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  October is a month that has provided much drama in the stock market through the years and this year is no exception.  The S&P 500 was up over 11%, which is the second best October in history, and ended a five month losing streak.  The S&P 500 was up 17.1% from October 3^rd through October 28^th.  Those 19 days were better than 9 of the last 11 calendar years.  Do you see why market timing is virtually impossible? 

 

• It’s very important for businesses and investors to have some predictability about what is going on in Washington, DC as it relates to the economy.  There has been some interesting research regarding policy uncertainty; that is, what is going to happen at the Federal Reserve, taxes, regulatory issues, Congressional mandates, federal deficit, etc.  The theory behind this research is that when policy uncertainty is at its highest, economic growth is at its toughest.  It doesn’t mean it won’t happen; it just comes with fits and starts.  For example, during the eight years that Presidents Reagan and Clinton were in office, policy uncertainty was generally low and we had eight years of sustained conviction; of course we all know what generally happened in the economy and the markets during those periods.  Early in the George W. Bush Administration (2001 – 2002), policy uncertainty spiked until the beginning of the second Gulf War, and then it declined until the banking crisis of 2008.  Markets responded accordingly.  Since then, uncertainty has remained very high and thus, the economy has been in a funk.  If Congress could simply get its act together and we had less uncertainty about what was going to happen, we might find that growth would be larger and more sustained.  Unfortunately, none of that is likely to happen until January 2013 when a new Congress starts.  (Source:  Measuring Economic Policy Uncertainty October 2011)

 

• In the age of information technology, where everything is practically instantaneous, we often get caught up in what is happening month-to-month, week-to-week, day-to-day, hour-to-hour, and even minute-to-minute.  As a result, sometimes we fail to look back to find out exactly what is occurring.  Let us state at the outset that jobs are not being produced at a fast enough pace to please anyone.  But, if you had to guess how many jobs were created so far this year (through September), what would your guess be?  If we then asked how many jobs were created in 2010, would you have guessed that there was a net gain of 940,000 in non-farm payrolls?  Thus far this year, the number of jobs created month-by-month has been 68,000 in January, 235,000 in February, 194,000 in March, 217,000 in April, 53,000 in May, 20,000 in June, 127,000 in July, 57,000 in August, and 103,000 in September, for a total of 1.074 million jobs created over nine months.  Not a great number, as we said, but isn’t it surprising that over the last two years America has created over 2 million jobs?  It’s not fun for the bears to admit to this type of information, but these additions are facts.  With the third quarter producing a 2.5% GDP gain, a recession just doesn’t seem to be knocking at the door.  The classic definition of a recession is two quarters of declining GDP.  In other words, the earliest that a recession could occur would be March of next year.  Given the recent consumer spending and the retail numbers, it is highly unlikely that a contraction will occur in the fourth quarter of 2011.  Thus, the likelihood of a recession is pushed out to at least June of next year, and that’s a worst case scenario, and is not one to which we subscribe.  Yes, it is true that we lost 8.75 million jobs during the two years that preceded the numbers listed above, but we are trying to put some structure to and add some perspective to the headlines – since those headlines would like you to believe differently.  (Source:  U.S. Department of Labor)    

 

• Recently, TD Ameritrade surveyed clients of 502 Registered Investment Advisory (RIA) firms like ProVise regarding why clients preferred working with an RIA as opposed to a brokerage firm.  The number one reason was the requirement that the RIA act in a fiduciary capacity, which means placing the best interests of the client first.  The second most frequently mentioned reason had to do with the fact that there was more personalized service at an RIA than at a brokerage firm.  This reason was closely followed by the fact that RIAs had a more competitive fee structure.  Another reason was that clients were dissatisfied with their current or former commission broker.

 

• Many American workers have not received a raise for a number of years.  That is also true for Social Security recipients.  However, beginning in January, Social Security beneficiaries will receive a 3.6% cost of living adjustment (COLA).  This will result in an increase of $43 per month for the “average” recipient, bringing the benefit of the “average” recipient to $1,229 per month.  The lack of a Social Security COLA for the past several years was part of a double whammy for those living on fixed incomes.  During that same period of time the interest rate on savings at banks has been virtually zero.  Thus, many people have been forced to use their principal, if they had any, or to cut back substantially on their lifestyle choices.  Couple the lack of a COLA with the fact that Medicare premiums have continued to rise, and most people’s net cash flow has diminished over the past two years.

 

• Social Security isn’t the only thing increasing this year.  The maximum allowable contribution for a 401(k) Plan will go up from $16,500 to $17,000 in 2014.  This is the first time in three years that the maximum allowable contribution increased.  People age 50 or over can still set aside an additional $6,000, making their maximum allowable contribution $23,000.  The Social Security wage base is also increasing from $106,800 to $110,100. 

