not that tactic will really improve America’s GDP. 6
Is the glass half-full or half-empty? Bears are arguing that we don’t have enough job creation in the economy (or buying pressure in the stock market) to drive stocks up. They also point out that the Dow dipped beneath its 50-day moving average and 200-day moving average during the choppy trading week of August 8-12.7
Bulls are countering these arguments by pointing to the relative strength index of the DJIA. On August 11, for example, the Dow’s RSI was at 26.6. A reading below 30 is interpreted as a signal that the market is oversold. The S&P 500’s RSI hit 16.5 on August 8, which was a 10-year low. They also think that Ben Bernanke’s approach will succeed – that is, that these sustained low interest rates will encourage businesses to borrow and expand, with gains in consumer income and consumer spending as byproducts. On top of that, many corporations are generating decent or better profits, and carrying much less debt than they did two or three years ago.7,8
Markets eventually rebound – so these prices won’t last forever. Falling share prices may translate to some outstanding long-term opportunities. Whether you simply practice dollar-cost averaging or something more hands-on, persistence and longevity can be good friends.
Last week, Chicago Tribune columnist Gail MarksJarvis noted how quickly we came back from the 2007-09 bear market. A hypothetical investor with $10,000 in assets divided evenly amonglong-term Treasuries and an index fund mirroring the S&P 500 would have had but $7,700 by April 2009. By October 2010, the value of that portfolio would have grown 46.8% in 18 months to around $11,300. You don’t want to miss comebacks like that – and Wall Street is certainly capable of making them.9
This material was prepared by Peter MontoyaInc., and does not necessarily represent the views of the presenting Representative or the Representative’s Broker/Dealer. This information should not be construed as investment advice.
Registered Principal, Securities offered through Cambridge Investment Research, Inc. a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., Registered Investment Advisor. Financial Planning offered through McBride Financial Services, Inc, a Licensed Investment Advisor. MFS and Cambridgeare not affiliated. Cambridgedoes not offer tax advice. The information in this email is confidential and is intended solely for the addressee. If you are not the intended addressee and have received this email in error, please reply to the sender to inform them of this fact. We cannot accept trade orders through email. Important letters, email, or fax messages should be confirmed by calling (480) 830-6600. This email service may not be monitored every day, or after normal business hours.
Citations.1 - finance.fortune.cnn.com/2011/08/11/warren-buffett-buy-stocks/ [8/11/11]
2 - reuters.com/article/2011/08/12/us-markets-global-weekahead-idUSTRE77B39D20110812 [8/12/09]
3 - google.com/hostednews/ap/article/ALeqM5jzRK3TF86yN06W1SofDFjPh8eudg?docId=77bfe0d2fbf547498af426d607e98515 [8/12/09]
4 - billionaires.forbes.com/quote/06lobtIfiO10y?q=Warren+Buffett [8/12/11]
5 - blogs.wsj.com/marketbeat/2011/08/12/data-points-energy-metals-511/ [8/12/11]
6 - online.wsj.com/article/BT-CO-20110809-716770.html [8/9/11]
7 - ibtimes.com/articles/196193/20110811/dow-jones-industrial-average-dow-djia-stocks-market-banks-financical-crisis.htm [8/11/11]
8 - bloomberg.com/news/2011-08-09/s-p-500-relative-strength-lowest-since-2001-technical-analysis.html [8/9/11]
9 - chicagotribune.com/business/yourmoney/ct-biz-0812-gail-20110812,0,2500613.column [8/12/11]
10 - montoyaregistry.com/Financial-Market.aspx?financial-market=an-introduction-to-the-stock-market&category=29 [8/14/11]
THE D WORD HAUNTS WALL STREET
Is there a chance that Americacould actually default on its debt?
Presented by David McBride
When will the debt ceiling issue be solved?The NFL, the NBA, the EU, Congress … wherever you look, it seems people would rather wrangle these days than resolve their differences. The U.S. Treasury has set a hard deadline of August 2 for Congress to settle its divide on the federal debt ceiling, and if partisan bickering interferes, the world economy could suffer a severe hit.
