Articles tagged with: interest rates

As Anticipated, Interest Rates Rise

The Federal Reserve’s latest policy moves correspond to market expectations.

On December 14, 2016 – the Federal Reserve raised its key interest rate by 0.25%. That decision surprised no one – at least no one in the financial markets. Hours before the announcement, the CME Group’s FedWatch Tool, which calculates the chance of interest rate moves based on Fed futures contracts, showed a 97.1% probability of a quarter-point hike.1,2

The central bank made its decision “in view of realized and expected labor market conditions and inflation.” Equity investors reacted with some degree of calm: thirty minutes after the news broke, the S&P 500 was down less than 15 points. As for Treasuries, the yield on the 2-year note spiked and hit a peak unseen since 2009 within a half-hour of the release of the Federal Open Market Committee’s statement.2,3

Any other decision could have thrown market participants for a loop. There is no such thing as a “sure thing” on Wall Street, but a December interest rate hike looked like a lock to many analysts. Fed officials had hinted that a move was near, and with economic indicators broadly improving, the Federal Open Market Committee had little choice but to follow through.

If the Fed had left rates unchanged Wednesday after all of its recent signals, it would have lost credibility. Any inaction would have implied a lack of faith in the economy and uncertainty about the next presidential administration. A half-point increase in the federal funds rate would have come as a hawkish surprise. Either scenario might have upset the bulls.  

What does the Fed’s latest dot-plot forecast indicate? The central bank now sees a trio of quarter-point rate hikes occurring in 2017, as opposed to two in its prior projection. If carried out, those increases would take the target range on the federal funds rate to 1.25-1.50% by the end of next year. If the Fed gradually raises its key interest rate in 2017 to try and maintain its target inflation rate, short-term interest rates will be impacted, and both consumer spending and business spending will be affected. The question is whether Wall Street will take such tightening in stride.4

This quarter-point move is less momentous than it may seem. Banks, borrowers, bond issuers, and investors influence medium-term and long-term interest rates much more profoundly than the Fed does. The central bank has boosted the federal funds rate for overnight lending just twice in 12 months, yet interest rates have been rising anyway. On July 8, the yield on the 10-year note was down at 1.37%. On December 13, it hit 2.48%.5,6

Mike Moffitt may be reached at ph# 641-782-5577 or email:  mikem@cfgiowa.com

Website:  www.cfgiowa.com    

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. 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.

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

Citations.

1 – cmegroup.com/trading/interest-rates/countdown-to-fomc.html [12/14/16]

2 – blogs.marketwatch.com/capitolreport/2016/12/14/fed-decision-and-janet-yellen-press-conference-live-blog-and-video/ [12/14/16]

3 – marketwatch.com/investing/index/spx [12/14/16]

4 – bloomberg.com/news/articles/2016-12-14/fed-raises-rates-boosts-outlook-for-borrowing-costs-in-2017 [12/14/16]

5 – knoxnews.com/story/money/business/2016/12/11/david-moon-fed-rate-increase-irrelevant/95103316/ [12/11/16]

6 – treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2016 [12/14/16]

How Might Higher Inflation Affect Your Investments?

With the Fed poised to gradually raise rates, this is worth considering.

America once experienced something called “moderate inflation.” It may seem like a distant memory, but it could very well return in the second half of this decade.

A remote possibility? Most economists think the Fed will start raising interest rates in late 2015 and take them higher in 2016 through a series of incremental hikes – a march toward normal monetary policy, in which the Fed funds rate ranges between 3-5%. Once the Fed begins tightening, it usually keeps at it – as an example, the central bank raised rates 17 times during 2003-06 alone.1

Keep in mind that there are two forms of interest rates. Short-term interest rates are mainly controlled by Fed policy. Long-term interest rates ride on the bond market’s expectations. Still, short-term rate hikes have an effect on investors as well as lenders. They influence the mood and outlook of Wall Street; they affect interest rates on credit cards, some home loans and short-term savings vehicles.

