Our Thoughts on the Election
Finally, the election season has finished! Regardless of whether your preferred candidate was elected President, some seeds of optimism were planted in many segments of the American population, that the new Administration will change the direction of government policy. This is evidenced by the record number of people voting and the outpouring of emotion after the winner was announced. We, as your financial planners, will be looking for investment opportunities that may be created as the new Administration’s plans are communicated. For example, will the new Administration really be able to push for the increased production and use of alternative energy sources, now that the price of oil is around $60 per barrel? We’re not sure, but we are watching.
Senator Obama’s election does increase the likelihood that 1) the tax cuts enacted by the Bush Administration will be allowed to expire in 2010, or 2) that new taxes will be passed by Congress. We believe this is one factor supporting the municipal bond market, which we’ll explain later. We don’t think any new policies from the new Administration will provide substantial support for the stock market. The stock market is currently focused on the rather bleak prospects for corporate earnings, consumer spending, and the unemployment rate (many of the stock market headwinds we identified last month). We think the stock market could begin to rally when participants have confidence that all of the government’s financial rescue programs have prompted the banks to resume lending, corporations have a more positive outlook on sales the rate of home foreclosures is reduced.
Our Current Thoughts on the Market:
Many clients are noticing the large amounts of cash invested in money market funds. This is intentional because of our lack of conviction regarding the stock and bond markets in the short term. The yields earned on those funds are falling after the Federal Reserve lowered its overnight borrowing rate from 2% to 1% over the past two weeks. This is a good sign for the economy but not necessarily good for your portfolio. Let us explain why and what we are doing.
During the past 3 or 4 months, the Fed has injected between $800 and $900 billion of new cash into the financial system, lending money at low rates to the banks, large companies, and Fannie Mae and Freddie Mac. This has successfully reduced, but not eliminated, the panic in the bond markets. However, bond investors are traditionally more conservative than equity investors; consequently, now that everyone is uncertain regarding the length and depth of the recession, bond fund managers are primarily buying the safest bonds, issued by the U.S. Treasury. Consequently, the yields on all the other types of bonds are historically high and attractive. However, enthusiasm is still lacking for most bonds because the Treasury Department will have to issue hundreds of billions of new bonds to pay for all the programs to bail out the banking system. If interest rates have to rise significantly to entice buyers to buy those bonds, all bond prices could fall. We are watching this closely to determine an attractive buying point.
Individual investors have started to enthusiastically buy municipal bonds. Muni yields rose dramatically during September and the first week of October, as 1) the panic selling in the stock market carried over into the municipal market, and 2) forced sales of muni bonds by hedge funds. We knew hedge funds dabbled in muni bonds, but we didn’t think that hedge funds owned enough muni’s to re-price, on the down side, the entire market.
Except for very short maturities, municipal yields are actually higher than taxable yields; a very rare occurrence. Most municipal bonds are of higher credit quality than corporate bonds, since most municipalities have the ability to raise taxes, or charge higher fees, to generate enough income to pay for the bonds. The heightened demand for municipal bonds has caused the yields on the municipal money market funds to fall below 1%, while the yield on taxable money market funds at Fidelity have not fallen as much due to fewer buyers in the taxable bond market. Consequently, we have transferred many of our clients’ holdings of municipal money market funds to the taxable money market funds.
We are also doing tax loss selling for our comprehensive clients that have taxable accounts. We do this buy swapping out of high cost positions into lower cost positions while maintaining the correct asset allocation exposure. We anticipate most of our clients will be saving at least $750 in income taxes (some significantly more) on their 2008 tax returns.
D3 Business Update for Clients:
The contractor is finally doing the build out for our new office down the street. Unfortunately, they don’t have an elevator yet for the building. We realistically, anticipate moving sometime in January or February 2009.
Last but not least we are doing a seminar in Downers Grove (flyer attached) called “Financial Planning for Turbulent Times.” Feel free to share this with a friend or relative that might be concerned about their financial future. As always, THANK YOU for your confidence in us!
Donald D. Duncan MBA CPA/PFS CFA™ CFP® Nancy Lencioni
Peter Marchese MBA CFA™ Becky Connery
Michael Meyers MBA CFP® Adam Glassberg