What would happen if we miss the deadline?According to federal budget analysts at the BipartisanPolicyCenter, the Treasury would only be able to make a slight majority of its 80 million monthly payments in August. Treasury Secretary Timothy Geithner would likely be put in the same position as a struggling consumer low on cash and behind on his bills: he would have to selectively decide which debts to pay for the month and which to ignore.1
Should August 2 come and go without a solution, Congress’s inaction (and Geithner’s subsequent decisions) would have dramatic global repercussions. Most likely, his big priority would be to pay off bond investors so that a formal default wouldn’t occur. Yet even if these institutional investors are assuaged, the Treasury would still have to postpone millions of payments at home … payments to Social Security recipients, federal employees, contractors and soldiers possibly among them.1
So technically, Americawouldn’t actually default come August 2 – certain federal payments would be delayed. The federal government’s existing revenue stream is decent enough so that it could still pay interest and principal on unpaid debts. 2
That said, the postponed federal payments would have a dramatic impact on cash flow, consumer spending, consumer credit and even interest rates.
S&P threatens to give America a D.The venerated credit rating agency says it will cut the U.S.debt rating from AAA all the way to D if the debt cap isn’t increased by the August deadline. (That’s right – the U.S.would go from the best credit rating to the worst.) Moody’s has indicated it would cut the U.S.rating to somewhere in the Aa range, which is three steps beneath its highest ranking.3
On Bloomberg Television, S&P sovereign rating committee chairmanJohn Chambers warned that a U.S default would rock global markets in a way that would be “much more chaotic” than the shock from the 2008 Lehman Brothers bankruptcy. Fitch Ratings is less gloomy; on June 21, it characterized the U.S.as “very likely” to raise its debt ceiling before the deadline looms.3
It may just be a matter of time.This negotiation is ultimately like so many others: a ticking clock will exert the most leverage. Given the gravity of what could happen, concessions will inevitably occur, a deal should happen (albeit probably at the eleventh hour), and both sides will put their own spin on the agreement. Until then, a hint of tension haunts Wall Street.
This material was prepared by Peter MontoyaInc., and does not necessarily represent the views of the presenting Representative or the Representative’s Broker/Dealer. This information should not be construed as investment advice.
Registered Principal, Securities offered through Cambridge Investment Research, Inc. a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., Registered Investment Advisor. Financial Planning offered through McBride Financial Services, Inc, a Licensed Investment Advisor. MFS and Cambridgeare not affiliated. Cambridgedoes not offer tax advice. The information in this email is confidential and is intended solely for the addressee. If you are not the intended addressee and have received this email in error, please reply to the sender to inform them of this fact. We cannot accept trade orders through email. Important letters, email, or fax messages should be confirmed by calling (480) 830-6600. This email service may not be monitored every day, or after normal business hours.
Citations.
1 - money.cnn.com/2011/07/01/news/economy/debt_ceiling_deadline/ [7/1/11]
2 - money.cnn.com/2011/05/23/news/economy/debt_ceiling_deadline/index.htm [5/23/11]
3 - bloomberg.com/news/2011-06-29/moody-s-would-likely-cut-u-s-debt-rating-to-aa-range-in-event-of-default.html [6/30/11]
4 - content.usatoday.com/communities/theoval/post/2011/06/poll-obama-leads-gop-candidates-but-remains-vulnerable/1 [6/3/11]
5 - montoyaregistry.com/Financial-Market.aspx?financial-market=tax-loss-harvesting&category=31 [7/3/11]
THE CURRENT CD QUANDARY
Today’s yields can’t beat inflation.
Presented by David McBride
CD investors are effectively losing money. According to Market Rates Insight, a research firm tracking bank rates, annualized inflation has surpassed long-term certificate of deposit rates since February. In April, 12-month inflation hit 3.16% while the highest-yielding 5-year callable CD on the market offered a 2.4% interest rate. May’s Consumer Price Index put annualized inflation at 3.6%; as of mid-June, the highest-yielding nationally available 5-year CD was at 3.05% APY.1,2,3
Still, the Federal Reserve found that almost $9 trillion of American wealth was held in CDs, bank accounts and various FDIC-insured products as of April.4
It’s a case of déjà vu. This is the second time in recent history that CD investors have been punished for assuming so little risk. During the period from January-July 2008, the negative yield on 5-year CDs was 1.8% according to MRI.5
They might come out ahead … should inflation diminish. As Bankrate.com senior financial analyst Greg McBride reminded Bloomberg, “Investing in a CD isn’t compensating you for last year’s inflation; it’s compensating you for next year’s inflation, which is unknown.” Will inflation ease in the long term? Many analysts aren’t betting on it.
