RETRO-Spectives from Above the Noise – 2014

The 3 Major Stories in the Global Economy for the Year

I would like to wish all of our readers a happy and prosperous 2015! As we did last year, I wanted to take a moment to reflect on the previous year, and take a look at the events that shaped the economy last year, and potential impact on 2015. The bull continued to run in the US, but other economies and investment asset classes lagged behind.

Volatility continues to be the norm. For the year, the S&P rose +11.5%, the Dow gained +7.5%, and the MSCI EAFE (developed international) lost -8.1%.

Here are the 3 major stories from 2013 we believe will continue to impact 2014:

Oil Prices Fall Hard…Where to Next?

With crude oil briefly trading below $50 a barrel on Monday, many wonder if the commodity is oversold and due for a rebound. However, one prominent analyst, Citigroup’s Ed Morse, believes there is further downside. Last March, Morse correctly predicted $75 a barrel global oil prices, back when it was trading above $100. His team at Citigroup are now calling for global and U.S oil prices to average $63 and $55 a barrel this year, respectively. They believe that the 2014 price decline was supply driven, and that the oversupply condition will continue to drive prices even lower before recovering somewhat in the second half of 2015 and into next year.

For more thoughts on the price of oil, please see our last blog entry—a special perspective on oil.

The Relationship Between Stocks & Interest Rates

We know the general inverse relationship between bond values and interest rates, but predicting equity trajectory during periods when interest rates rise is a little bit tougher. An article from the Wall Street Journal provides the history of S&P 500 returns when the U.S. Federal Reserve boosts rates. The author reviewed 14 periods during which the Fed was boosting short-term interest rates since the S&P 500 index was launched in 1957. He calculated the returns for the index in each period from the month when rates bottomed out through the month when rates peaked. The periods ranged in length from several months to more than four years. The average return for the S&P 500 during all four periods was 9.6%, including dividends. The S&P 500 fell in only two of the 14 periods, both in the early 1970s. Other researchers have pointed out similar conclusions although they point out that the stock market has tended to undergo increased volatility (an average decline of 8%) around the initial instance of rate hikes.

It might not matter. According to bond guru Bill Gross, it will be difficult for the Fed to raise rates in light of continued sluggish global growth and low inflation. He has a weak outlook for growth this year in both developed and emerging markets. Moreover, he feels the strengthening U.S. dollar and falling oil prices will also contribute to the Fed holding off on raising interest rates. The Federal Reserve has not raised short-term interest rates in nine years, but the consensus expectation is for a rate hike in mid-year.

Divided Government--Officially

The US government officially became divided, with Republicans seizing control of both houses of Congress. Expect a whole lot of nothing as President Obama does not have the votes from his party in either house, and the Republicans lack a super-majority to override any veto. There will likely be many “symbolic” legislation sent by Congress to the President’s desk, but the larger issues will likely be ignored.

Tax Reform is probably the single largest economic issue that needs to be addressed (but likely won’t). Not only does it affect the net income of every American by its arcane complexity, it also affects the long-term viability of social security, calculation of Medicare premium payments for retirees, business planning (e.g. hiring for growth), and much more. Again I do not expect any of this to be addressed by a fully divided executive and legislative branch.


Looking ahead, we're optimistic about 2015. We do expect US equities to slow their pace of growth. Corrections & bear markets are part of the normal investing and economic cycle, and statistically we are due for either. That said, there are still many prospects for growth and opportunities in other asset classes. Long term economic trends are still heading in the right direction. Although it's impossible to predict market trajectories with accuracy, we're always on the lookout for both dangers and opportunities for our clients, and we look forward to supporting you in the year ahead!

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team. First Allied Asset Management provides investment management and advisory services to a number of programs sponsored by First Allied Securities and First Allied Advisory Services. First Allied Asset Management individuals who provide investment management services are not associated persons with any broker-dealer.

8 Wealth Issues: Taxes

The Tax Effect; Taking Taxes Into Account When Saving & Investing

In this month’s 8 Wealth Issues blog, I thought it important to focus on the inter-play between taxes and investing. Many people have been surprised by their tax bill for 2013—and with taxes certainly not decreasing, let’s look at how investment strategies can lead to potential higher “pay as you go” capital gains and interest income taxes.

