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Post Election Economic and Investment Outlook

Well the first several days after the election has seen the stock market drop by five percent, leaving those that follow our nation’s fiscal situation feeling uneasy.  I feel the same way as I have been yelling from the tallest tower (or at least my weekly blog) that our government spending is out of control and one day there will be serious repercussions.  The reason for all the “Fiscal Cliff” talk is that the impact will be immediate compared to the effects of the $16+ trillion debt, Obamacare and other less directly painful government created issues.
The Fiscal Cliff is a political situation that was created by the President and Congress when they could not come to a long-term agreement on taxes and spending in 2010.  The fact is that the potential increase in taxes rates will not put dent in the $16 trillion-dollar debt.  The projected spending cuts are also a big part of the cliff and if enacted would impact the debt.  The current administration is annually spending over one trillion dollars per year more than the tax revenue it receives.

Well I have news for them: a stalemate would be good for the U.S. economy, and any deal that does not preserve most of the fiscal cliff is not worth having.

Here’s why.

By ending Social Security tax relief, the Bush tax cuts and cutting spending on both defense and domestic programs, the “fiscal cliff” cuts a deficit projected by the Congressional Budget Office (CBO) at $10 trillion over the next 10 years down to $2.3 trillion.

Contrary to all of the media caterwauling, that’s not a dreadful fate.
Bottom line, we can tax the so-called “rich” all day long, but it won’t matter if spending is not cut much further and more tax paying jobs are created. This may cause even slower growth or a recession, but that is necessary medicine for a government that has been running out of control for the past four years.
While we wait for the Fiscal Cliff issue to be resolved (I expect it to be straightened out by the middle of December) we need to figure out what to do with our personal investments.

Consider our options for investment and what makes the most sense given what we know.
A Conservative Growth Portfolio Makes Sense for Most Long Term Goals

Tax-Managed (minimize taxable dividends and capital gain distributions) portfolio’s make a ton of sense for taxable accounts

Stocks:         The S&P 500 trades and a Price to Earnings ratio (P/E) of about 12.5 which historically is a pretty low number.  This could indicate a good place to be a buyer of stocks.   Remember as our national debt (see debt clock) climbed $5 trillion dollars the past four years the stock market did very well.

Bonds:         The bond market is being fed by QE3.  This was a promise by Federal Reserve Chairman Ben Bernanke to keep buying U.S. Treasury Bonds.  This will keep interest rates low and bond prices high.  I feel badly for those senior citizens living on a fixed income and hoping to earn more interest on bonds and CD’s and interest rates will not be going up anytime soon.

Inflation is another concern for many people. Inflation is limited to niche areas and is dependent on what you spend your money on.  If you have a long commute to work, the fact than gas prices that have doubled over the past four years (that equates to about an annual rate of 18% inflation) has been quite painful to your pocketbook.  At the same time, if you are in the market for your first home you have seen deflation as prices have obviously plummeted in many parts of the country.  I do not see typical inflation being a problem as that is usually dictated by supply and demand (too many dollars chasing limited supply) and with unemployment the way it is and those employed not seeing significant or any wage increase there is no money to chase the goods.  This will not change anytime soon as the employment situation in our country is terrible and about to get worse as the one of the impacts of Obamacare will be less full-time employment demand as employers hire part-time workers to avoid adding workers to their expensive healthcare plan. For the time being, we are in a deflationary environment, but at some point this will probably make a dramatic shift.

Gold and Silver are considered hedges against a devalued currency and while they had large gains the past several years are considered highly speculative.  They both had a big run up the past few years, and may make do well in the future.  Before investing in either, I want to wait and see what happens the next few months of this administration.

International investment opportunities are a mixed bag.  We know that Europe is in a dicey state that will take quite a while to be worked out.  First it was Greece, now Spain, and France will likely be the next shoe to drop.There seem to be more opportunities for gain in emerging markets as their overall valuations seem to indicate they are relatively better buys to be found in this area.

Is your Portfolio Aligned With Your Financial Goals?

If the answer is “Yes” you should sleep well at night and not worry about this latest crisis (real or not).  During the next four years we are likely to have another recession and a 10-20% correction would be normal to expect as well.  Stock markets often climb a “wall of worry.”  My goal is to make sure your money is aligned with your specific goals.  I would not invest a dime in the stock market if I was going to need that money in the next year or two.  That is called “gambling”.  Investing is goal focused with your time horizon and need for income as the two largest factors in your allocation.  Your time horizon is when you expect to spend that money.  If you are 65 years old and do not see yourself spending that money for 10 years than that is a pretty long time horizon so don’t sweat what your hear in the news.

If your answer is “I don’t know” you are much more likely to make an emotional “sell” decision and hurt the chances of accomplishing your financial goals.  Investor’s emotions get seriously in the way of their financial success.  Study after study show retail investor’s impulsive decision making behavior tends to encourage investors to sell low and buy high.  It would be a good idea to review your financial plan and investment portfolio to make sure they are in line.

Tax Planning

The Obamacare tax increases start to hit us January 1, 2013. Extra income, dividend and capital gain taxes are headed our way and could impact our decision making.  The biggest decisions to make are should we sell our winners and pay the capital gain tax while it is at 15% or hold our positions continuing to defer the tax and potentially pay at a higher rate down the road. These tax rates hikes may be even higher depending on the fiscal cliff negotiations.  Tax-managed portfolio’s will be very valuable going forward for non-retirement investment accounts.

A second major potential change is an escalation in the estate tax rate and a decrease from $5 million to $1 million the amount of money that is not included in that calculation. This is part of the fiscal cliff.  This would mean that estates would be taxed up to a 55% rate for amounts being passed to heirs (not spouses) in excess of $1,000,000 (rather than $5 million).  There may be some compromise with this law before year-end as well.

I will wait until this has been resolved before making specific recommendations.
For now, your portfolio should be aligned with your goals and very well diversified in numerous asset classes with world class money managers that are making prudent day-to-day investment decisions on your behalf.

For those that are having trouble living with the election outcome the Serenity Prayer may give you comfort:

God grant me the serenity
to accept the things I cannot change;
courage to change the things I can;
and wisdom to know the difference.

3 thoughts on “Post Election Economic and Investment Outlook”

  1. Chuck Graber says:

    I concur with your sentiments. Through sister Ann, I am transferring my IRA into your care and appreciate you staying on top of all of this.

    1. Brad Rosley says:

      Thanks for your input and confidence.

  2. experimentalinvestor says:

    Hmmmm, good article summarising the current investment environment.

    It’s pretty tough out there at the moment and there are not really any safe havens. Bonds look dangerously overvalued, stocks don’t look good value either in my book. Real estate may have bottomed out in the US but you don’t exactly get much diversification with a rental property! Precious metals have had a great run but as you point out they are very volatile and no-one knows where they are going to go.

    In light of all this, and as you say, diversification looks the way to go!

    Good luck everyone.

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