What if moderate inflation resumes & the Fed reacts? What might higher inflation (and correspondingly higher interest rates) mean for your portfolio? Under such conditions, your investments may perform better than you think.

Equities should still be attractive. The ascent of the federal funds rate should be gradual over the next couple of years, and the market may price it in. A climbing federal funds rate need not become a market headwind. Remember that as the Fed authorized all those rate hikes in the mid-2000s, the market pushed toward all-time highs. When it becomes apparent that the Fed has taken rates too high, then Wall Street tends to adopt a defensive mindset.

Fixed-income investments may hold up well. It is true, long-term bonds may lose market value in a market climate with rising interest rates (though this will eventually promote additional income for investors with patience). Many investors may see wisdom in a fixed-income ladder, which means putting money into fixed-income securities with staggered maturity dates, typically from one to five years away. As interest rates gradually increase, you can gradually take advantage by replacing the shortest-term security with a medium-term or longer-term security. (Some of the other kinds of fixed-income investments, which have been earning next to nothing, may start to become more attractive; we might see interest-earning checking and savings accounts make a full-fledged comeback.)

In the big picture, consider how unimpeded the Barclays U.S. Aggregate Bond Index (in shorthand, the S&P 500 of the bond market) was in prior rising-rate environments. In the six such instances during the past 40 years (and these periods lasted 2-5 years), T-bill rates increased between 2.3-11.9% while the total annual return for the index ranged from 2.6-11.9%, with most of those total returns varying between 4-6%. For the record, the index posted a total return of 5.97% in 2014.2

So, gradually increasing inflation might not hold back the return on your portfolio. Your portfolio aside, what steps could you take that may put you in a better financial position as inflation normalizes?

You may want to adjust your spending habits. If consumer prices start rising notably, you may decide to spend less and buy less often. You may want to buy durable goods such as cars now rather than later in the decade. You may also want to make your house more energy-efficient, drive vehicles that get better MPG, and take full advantage of your health care coverage – as energy, fuel, and medical costs often rise faster than others.

You could live with less debt. As determined by Bankrate.com, the average credit card currently carries a 15.91% interest rate. Can you imagine that going higher? It almost certainly will when the Fed makes its move. Credit card interest rates are based on the prime rate; movements in the prime rate closely mirror movements in the federal funds rate. Credit card issuers frequently adjust interest rates upward right after the central bank does.3

Lastly, remember the upside to rising inflation. A larger annual increase for the Consumer Price Index implies a boost in Social Security income for seniors, and rising interest rates will translate to appreciable yields for risk-averse savers.

Mike Moffitt may be reached at ph# 641-782-5577 or email rsmlbyer@mchsi.com

Website: www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. 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.

The Barclays U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds.

Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

No strategy assures success or protects against loss. Investing involves risk, including loss of principal. 

Citations.

1 – news.morningstar.com/articlenet/article.aspx?id=705846 [7/16/15]

2 – marketwatch.com/story/how-your-bond-portfolio-can-survive-higher-rates-2015-04-23 [4/23/15]

The U.S. Savings Bond Tax Trap

Open that safe deposit box.  See if your bond has matured.

Did you buy U.S. Savings Bonds decades ago? Or did your parents or grandparents purchase some for you? If so, take a look at them before April 15 rolls around. Your bonds may have matured. That means they are no longer earning interest, and it also means you need to cash them in.1

Check those maturity dates. Sometimes people hold U.S. Savings Bonds past the date of final maturity, often by accident. The old bonds are simply stashed away somewhere and forgotten.