The appeal of CDs remains strong. After all, not many investments are federally insured. MRIvice-president Dan Geller said it best to Bloomberg: “Right now, people are more concerned about the return of their deposits rather than a return on their deposits.”
With 63% of Americans still believing the nation is in a recession (according to a recent Rasmussen Reports poll), there is still plenty of skittishness about equity investment. Even with the Fed’s bond-buying campaign sending yields on short-term Treasuries and CDs toward all-time lows, some investors really aren’t hungry for risk.5
Are CDs still worth it?There is no pat answer. Your own answer will depend on your preferred investment style, your risk tolerance and your financial objectives. Many people choose to park some of their invested assets in CDs and other savings instruments as part of a diversification approach. The inflation-adjusted return is dismal at the moment, but knowing that your principal is safe certainly has its appeal.
This material was prepared by Peter MontoyaInc., and does not necessarily represent the views of the presenting Representative or the Representative’s Broker/Dealer. This information should not be construed as investment advice.
Registered Principal, Securities offered through Cambridge Investment Research, Inc. a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., Registered Investment Advisor. Financial Planning offered through McBride Financial Services, Inc, a Licensed Investment Advisor. MFS and Cambridgeare not affiliated. Cambridgedoes not offer tax advice.
Citations.
1 - bloomberg.com/news/2011-05-23/savers-lose-as-long-term-cd-yields-fall-below-inflation.html [5/23/11]
2 - bls.gov/news.release/cpi.nr0.htm [6/15/11]
3 - depositaccounts.com/blog/2011/06/highest-5year-cd-rate-in-the-nation-at-fort-knox-federal-credit-union.html [6/17/11]
4 - articles.philly.com/2011-06-13/news/29653033_1_inflation-rate-mutual-funds-stock-market/2 [6/13/11]
5 - online.wsj.com/article/BT-CO-20110523-712255.html [5/23/11]
6 - montoyaregistry.com/Financial-Market.aspx?financial-market=roth-ira-rules-and-regulations&category=1 [6/19/11]
REASONS FOR OPTIMISM
Stocks are fizzling ... but things could change this summer.
Presented by David McBride
When was the last time the Dow took a six-week tumble?On June 10, the Dow dipped below 12,000 and posted its sixth straight weekly decline. You have to go back to October 2002 to find a Dow losing streak that long. If you’re hearing bearish groans in the distance, you’re not alone: the bears are making their voices heard as the Dow is down almost 7% from where it was at the end of April.1
June certainly has been tough on Wall Street, with the bulk of economic indicators flashing a slowdown. However, there is reason to think the third and fourth quarters of 2011 may be better for stocks – in fact, that’s what many analysts believe.
Q2 earnings projections are quite good.Investment research firm FactSet finds that despite the losing streak, aggregate Q2 S&P 500 earnings estimates are basically unchanged from late May. The collective forecast projects a 14.6% growth in earnings for the quarter and a 10.4% jump in revenues. (That double-digit revenue growth would be the best since Q1 2010.) As earnings are truly the mother’s milk of stocks, the market could heat up this summer if these collective predictions come true.2
Stocks are still cheap.On June 3, the S&P 500’s P/E ratio was 16.4 compared to 18.3 a year earlier. Most stocks look like a fair value right now.3
The economy is still growing.The Federal Reserve’s latest Beige Book and the twin PMIindices from the Institute for Supply Management both signal this. In fact, the ISM service sector index showed the growth of that sector accelerating in May.4
Homebuying could be poised to pick up.Sustained high unemployment isn’t going away this year, but some silver linings are emerging that bode well for the housing market. Moody’s Analytics says that the ratio of home prices to income is now 20.9% below the average ratio from 1985-2010. Mortgage interest rates are at levels unseen since the early 1960s. There are also indications that prices may be approaching a bottom in metro areas not rampant with short sales and foreclosures. Real estate analytics company CoreLogic found that home prices were down 7.5% year-over-year in April, but only down 0.5% when distressed sales were factored out.5
Hang in there.The bull market is maturing; QE2 is ending. We haven’t yet seen a correction, just a pullback. Mays and Junes have brought more than a few of those.