 

• A recent survey of 1,500 employees by Sun Life Financial discovered the biggest drop in workers’ confidence about retirement in the four year history of the survey.  Only 23% of working Americans feel very confident about having their basic living expenses covered in retirement.  That’s a drop from 42% in September of 2010.  The prospective retirees’ confidence in Social Security has plunged to the lowest level in the four years of the survey, with only 9% confident about having the same benefits in the future that are currently available, and only 8% believing that Medicare will still exist.  Do you think this is a message to which Congress and the President should take heed?

 

• Winston Churchill once famously said, (we are paraphrasing) “America always does the right thing after doing everything else.”  Perhaps the same thing can be said about Europe, as it grappled with the euro crisis for the past several years, and especially over the past few months.  Bank bond holders will take a 50% haircut on the Greek bonds they own, and because of this write-down, they will be asked to raise capital in the public sector.  The public sector doesn’t just apply to individual investors and institutions.  It could also mean cash rich countries like China, India, etc.  To the extent they are unable to raise the needed capital, there is a guarantee that the respective government will step in and either directly infuse the money or use the European Financial Stability Facility (EFSF) which is now being increased to €1.4 trillion.  There are further indications that the European Central Bank (ECB) will also do its part by purchasing bonds of other European countries which may have some sovereign debt issues (Italy, Portugal, Spain).  Needless to say, the markets around the world reacted extremely positively to these developments.

 

The real question, however, is whether the movement is simply a knee jerk reaction or whether there is a fundamental change in European finances and thus in the European economy.  Only time will tell for sure and while this is a good start, we need to keep in mind that it is just a start.  For example, the Greeks have done a lot to cut excess from government spending, but they have only begun to scratch the surface.  Not a single governmental job has been eliminated, and in Greece, a government job is tantamount to lifetime employment (think Japan 25 years ago).  While the Greeks think they have suffered enough already, they are probably only at the half way point.  The other Mediterranean nations have to take positive steps before they become “another Greece”.  As we learned in the U.S. during our financial crisis in 2008, our first steps, while dramatic, required even bolder actions from our political leadership.  It has taken Europe a long time to summon the political courage and obtain the consensus to develop this bail-out plan.

 

What is really needed in order to slow down the European debt crisis on a more permanent basis is growth in the economy and that will take time.  It is highly unlikely that the ECB will cut interest rates at its next meeting, but if it does so at its December meeting, it would clearly signal its intention to help the European economy grow.  In order for this to happen Germany must get over its fear of inflation and accept the fact that financial collapse and deflation is even harder to fight than inflation.  On a longer term basis, the European Union (EU) must recognize that the cumbersome nature of its decision making process needs to change.  There must be more central decision making.  If we want to take action in the U.S., as we did in 2008, it can be done with a few phone calls, setting wheels in motion over a course of a few hours, rather than requiring 17 separate decisions to be made in each country in a process that can last months.  In today’s fast paced world that type of thinking simply can’t last.      

 

In short, the journey has not ended, but another important step has been taken.  It is not a first step, but it is far from the last step.  There remain many decisions to be made and, as a result, the markets will likely remain volatile, turning on each event, both to the down and to the upside.  

 

• Congress started a three week homestretch on Halloween (isn’t that appropriate?) leading into the Thanksgiving holidays.  If they have their way, they would like to remain home for all of the holiday – after all, they do have an election next November, and they would love to use the time to campaign.  Why would you use the time between the two holidays to carry on the important work that needs to be done, when you could stay home for the holidays?  After all, doesn’t everyone get the entire month of December off?  Maybe they should put that into the Jobs Bill.  Congress can’t go home – it has to work a reasonable schedule.  In any event, between now and whenever they decide to recess, they have to keep the government running (that is a good idea, isn’t it?) by passing some temporary spending bills, they must tackle the President’s jobs program, and, oh yes, the Bipartisan Task Force must come up with a new fiscal package – otherwise automatic spending cuts begin.  It will be interesting to see whether Congress puts the interests of the country ahead of their partisan bickering and their vacation.  Like a lot of Americans, we have become cynical and we think it will be hard for them to do.

 

• As Congress begins its final weeks of debate on spending and tax proposals, we thought it was a good time to reflect on the latest information from the IRS regarding tax specifics.  In 2009 the so-called “one percenters” (those with an adjusted gross income (AGI) of at least $343,927), paid 36.7% of all federal income taxes, but only reported 16.9% of total AGI.  The average tax rate on this group was 24% of their AGI (remember Buffett at about 17%) and this is the highest percentage since 2003.  This of course includes the so-called Bush tax cuts on the wealthy.  In other words, they paid a bigger percentage in 2009 than they did in 2003.  To qualify for the top 5%, $154,643 AGI was needed, and this group paid 58.7% of all federal income taxes and accounted for 31.7% of AGI.  Stretch that to the top 10% and an AGI of $112,124 is needed, and this group paid 70.5% of all federal income taxes with only 43% of total adjusted gross income.  The bottom 50% paid only 2.25% of federal income taxes after applying all of the tax credits they were due and their average tax was only 12.5% of AGI, or about half of what was paid by the top 1%.  We’ll let you draw your own conclusions about tax fairness.

 

 

 

 

(c) ProVise Management Group

www.provise.com