While the Treasury will not penalize you for holding a U.S. Savings Bond past its date of maturity, the Internal Revenue Service will. Interest accumulated over the life of a U.S. Savings Bond must be reported on your 1040 form for the tax year in which you redeem the bond or it reaches final maturity. This must be done even if you (or the original bondholder) chose to have the interest on the bond accumulate tax-deferred until the final maturity date. Failure to report such interest may lead to a federal tax penalty.2

You are supposed to pay tax on a U.S. Savings Bond in one of two ways. Most bondholders choose to defer the tax until the bond matures. Once they redeem the bond, they report the interest through a 1099-INT form. Others choose to pay the tax annually prior to cashing the bond in, reporting the increase in the value of the bond as taxable interest each year.2,3

What if you find out you have held a U.S. Savings Bond for too long? You need to amend your federal tax return for the year in which the bond reached final maturity. You can file an amended return with the help of IRS Form 1040X. It may seem more logical and less arduous to report the forgotten, accumulated U.S. Savings Bond interest on your latest federal tax return, but the IRS does not want you to do that. The longer you leave the accumulated interest unreported, the greater the chance you will be cited for a tax penalty (or assessed a larger one than the one already in store for you).2

Another note about reporting interest: if a U.S. Savings Bond has matured and you have failed to redeem it, you will not find a Form 1099-INT for it in your records. Only redemption will bring that 1099-INT your way. (The accumulated interest for the bond should have been reported to the IRS regardless.) After you cash in that old bond, you will thereafter receive a 1099-INT. It will record that the interest on the bond was earned in the year of the bond’s final maturity.2

Plan ahead & keep track. U.S. Savings Bonds were issued on paper for decades and were often purchased on behalf of children and grandchildren. They are issued electronically now and receive little recognition, yet they can still prove quite useful to a retiree looking to improve cash flow. When you cash in a bond, or even multiple bonds, the “cash infusion” may help you put off withdrawing assets from another retirement account. While the interest on U.S. Savings Bonds is taxed by the IRS, it is exempt from state and local taxes.4

You want to keep track of the maturity dates, the yields and the interest rates on your bonds, as that will help you to figure out what bond to redeem when. A decades-old U.S. Savings Bond may cash out at anywhere from three to nine times its face value at full maturity.4

A useful search tool. Do you own a Series E U.S. Savings Bond? You might want to check on its maturity date at savingsbonds.gov/indiv/tools/tools_treasuryhunt.htm, which provides records of Series E bonds issued since 1974.5

Mike Moffitt may be reached at ph# 641-782-5577 or  email:  mikem@cfgiowa.com

Website:  www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. 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.

Citations.

1 – treasurydirect.gov/indiv/research/securities/res_securities_stoppedearninginterest.htm [3/2/15]

2 – budgeting.thenest.com/penalty-savings-bond-past-final-maturity-31113.html [3/18/15]

3 – irs.gov/publications/p550/ch01.html#en_US_2014_publink10009895 [2014]

4 – usatoday.com/story/money/columnist/tompor/2014/01/26/did-you-cash-those-savings-bonds-you-got-as-a-kid/4824631/ [1/26/14]

5 – treasurydirect.gov/indiv/tools/tools_treasuryhunt.htm [9/19/14]

 

The Strong Dollar: Good or Bad?

What is dollar strength and who invests in it?

You may have heard that the dollar is “strong” right now. You may have also heard that a strong dollar amounts to a headwind against commodities and stocks.

While there is some truth to that, there is more to the story. A strong dollar does not necessarily rein in the bulls, and dollar strength can work for the economy and the markets.

The U.S. Dollar Index has soared lately. Across July 2014-February 2015, the USDX (which measures the value of the greenback against key foreign currencies) rose an eyebrow-raising 19.44%.1

On March 9, the European Central Bank initiated its quantitative easing program. The dollar hit a 12-year high against the euro a day later, with the USDX jumping north more than 3% in five trading days ending March 10. Remarkable, yes, but the USDX has the potential to climb even higher.2,3

Before this dollar bull market, we had a weak dollar for some time. A dollar bear market occurred from 2001-11, partly resulting from the monetary policy that the Federal Reserve adopted in the Alan Greenspan and Ben Bernanke years. As U.S. interest rates descended to historic lows in the late 2000s, the dollar became more attractive as a funding currency and demand for dollar-denominated debt increased.4

In Q1 2015, private sector dollar-denominated debt hit $9 trillion globally. Asian corporations have relied notably on foreign currency borrowing, though their domestic currency borrowing is also significant; Morgan Stanley recently researched 625 of these firms and found that dollar-denominated debt amounted to 28% of their total debt.4,5

So why has the dollar strengthened? The quick, easy explanation is twofold. One, the Fed is poised to tighten while other central banks have eased, promoting expectations of a mightier U.S. currency. Two, our economy is healthy versus those of many other nations. The greenback gained on every other major currency in 2014 – a development unseen since the 1980s.4

This explanation for dollar strength aside, attention must also be paid to two other critical factors emerging which could stoke the dollar bull market to even greater degree.