This material was prepared by Peter MontoyaInc., and does not necessarily represent the views of the presenting Representative or the Representative’s Broker/Dealer. This information should not be construed as investment advice.
Registered Principal, Securities offered through Cambridge Investment Research, Inc. a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., Registered Investment Advisor. Financial Planning offered through McBride Financial Services, Inc, a Licensed Investment Advisor. MFS and Cambridgeare not affiliated. Cambridgedoes not offer tax advice.
Citations.
1 - blogs.wsj.com/marketbeat/2011/06/10/were-going-streaking/ [6/10/11]
2 - blogs.wsj.com/marketbeat/2011/06/10/q2-earnings-and-revenue-estimates-remain-upbeat/ [6/10/11]
3 - smartmoney.com/invest/stocks/why-the-market-worrywarts-are-wrong-1307117379674/ [6/3/11]
4 - ism.ws/ISMReport/NonMfgROB.cfm [6/3/11]
5 - online.wsj.com/article/SB10001424052702304563104576361522020024248.html [6/4/11]
6 - montoyaregistry.com/Financial-Market.aspx?financial-market=money-and-happiness&category=29 [6/12/11]
- DAX (Germany): -14.7%
- CAC40 (France): -17.0%
- Bovespa (Brazil): -18.1%
- All Ordinaries (Australia): -15.2%
- Shanghai Composite (China): -21.7%
- Hang Seng (Hong Kong): -20.0%
- Nikkei 225: -17.3%4
-
A COLA increase in Social Security means that Medicare premiums can also increase. Much of the 2012 COLA adjustment could effectively be eaten up this way, as Medicare premiums are automatically deducted from Social Security checks. (2012 Medicare Part B premiums should be announced before the end of October.)1,2
- Businesses should note that the Social Security wage base will rise to $110,100 for 2012. Currently, the federal government levies payroll tax on the first $106,800 of income; next year, that ceiling rises by $3,300. This means about 10 million more high-earning Americans will be subject to the payroll tax, which could vary anywhere from 3.1% to 6.2% in 2012 depending on legislative action (or inaction).1,2
- President Obama’s fiscal commission has suggested raising the FICA cap. In this proposal, the payroll tax cap would gradually increase between now and 2050 so that 90% of wages earned in Americawould be subject to Social Security tax by the middle of the century. (This is how it used to be.) Under this plan, the taxable maximum would be $190,000 by 2020.2
- Rep. Paul Ryan (R-WI), Chair of the House Budget Committee, has authored the GOP’s “Path to Prosperity” plan, the so-called “Ryan roadmap” that would encourage workers under age 55 to direct some of their payroll taxes into personal retirement accounts. Rep. Ryan’s proposal would also index initial Social Security benefits for most retirees to price growth instead of average wage growth and set the age for Social Security eligibility at 67.3,4,5
- The conservative Heritage Foundation suggests a 5-year strategy in its Saving the American Dream proposal, which calls a reduction in Social Security benefits for the richest 9% of retirees, a $10,000 tax exemption for all who work past the federal retirement age, and the near-term elimination of taxation of Social Security income.6
- Republican presidential candidate Herman Cain has proposed replacing Social Security with the “Chilean model”. In the early 1980s, Chile’s government ended its retirement entitlement program and put retirement planning solely in the hands of individuals, who maintain personal retirement investment accounts and set their own contribution levels and retirement dates. Investor’s Business Daily notes that on average, the program has yielded better than 9.2% compounded annual returns over 30 years.7
- Twelve fixes were suggested in a 2010 report issued by the U.S. Senate Special Committee on Aging, among them:
-
- A 3% cut in benefits
- Taking the payroll tax to 7.3%
- Hiking the full retirement age to 68 or older
- Increasing the Social Security averaging period that determines SSI
- Reducing the typical yearly COLA by 1% or .5%
- Reducing spousal benefits
- Investing some of Social Security’s trust funds in equities
- Directing some estate tax revenues into Social Security’s trust fund
