Weekly Commentary January 11th, 2016

The Markets

The People’s Bank of China (PBOC) started the New Year with a downward currency adjustment and fireworks followed.

Last week, three distinct issues affected China’s stock market. First, the PBOC’s devaluation of the yuan (a.k.a. the renminbi), along with the knowledge the central bank had been spending heavily to prop up its currency in recent months, led many analysts and investors to the conclusion China’s economy might not be as robust as official reports indicated, according to the Financial Times.

Not everyone was surprised by this revelation. During the fourth quarter of 2015, The Conference Board’s working paper entitled Global Growth Projections for The Conference Board Global Economic Outlook 2016 reported:

“China’s economy grew much slower than the official estimates suggest in the recent years. During the last five years, our estimates suggest an average growth of 4.3 percent, which is substantially lower than the official estimate of 7.8 percent. In 2015, we project China to see an average growth of 3.7 percent, which is indeed lower than the official target of 7 percent.”

Second, state-run media made it clear the Chinese government would not step in to spur growth. Allowing market forces to play out is a requirement of the reforms international investors have been demanding of China, according to Barron’s. The publication suggested Chinese President Xi Jinping is the victim of a Catch-22. The Chinese government took steps toward reform and international investors responded by selling shares in a panic:

“Weaning China off excessive credit, investment and import-led growth in favor of services means slower growth. Markedly slower, in fact, than the 6.5 percent Beijing is gunning for this year. But Monday’s 7 percent stock rout shows international investors want it both ways. The rapid growth, innovation, and disruptive forces that capitalism produces? Yes. The downturns and volatility that come with it? Not so much.”

The third factor was China’s new and very strict stock market circuit breakers, which were introduced on January 4. The circuit breakers were intended to calm overheated markets, but they sparked panicked selling instead. When the Shanghai Shenzhen CSI 300 Index falls 5 percent, Chinese stock trading stops for 15 minutes. When the index is down 7 percent, trading stops for the day. A similar mechanism is employed in U.S. markets, which are far less volatile. However, trading is not delayed until the Standard & Poor’s 500 index has fallen by 7 percent, and it does not stop until the index is down by 20 percent. Last week, China’s stock markets closed twice as investors, who were worried the circuit breakers might kick in, rushed to sell shares.

 
China suspended its circuit breakers on Thursday, and the PBOC set the value of the yuan at a higher level. That helped China’s stock markets, and others around the world, settle. China’s markets gained ground on Friday, although U.S. markets finished the week lower. Markets may continue to be jittery next week as “a tsunami of negative psychology driven by China” works its way through the system, reported Reuters.

fourth quarter, a look back…

The Federal Reserve pulled the trigger. At the December Federal Open Market Committee meeting, the Fed finally acted, tightening monetary policy by raising the funds rate from 0.25 percent to 0.50 percent. It’s important to remember the Fed doesn’t actually set interest rates. It takes actions designed to influence financial behaviors. The Fed has given rates a push, it remains to be seen whether its efforts will bear fruit.

The European Central Bank (ECB) acted, too. Although, its monetary policy moved in a different direction, offering additional stimulus measures to support European economies.  Investors were enthusiastic when the ECB announced its intentions; however, markets were underwhelmed when the economic measures delivered were less stimulative than many had expected.

China’s currency gained status. The International Monetary Fund decided to add the Chinese yuan (a.k.a. the renminbi) to its Special Drawing Rights basket, effective October 1, 2016. After the renminbi is added, the U.S. dollar will comprise 42 percent of the basket, the euro will be 31 percent, the renminbi will be 11 percent, the Japanese yen will be 8 percent, and the British pound will also be 8 percent.

Congress tweaked Social Security. The Bipartisan Budget Act of 2015 (BBA) averted a U.S. default and deferred further discussion of U.S. debt and spending levels until after 2016’s presidential and congressional elections. It also did away with two popular social security claiming strategies. The restricted application strategy was discontinued at the end of 2015, and file and suspend strategies will be unavailable after May 1, 2016.