At some point, liabilities will increase for the issuers of all that dollar-denominated debt. That will ramp up demand for dollars, because they will want to hedge.

Will the dollar supply meet the demand? The account deficit has been slimming for the U.S., and the slimmer it gets, the fewer new dollars become available. It could take a few years to unwind $9 trillion of dollar-denominated debt, and when you factor in a probable rate hike from our central bank, things get really interesting. The dollar bull may be just getting started.

If the dollar keeps rallying, what happens to stocks & commodities? Earnings could be hurt, meaning bad news for Wall Street. A strong dollar can curb profits for multinational corporations and lower demand for U.S. exports, as it makes them more expensive. U.S. firms with the bulk of their business centered in America tend to cope better with a strong dollar than firms that are major exporters. Fixed-income investments invested in dollar-denominated assets (as is usually the case) may fare better in such an environment than those invested in other currencies. As dollar strength reduces the lure of gold, oil and other commodities mainly traded in dollars, they face a real headwind. So do the economies of countries that are big commodities producers, such as Brazil and South Africa.6

The economic upside is that U.S. households gain more purchasing power when the dollar strengthens, with prices of imported goods falling. Improved consumer spending could also give the Fed grounds to extend its accommodative monetary policy.6

How are people investing in the dollar? U.S. investors have dollar exposure now as an effect of being invested in the U.S. equities market. Those who want more exposure to the rally can turn to investment vehicles specifically oriented toward dollar investing. European investors are responding to the stronger greenback (and the strong probability of the Fed raising interest rates in the near future) by snapping up Treasuries and corporate bonds with longer maturities.

Stocks can still rally when the dollar is strong. As research from Charles Schwab indicates, the average annualized return for U.S. stocks when the dollar rises has been 12.8% since 1970. For bonds, it has been 8.5% in the years since 1976. A dollar rally amounts to a thumbs-up global vote for the U.S. economy, and that can certainly encourage and sustain a bull market.7

Mike Moffitt may be reached at ph# 641-782-5577 or email:  mikem@cfgiowa.com

website:  www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. 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.

Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

There is a potential for fast price swings in commodities and currencies that will result in significant volatility in an investor’s holdings.

Citations.

1 – wsj.com/mdc/public/npage/2_3050.html?mod=mdc_curr_dtabnk&symb=DXY [3/9/15]

2 – reuters.com/article/2015/03/10/us-markets-stocks-idUSKBN0M612A20150310 [3/10/15]

3 – forbes.com/sites/maggiemcgrath/2015/03/10/u-s-equities-hammered-on-dollar-strength-and-oil-weakness/ [3/10/15]

4 – valuewalk.com/2015/02/us-dollar-bull-market/ [2/4/15]

5 – tinyurl.com/ptpolga [2/25/15]

6 – blogs.wsj.com/briefly/2014/12/24/how-a-strong-dollar-affects-investors-at-a-glance/ [12/24/14]

7 – time.com/money/3541584/dollar-rally-global-currencies/ [2/13/15]

 

Financial Considerations for 2015

Is it time to make a few alterations for the near future?

2015 is less than two months away. Fall is the time when investors look for ways to lower their taxes and make some financial changes. This is an ideal time to schedule a meeting with a financial, tax or estate planning professional.

