· For the 7th year in a row, the US Postal Service lost money. After setting a record loss last year of $15.9 billion, it pared the losses to $5 billion in the current year. The USPS showed its first growth in revenue since 2008, rising 1.2% to $66 billion. In no surprise, the USPS asked Congress for help. Wonder how that is going to work out for them?
· With only two weeks to go until Congress is supposed to come up with a “compromise” to avoid another government shutdown and a possible default of the debt, we are wondering if Santa Claus will be delivering any presents from Capitol Hill to taxpayers. In the words of Ebenezer Scrooge, we are afraid it will be more like “Bah, humbug”, than “Happy Holidays”. The recent debacle around ObamaCare has emboldened the Republicans, who believe that they have gained ground with the public, an outlook hard to deny given the President’s falling popularity numbers. We see them digging in their heels. Next, the sequester doesn’t seem to be bothering the economy or voters, at least in the short run. But the longer run may be an issue as one can only delay the inevitable for so long. While sequestration will lower spending and revenue will rise with an improving economy, it will not get to the point where there are surpluses without a significantly better economy. On top of that, the tough decisions need to be made around entitlement programs. Until that happens it hard to see our way clear to reducing the nation’s debt. Look for a last minute compromise, once again.
· Janet Yellen made it clear in her confirmation hearings that she will lean more to erring on the side of keeping QE infinity to stimulate the economy rather than starting the tapering sooner. This provides both good and bad news. On the negative side, it will likely keep company plans to hire more people in the slow growth mode of the past few years. This, on the other hand, limits expenses and means that corporate earnings may be higher than they might be otherwise. Look for corporate earnings to increase 7-10% in 2014 after an anticipated increase of about 6% in 2013. How does this likely translate into stock market returns for next year? Given the outstanding year investors have enjoyed in 2013, 2014 may be a year when the US markets take a breather.
· Just where do investors find themselves today? Happy, yes; given the spectacular equity returns of 2013. But just as the President’s fortunes turned on a dime, could investor euphoria turn to concern? At the beginning of 2013, we suggested that, given the quick market rise at the end of 2012, investors should be pleased if portfolios returned 8-10% in 2013. Fundamentally, that was the best we could justify and that didn’t happen, but it probably should have. We do not believe in timing the markets, and thus, resisted the temptation to sell equities in 2013, except to provide cash flow and/or to rebalance portfolios. At this point, however, investors must understand that while it has been great to see portfolios increase as much as they have, we are in the upper range of a healthy market without a solid increase in earnings.
In looking into 2014, we may continue to see a rising market while investors enjoy the stimulus of $85 billion a month from the Federal Reserve. But we fear this may be causing future problems for the stock market. We are concerned that if these bond purchases continue too long, they will only create another bubble of epic proportions. We are not there yet, but we are much closer than we were this time last year. Bubbles don’t happen when you expect them; they happen when you don’t. We do not believe that the market will collapse, as fundamentally we believe the economy will continue to grow in 2014. It is just that the market may be ahead of itself. As we said, we are not market timers, nor will we likely ever be. Even if the markets declined by 15% from here, investors would find their portfolio with double digit gains, a situation that likely would have been pleasing at the outset of 2013. In other words, investors need to remind themselves that the stock market moves in both directions, but over time it moves forward. Those that try to time it to the upside, or to the downside, may get it right once, but no one gets it right enough to become wealthy. Calm and patience will be the watch words in 2014.
· This recovery has not produced the big growth that has followed most recessions of the past, and most of this is a result of a lack of job growth. The Federal Reserve has tried to stimulate the economy in many ways over the past several years. Their courage in trying new and innovative approaches certainly helped soften the blow from the fiscal crisis and has helped propel the S&P 500 to increase over 150% since the low of March 2009. Meanwhile, Congress has become more dysfunctional and while they could have helped the Federal Reserve’s efforts, they have been an impediment to growth. It is now time for them to do their part.
What must they do? Without job creation and without real income (after taxes and inflation) increasing, we are not going to see our economy grow the way it should and the way all of us want it to do. Some think that all we need is several years of inflation to drive incomes up and everything will be fine. For those of us who lived through the 70s, how did that work out for us? The famous term of that decade was “stagflation”. There was no real growth, just manufactured increases in everything simply because of higher prices and wages. This approach sometimes works in the short run, but in the long run does not end well.
We know that the folks who can be job creators are not going to provide jobs into the future when they have uncertainty in front of them, let alone high taxes which discourage them from growing their businesses. While much has been made of the “one-percenters”, it is the small business owners of America that are the backbone of job growth. But what incentive do they have today when there is little certainty and a tax system which does not encourage them to take risks? Now, before some folks start hollering, we are calling on Congress to step up to broaden the tax base and lower the tax rate in a fair way at all levels of income, in order to create an environment where the average American can feel comfortable in buying a home once again, can afford to go to college without a significant debt burden, can have some comfort in having a job for the long term, can save for retirement, and so much more. We need to deal with this issue not only around taxes, but also with respect to the various entitlement programs. We need them to step up and have the courage to do the job they were sent to do, and it isn’t to simply get re-elected.
· Congress only has a few weeks before it sets sail from Washington, DC and they could leave taxpayers in a very grumpy holiday mood. A total of 57 provisions of the tax code are expected to sunset come December 31st. Among the most popular are the deduction for state and local sales taxes, tax free direct charitable distributions from an IRA for those that are over 70½, and the “above the line” deduction for tuition. Don’t be surprised if they don’t get around to extending these until after the New Year. Can’t Congress ever make it easy for planning purposes?
· There is good news and difficult news on the retirement front. While more people, 61.6 million, than ever are participating in retirement plans on a percentage basis, only 39.4% of workers are participating. When narrowing the field to those working full-time and age 21-64, participation figures increase to 53.5% with a participation rate of 39.1% in the private sector and 71.5% in the public sector. This may change in the future as public pension programs struggle with funding these plans and many are expected to move away from the traditional pension plan to a plan that looks more like a 401k. (Source: US Census; Employee Benefit Research Institute)
As always, we encourage you to give us a call if you would like to discuss anything further. We will visit again soon. Proudly and successfully serving our clients for over 27 years.
RAY, KIM, ERIC, BRUCE, LOU, NANCY, TINA, JON, STEVE and DOROTHY
© 11/29/13 ProVise Management Group, LLC
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