How many of us save and invest with an eye on tax implications? Not that many of us, according to a recent survey from Russell Investments (the global asset manager overseeing the Russell 2000). In the opening quarter of 2014, Russell polled financial services professionals and asked them how many of their clients had inquired about tax-sensitive investment strategies. Just 35% of the polled financial professionals reported clients wanting information about them, and just 18% said their clients proactively wanted to discuss the matter.1

Good financial professionals aren’t shy about bringing this up, of course. In the Russell survey, 75% of respondents said that they made tax-managed investments available to their clients.1

When is the ideal time to address tax matters? The end of a year can prompt many investors to think about tax issues. Investors’ biggest concerns may include any sudden changes to tax law. Congress often saves such changes for the eleventh hour. Sometimes they present opportunities, other times unwelcome surprises.

The problem is that your time frame can be pretty short once December rolls around. You can’t always pull off that year-end charitable donation, gift of appreciated securities, or extra retirement plan contribution; sometimes your financial situation or sheer logistics get in the way. It is better to think about these things in July or January, or simply year-round.

While thinking about the tax implications of your investments year-round may seem like a chore, it may save you some money. Your financial services professional can help you stay aware of the tax ramifications of certain financial moves.

Think about taxes as you contribute to your retirement accounts. Do you contribute to a qualified retirement plan at work? In doing so, you can lower your taxable income (and your yearly tax liability). Why? Those contributions are made with pre-tax dollars. In 2014, you can contribute up to $17,500 to a 401(k) or 403(b) account or the federal government’s Thrift Savings Plan. If you are 50 or older this year, you can put in up to $23,000 into these accounts. The same is true for most 457 plans. This can reduce your taxable income and lower your tax bill.2,4

Think about where you want to live when you retire. Certain states have high personal income tax rates affecting wealthy households, and others don’t levy state income tax at all. If you are wealthy and want to retire in a state with higher rates, a Roth IRA may start to look pretty good versus a traditional IRA. Withdrawals from a Roth IRA aren’t taxed (assuming the Roth IRA owner follows IRS rules), because contributions to a Roth are made with after-tax dollars. Distributions you take from a traditional IRA in retirement will be taxed.2

What capital gains tax rate will you face on a particular investment? In 2013, the long-term capital gains tax rate became 20% for high earners, up from 15%. On top of that, the Affordable Care Act Surtax of 3.8% effectively took the long-term capital gains tax rate to 23.8% for investors earning more than $200,000.2,3

Greater capital gains taxes can actually be levied in some cases. Take the case of real estate depreciation. If you sell real property that you have depreciated, part of your gain will be taxed at 25%. The long-term capital gains tax rate for collectibles is 28%. Own any qualified small business stock? If you have owned it for over five years, you typically can exclude 50% of any gains from income, but the other 50% will be taxed at 28%. Lastly, if you sell an asset you’ve held for less than a year, the money you realize from that sale will be taxed at the short-term rate (i.e., regular income), which could be as high as 39.6%.2,3

Are you deducting all you can? The mortgage interest deduction is not always noticed by taxpayers. If a home loan exceeds $1.1 million, interest above that amount may not qualify for a deduction. Itemizing can be a pain, but may bring you more tax savings than you anticipate.2

A tax-sensitive investing approach is always specific to the individual. Therefore, any strategy needs to start with an in-depth discussion with your tax or financial professional. With growing concern over government entitlement programs and rising debt, taxes are likely on the rise. It is important to incorporate strategies to help mitigate taxation of your investments into your financial plan.

Citations.

1 - russell.com/us/newsroom/press-releases/2014/russell-survey-advisors-say-tax-aware-investment-strategies-not-top-of-mind.page? [4/29/14]
2 - foxbusiness.com/personal-finance/2014/08/07/investments-and-tax-planning-go-hand-in-hand/ [8/7/14]
3 - bankrate.com/finance/money-guides/capital-gains-tax-rates-1.aspx [3/27/14]
4 - irs.gov/uac/IRS-Announces-2014-Pension-Plan-Limitations;-Taxpayers-May-Contribute-up-to-$17,500-to-their-401%28k%29-plans-in-2014 [11/4/13] 

MarketingPro, Inc.contributed to this blog post.  This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.