How do economists see next year unfolding? Morningstar sees 2.0-2.5% Gross Domestic Product (GDP) for the U.S. for 2015, with housing, export growth, wage growth, very low interest rates and continuing vitality of energy-dependent industries as key support factors. It sees the jobless rate in a 5.4-5.7% range and annualized inflation running between 1.8-2.0%. Fitch is far more optimistic, envisioning U.S. GDP at 3.1% for 2015 compared to 1.3% for the eurozone and Japan. (Fitch projects China’s economy slowing to 6.8% growth next year as India’s GDP improves dramatically to 6.5%.)1,2

The Wall Street Journal’s Economic Forecasting Survey projects America’s GDP at 2.8% for both 2015 and 2016 and sees slightly higher inflation for 2015 than Morningstar (with the Consumer Price Index rising at an annualized 2.0-2.2%). The Journal has the jobless rate at 5.9% by the end of this year and at 5.5% by December 2015.3

The WSJ numbers roughly correspond to the Federal Reserve’s outlook: the Fed sees 2.6-3.0% growth and 5.4-5.6% unemployment next year. A National Association for Business Economics (NABE) poll projects 2015 GDP of 2.9% with the jobless rate at 5.6% by next December.4

What might happen with interest rates? In the Journal’s consensus forecast, the federal funds rate will hit 0.47% by June 2015 and 1.17% by December 2015. NABE’s forecast merely projects it at 0.845% as next year concludes. That contrasts with Fed officials, who see it in the range of 1.25-1.50% at the end of 2015.3,4

Speaking of interest rates, here is the WSJ consensus projection for the 10-year Treasury yield: 3.24% by next June, then 3.58% by the end of 2015. The latest WSJ survey also sees U.S. home prices rising 3.3% for 2015 and NYMEX crude at $93.67 a barrel by the end of next year.3

Can you put a little more into your IRA or workplace retirement plan? You may put up to $5,500 into a traditional or Roth IRA for 2014 and up to $6,500 if you are 50 or older this year, assuming your income levels allow you to do so. (Or you can spread that maximum contribution across more than one IRA.) Traditional IRA contributions are tax-deductible to varying degree. The contribution limit for participants in 401(k), 403(b) and most 457 plans is $17,500 for 2014, with a $5,500 catch-up contribution allowed for those 50 and older. (The IRS usually sets next year’s contribution levels for these plans in late October.)5

Should you go Roth in 2015? If you have a long time horizon to let your IRA grow, have the funds to pay the tax on the conversion, and want your heirs to inherit tax-free distributions from your IRA, it may be worth it.

Are you thinking about an IRA rollover? You should know about IRS Notice 2014-54, which lets taxpayers make “split” IRA rollovers of employer-sponsored retirement plan assets under more favorable tax conditions. If you have a workplace retirement account with a mix of pre-tax and after-tax dollars in it, you can now roll the pre-tax funds into a traditional IRA and the after-tax funds into a Roth IRA and have it all count as one distribution rather than two. Also, the IRS is dropping the pro rata tax treatment of such rollover amounts. (Under the old rules, if you were in a qualified retirement plan and rolled $80,000 in pre-tax dollars into a traditional IRA and $20,000 in after-tax dollars into a Roth IRA, 80% of the dollars going into the Roth would be taxed under the pro-rated formula.) The tax liability that previously went with such “split” distributions has been eliminated. The new rules on this take effect January 1, but IRS guidance indicates that taxpayers may apply the rules to rollovers made as early as September 18, 2014.6  

Can you harvest portfolio losses before 2015? Through tax loss harvesting – dumping the losers in your portfolio – you can claim losses equaling any capital gains recognized in a tax year, and you can claim up to $3,000 in additional losses beyond that, which can offset dividend, interest and wage income. If your losses exceed that limit, they can be carried over into future years. It is a good idea to do this before December, as that will give you the necessary 30 days to purchase any shares should you wish.7

Should you wait on a major financial move until 2015? Is there a chance that your 2014 taxable income could jump as a consequence of exercising a stock option, receiving a bonus at work, or accepting a lump sum payout? Are you thinking about buying new trucks or cars for your company, or a buying a building? The same caution applies to capital investments.

Look at tax efficiency in your portfolio. You may want to put income-producing investments inside an IRA, for example, and direct investments with lesser tax implications into brokerage accounts.