Medicare premiums go up, but not for everyone. The BBA also limited increases in Medicare premiums. About 14 percent of Medicare beneficiaries will pay higher premiums in 2016. The new premium will be $121.80, up from $104.90 in 2015. Original proposals suggested the premium amount increase to $159.30.

 

Weekly Focus – Think About It

“If you do not change direction, you may end up where you are heading.”

--Lao Tzu, Chinese philosopher

Weekly Commentary January 4th, 2016

The Markets

Investing in U.S. stock markets during 2015 was a bit like riding a mechanical bull. Markets jolted up and down but, once the year ended, investors were almost where they had started.

The Standard & Poor’s 500 Index (S&P 500) entered 2015 at about 2,058. It rose as high as 2,130 during May and fell to about 1,867 in August. As the year ended, the index was almost at 2,044. It would have finished in negative territory if it weren’t for dividends. With dividends included, the S&P 500 was up 1.4 percent for the year, according to Barron’s. Without dividends, it was down 0.7 percent.

Market performance left plenty of room for speculation about what the future may hold. Barron’s explained:

“The problem isn’t just that the S&P 500 finished flat but that it finished trendless…So, as 2016 begins, it’s very easy to impose whatever narratives we want on the market. For the bears, the fact that the market hasn’t been able to hit a new high, and that small caps have underperformed large, is a sign that the market is peaking…Still, there’s enough good news to keep the bulls heartened…The price of oil, which pulled down S&P 500 earnings in 2015, might be stabilizing…And, remember, Congress just passed a spending bill that could pick up the stimulus baton from the Federal Reserve.”

Regardless of whether you lean toward bullishness or bearishness, the performance of the S&P 500 during 2015 reinforced the value of dividends. When it comes to investing in stocks, there are basically two ways to make money. First, the value of a company can increase and investors can earn capital gains. Second, investors may receive dividends, which are a portion of a company’s earnings its board of directors chooses to distribute to shareholders.

During the past several years, as interest rates have remained persistently low, dividends have become important to many investors as a source of income. They also are a critical component of total return. From 1926 through 2014, dividends accounted for more than 40 percent of the total returns generated by the S&P 500.

You may have received a gift from congress. Our elected leaders did some re-gifting during 2015. They restored tax cuts that had been allowed to expire and made them retroactive for 2015. Kiplinger’s reported, “In an important twist to the habitual year-end gamesmanship, however, this time Congress actually made many of [the tax cuts] permanent and even improved a few.” The tax law changes help people who:

·         Commute to work: During 2016, employees who drive can pay for parking with up to $255 of pre-tax salary, and people who rely on mass transit to get to work can spend the same amount of pre-tax salary on transportation. (Slide 3)

·         Have children in college: The American Opportunity College Credit, a $2,500 tax credit for families with qualifying college students, was made permanent, although the credit phases out at higher income levels. (Slide 4)

·         Live in states with no or low income tax: The choice about whether to deduct state income tax or state sales tax paid during the year on a federal tax return was renewed. It expired at the end of 2014, and now applies retroactively to 2015. (Slide 6)

·         Want to make charitable contributions using required minimum distributions (RMDs): Once again, IRA owners who are age 70½ or older can donate up to $100,000 of their traditional IRAs directly to charity, tax-free, using all or part of their RMDs. It’s now a permanent tax break. (Slide 7)

·         Own businesses: The $500,000 “expensing” cap was restored for 2015, and will be permanent going forward. Bonus depreciation also was extended. (Slide 12)

These are just a few of the tax cuts Congress passed. Give us a call to discuss how these tax changes, and others, may benefit you.

 

Weekly Focus – Think About It

 
“I live my life in widening circles
that reach out across the world.”

--Rainer Maria Rilke, Austrian poet