Finally, do you need to change your withholding status? If major change has come to your personal or financial life, it might be time. If you have married or divorced, if a family member has passed away, if you are self-employed now or have landed a much higher-salaried job, or if you either pay a lot of tax or get unusually large IRS or state refunds, review your current withholding with your tax preparer.

Mike Moffitt may be reached at  ph# 641-782-5577 or mikem@cfgiowa.com.

website:  www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC.  Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor.  Cornerstone Financial Group and AIM are separate entities from LPL Financial.

Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. 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.

Citations.

1 – news.morningstar.com/articlenet/article.aspx?id=666682&SR=Yahoo  [9/29/14]

2 – 247wallst.com/economy/2014/09/30/downside-risks-to-global-gdp-growth/ [9/30/14]

3 – projects.wsj.com/econforecast [9/30/14]

4 – blogs.wsj.com/economics/2014/09/29/business-economists-see-lower-interest-rates-than-the-fed-sees-in-late-2015/ [9/29/14]

5 – shrm.org/hrdisciplines/benefits/articles/pages/2014-irs-401k-contribution-limits.aspx [11/1/13]

6 – lifehealthpro.com/2014/09/30/irs-blesses-split-401k-rollovers [9/30/14]

7 – dailyfinance.com/2013/09/09/tax-loss-selling-dont-wait-december-dump-losers/ [9/9/13]

Pullback Perspective

This latest stock market pullback has provided an unwelcome reminder that stocks do not always go up in a straight line. Even within powerful bull markets such as this one, pullbacks of 5 – 10% have been quite common and do not mean the bull market is nearing an end. In this week’s commentary, we attempt to put the pullback into perspective. We look beyond this latest bout of volatility and share our thoughts on the current bull market, compare it with prior bull markets at this stage, and discuss why we do not think it’s coming to an end.

Pullbacks Don’t Mean the End of the Bull Market

Pullbacks such as this one, which has reached 5%, have been normal. Sometimes stocks get ahead of themselves. When they do, investor concerns can be magnified and profit taking might take stocks down more than might be justified by the fundamental news. We see this latest pullback as normal within the context of an ongoing and powerful bull market and do not see its causes (European and Chinese growth concerns, the rise of Islamic State militants, Ebola, the Russia-Ukraine conflict, etc.) as justifying something much bigger.

The S&P 500 has now experienced 19 pullbacks during this 5.5-year-old bull market, during which the index has risen by 182% (cumulative return of 217% including dividends). The 1990s bull market included 13 pullbacks; there were 12 during the 2002 – 2007 bull market. At an average of three to four pullbacks per year, we are in-line with history. We understand the nervousness out there, but what we have just experienced looks pretty normal at this point.

When volatility has been so low for so long, normal volatility does not feel normal. Investors have become unaccustomed to what we would characterize as normal volatility. While most of the 5% drop came in a short period of time last week (October 6 –10), the level of volatility experienced last week is not at all uncommon within an ongoing economic expansion and bull market. Volatility tends to pick up as the business cycle passes its midpoint, which we believe it has. Reaching this stage just took longer than many had expected during the current cycle.

Also, keep in mind that the 335 drop in the Dow Jones Industrials that we experienced on Thursday, October 9, 2014, is not as dramatic as it once was. That loss was less than 2%, with the Dow near 17,000 when it occurred, compared with 3 – 4% losses associated with that number of points on the Dow earlier in the recovery.

These pullbacks do not mean the end of the bull market is near, nor does the fact that we have not had a 10% or more correction since 2011. In fact, most bull markets since World War II included only one correction of 10% or more, and the current bull has already had two (2010 and 2011). We do not believe the current economic and financial market backdrop has sufficiently deteriorated for the pullback to turn into a bear market, as we discuss below.

Why This Pullback Is Unlikely to Get Much Worse

So why do we think this pullback is unlikely to turn into a bear market? There are number of reasons:

• The economic backdrop in the United States remains healthy. Gross domestic product (GDP) is growing at above its long-term average, providing support for continued earnings growth; the U.S. labor market has created 2 million jobs over the past year; and the drop in oil prices may support stronger consumer spending.
• Our favorite leading indicators, including the Conference Board’s Leading Economic Index (LEI), the Institute for Supply Management (ISM) Index, and the yield curve, suggest that the bull market may likely continue into 2015 and beyond, with a recession unlikely on the immediate horizon.
• The European Central Bank (ECB) is likely to add a dose of monetary stimulus to spark growth in Europe, the source of much of the global growth fears that have driven recent stock market weakness. China stands ready to invigorate its economy as well.
• Interest rates, and therefore borrowing costs for corporations, remain low. The Federal Reserve (Fed) is in no hurry to raise interest rates.
• Valuations have become more attractive. Price-to-earnings ratios (PE) have not reached levels that suggest the end of the bull market is forthcoming, based on history. We view PEs, which have fallen about 0.5 points from their recent peak, as reasonable given growing earnings and low interest rates.
• The S&P 500 is marginally above its 200-day moving average at 1905. Historically, this level has proven to be strong support. Although the index may dip slightly below this level in the near term, we expect the range around that level (1900 – 1910) to provide strong support for the index again and would not expect it to stay below that range for very long.

Bull Markets Don’t Die of Old Age

The current bull market is one of the most powerful ever at this stage, just over 5.5 years in. Since March 9, 2009, when the current bull market began, the S&P 500 has risen 182% (total cumulative return of 217%), topping all other bull markets since World War II at this stage. The 1949 and 1982 bull markets were close, with gains of 170% and 163% (respectively) at this stage, but were not quite as strong.

So does that mean that this bull market is too old and should end? We don’t think so. Bull markets die of excesses, not old age, and we do not see the excesses that characterize an impending bear market. The labor markets are not strong enough yet to generate significant upward pressure on wages to drive inflation. U.S. factories have excess capacity. As a result, the Fed is unlikely to start hiking interest rates until the middle of 2015, and rate hikes are likely to be gradual. It will likely take numerous hikes to slow the U.S. economy enough to tip it into recession (and invert the yield curve), which is unlikely to come until at least 2016. We do not see stock valuations or broad investor sentiment as excessive. We expect this bull market to complete its sixth year in March 2015 and believe there is a strong likelihood that it continues well beyond that date.

Conclusion
We do not believe the volatility seen in recent weeks, which is in-line with historical trends, is an early signal of a recession or bear market. Nor do we think the age of this bull market means it should end, given the favorable economic backdrop, central bank support, and reasonable valuations. Although we will continue to watch our favorite leading indicators for warning signs of something bigger, we think this latest bout of volatility is nothing more than a normal, though unwelcome, interruption within a long-term bull market. We maintain our positive outlook for stocks for the remainder of 2014 and into 2015.

Mike Moffit may be reached at phone# 641-782-5577 or email: mikem@cfgiowa.com
Website: cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

IMPORTANT DISCLOSURES
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 reference is historical and is no guarantee of future results. The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Stock investing involves risk including loss of principal. Price-to-earnings ratio is a valuation ratio of a company’s current share price compared to its per-share earnings.
INDEX DESCRIPTIONS
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure
performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

Rising Interest Rates

How might they affect investments, housing and retirees?

How will Wall Street fare if interest rates climb back to historic norms? Rising interest rates could certainly impact investments, the real estate market and the overall economy – but their influence might not be as negative as some perceive.

Why are rates rising?
You can cite three factors. The Federal Reserve is gradually reducing its monthly asset purchases. As that has happened, inflation expectations have grown, and perception can often become reality on Main Street and Wall Street. In addition, the economy has gained momentum, and interest rates tend to rise in better times.

The federal funds rate (the interest rate on loans by the Fed to the banks to meet reserve requirements) has been in the 0.0%-0.25% range since December 2008. Historically, it has averaged about 4%. It was at 4.25% when the recession hit in late 2007. Short-term fluctuations have also been the norm for the key interest rate. It was at 1.00% in June 2003 compared to 6.5% in May 2000. In December 1991, it was at 4.00% – but just 17 months earlier, it had been at 8.00%. Rates will rise, fall and rise again; what may happen as they rise?1,2

The effect on investments. Last September, an investment strategist named Rob Brown wrote an article for Financial Advisor Magazine noting how well stocks have performed as rates rise. Brown studied the 30 economic expansions that have occurred in the United States since 1865 (excepting our current one). He pinpointed a 10-month window within each expansion that saw the greatest gains in interest rates (referencing then-current yields on the 10-year Treasury). The median return on the S&P 500 for all of these 10-month windows was 7.93% and the index returned positive in 80% of these 10-month periods. Looking at such 10-month windows since 1919, the S&P’s median return was even better at 11.50% – and the index gained in 81% of said intervals.3

Lastly, Brown looked at the S&P 500’s return in the 12-month periods ending on October 31, 1994 and May 31, 2004. In the first 12-month stretch, the interest rate on the 10-year note rose 2.38% to 7.81% while the S&P gained only 3.87%. Across the 12 months ending on May 31, 2004, however, the index rose 18.33% even as the 10-year Treasury yield rose 1.29% to 4.66%.3

The effect on the housing market. Do costlier mortgages discourage home sales? Recent data backs up that presumption. Existing home sales were up 1.3% for April, but that was the first monthly gain recorded by the National Association of Realtors for 2014. Year-over-year, the decline was 6.8%. On the other hand, when the economy improves the labor market typically improves as well, and more hiring means less unemployment. Unemployment is an impediment to home sales; lessen it, and more homes might move even as mortgages grow more expensive.4

When the economy is well, home prices have every reason to appreciate even if interest rates go up. NAR says the median sale price of an existing home rose 5.2% in the past year – not the double-digit appreciation seen in 2013, but not bad. Cash buyers don’t care about interest rates, and according to RealtyTrac, 43% of buyers in Q1 bought without mortgages.4,5

Rates might not climb as fast as some think. Federal Reserve Bank of New York President William Dudley – whose voting in Fed policy meetings tends to correspond with that of Janet Yellen – thinks that the federal funds rate will stay below its historic average for some time. Why? In a May 20 speech, he noted three reasons. One, baby boomers are retiring, which implies less potential for economic growth across the next decade. Two, banks are asked to keep higher capital ratios these days, and that implies lower bank profits and less lending as more money is being held in reserves. Three, he believes households and businesses are still traumatized by the memory of the Great Recession. Many are reluctant to invest and spend, especially with college loan debt so endemic and the housing sector possibly cooling off.6

Emerging markets in particular may have been soothed by recent comments from Dudley and other Fed officials. They have seen less volatility this spring than in previous months, and the MSCI Emerging Markets index has outperformed the S&P 500 so far this year.2

Michael Moffitt may be reached at 1-641-782-5577 or email: mikem@cfgiowa.com
website: cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC.  Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor.  Cornerstone Financial Group and AIM are separate entities from LPL Financial.

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

Economic forecast set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

The MSCI EM (Emerging Marketing) Europe, Middle East and Africa Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the emerging market countries of Europe, the Middle East and Africa. As of May 27, 2010 the MSCI EM EMEA index consisted of the following 8 emerging market country indices: Czech Republic, Hungary, Poland, Russia, Turkey, Egypt, Morocco, and South Africa.

All indices referenced are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. Past performance is no guarantee of future results.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. 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.

Citations.
1 – newyorkfed.org/markets/statistics/dlyrates/fedrate.html [5/22/14]
2 – reuters.com/article/2014/05/21/saft-on-wealth-idUSL1N0NZ1GM20140521 [5/21/14]
3 – fa-mag.com/news/what-happens-to-stocks-when-interest-rates-rise-15468.html [9/17/13]
4 – marketwatch.com/story/existing-home-sales-fastest-in-four-months-2014-05-22 [5/22/14]
5 – marketwatch.com/story/43-of-2014-home-buyers-paid-all-cash-2014-05-08 [5/8/14]
6 – money.cnn.com/2014/05/20/investing/fed-low-interest-rates-dudley/index.html [5/20/14]