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Embracing Average

By | 2014, Money Moxie, Newsletter | No Comments

In what area of your life is it okay to shoot for average? In your financial life! In all other areas we strive to be above average. Pushing for higher achievement makes sense when it comes to career opportunities, participating in sports, or setting goals. When it comes to investing, however, reaching for above-average returns can be financial madness.

Striving to get the highest return possible at any risk can be devastating to investment portfolios. It encourages investors to take on too much risk without properly assessing the downside possibilities. It emboldens investors to believe they can predict a future outcome when in reality no one can accurately or consistently predict future market movements.

Embracing Average

When analyzing portfolio returns, investors often use market indexes as the benchmark by which they measure their personal investment performance. If they outperform the chosen index they feel empowered. In contrast, if they underperform that index, they feel they are failing financially. Standards for measuring long-term portfolio returns are much more complex. Investors may be well served when they embrace average.

Emotional impact to market volatility varies widely and can be as diverse and unique as we are as individuals. Having said that, similarities exist in the ways investors react.

Throwing in the towel
Volatility tempts even experienced investors to give in at the wrong time. Take for instance an investor who was spooked by the bear market of 2008. Many investors fled the market for good, seeking fixed, low-yielding options for their money. During that bear market period, from October 9, 2007, through March 9, 2009, the S&P 500 lost 56.78 percent. Hypothetically, if after suffering this large loss, the investor moved to an investment growing at 3 percent, it would take more than 28 years to
break even.

Concentrating investment focus
Investing in one area of the market that represents the same sector does not reduce risk. Concentrated sector allocations may cause investors to fall behind when the market heads down. For instance, the S&P 500 represents 500 American large capitalization stocks. Even though there are 500 stocks, they are all part of the same market sector.

A portfolio concentrated in one sector results in greater risk. When that sector of the market heads south, you may quickly forget how great it was on the upside. You have heard us say that when it comes to money the pain of losing is greater than the thrill of winning. As such, a 40 percent loss has a much greater impact on a portfolio than a 40 percent gain. Assuming an investor suffered a loss equivalent to the S&P 500 during the 2008 bear market, he or she would have to gain 131.35 percent, and it would have taken four years to break even. Let’s say that again. For over four years their investments were still below the high point of October 2007.

Timing the market
When left to their reactive behaviors, investors often sabotage their investment performance. Dalbar has long studied the results experienced by investors. Year after year, we see the same information reported. Investors are not able to outperform, let alone keep up with, market returns. This is believed to be the result of chasing returns, becoming overly cautious during periods of increased volatility, and consequently making poor decisions at inopportune times. Outperforming the market every year is an unrealistic goal. If an investor is consistently changing strategies or investments in an effort to get the best return, he or she is missing the value of average returns over longer periods of time. The chart illustrates how investors are falling short of the market. To put it in perspective, a 3 percent increase in return, over 24 years, will double your money.

Embracing average returns
It’s not exciting or flashy, but consistent returns are important in reaching financial goals. This can be accomplished through diversification. As an example, a portfolio with 60 percent allocated to the S&P 500 and 40 percent allocated to fixed-income has a greater chance of smoothing out big market swings. Generally you will not have the hottest returns nor will you suffer the greatest losses. When compared to the same 2008 bear market, the hypothetical 60/40 portfolio would have lost only 35 percent compared to the S&P 500’s 56.78 percent loss. The break-even point comes at just shy of two years as compared to over four. This type of diversified portfolio does not prevent losses but it does help reduce market risk. The result is average returns.

When it comes to investing, the most important factor should be reaching your financial goals with a reasonable amount of risk based on your objectives and risk-tolerance. We believe that if investors avoid the emotions that push them to chase high returns and remember that consistency pays in the long run, they will be better positioned to meet their investment expectations and concurrently their goals.

If it has been awhile since you have reviewed your portfolio, investment strategy, and financial goals, we encourage you to meet with one of our wealth management consultants. Call us to schedule an appointment to meet in person or speak over the phone (800) 748-4788.

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Impact of War on Stock Markets

By | 2014, Money Moxie, Newsletter | No Comments

War Graphic

As the Sochi Olympics ended, many eyes turned to the other side of the Black Sea and the threat of war in Ukraine. With each successive turn of good or bad events, our U.S. stock markets1 seem to react in like manner. That begs the question, what impact do wars have on stock markets, and how should an individual react?

To see the impact of war, let’s first examine the most recent war that started on American soil. The impression that many people have is that the recession of the early 2000s started with the terror attacks on September 11, 2001. The reality is that stocks were already on a downward trend when September 11th happened. Yes stocks dropped sharply in the 10 days following that awful event, but once America grasped the reality of the situation, stocks rebounded, recovering the losses directly related to the shock of that event.2

There is a similar pattern for each conflict involving the United States. “In 14 shocks dating (back) to the attack on Pearl Harbor in December 1941, the median one-day decline has been 2.4%. The shocks, which also include the September 11th terror attacks and the 1962 Cuban missile crisis, lasted eight days, with total losses of 7.4%…The market recouped its losses 14 days later.”3

Similar patterns of decline occurred during several Middle Eastern conflicts such as Desert Storm in 1991, the Iraq War in 2003, and the Syrian Conflict in 2011. Leading up to each of these events, the market dropped, but recovery happened shortly thereafter.4

Mark Luschini, the Chief Investment Strategist for Janney Montgomery, put it this way, “It’s not that it’s welcome, but once it gets underway, you can quantify what the situation might look like. When you’re left in the dark about when it will start, what will be the result, it gives investors trepidation.”5

Short-term shocks to the system cause short-term consequences for the stock market and the economy. On the other hand, major periods of conflict can have more lasting effects on the economy and the stock market.

One of the most harmful economic effects of war is a supply shock. A major shock in the supply of goods or labor can severely impact economic productivity. Sources of these setbacks include economic sanctions, manufacturing destruction, infrastructure damage, etc. This has not been a factor of major concern within the United States as it has been a long time since there has been a war fought on American soil.

Public opinion supports the belief that war and its associated spending creates positive economic outcomes for the U.S. economy. This is mostly due to the higher GDP growth that was exhibited during conflict periods like World War II, the Korean War, the Vietnam War, and the Cold War. The only outliers have been the Iraq and the Afghanistan wars.6

While war tends to generate some positive economic benefits, it is more of a mixed bag for stock markets. “During WWII stock markets did initially fall but recovered before its end, during the Korean War there were no major corrections while during the Vietnam War and afterwards stock markets remained flat from the end of 1964 until 1982.”7

Another typical impact of major conflicts is inflation. This is due to the increase in government spending through various financing methods. “While inflation may be good for reducing debt burdens, high inflation has many harmful effects, such as wealth redistribution and erosion of international competitiveness.”8

Short-term conflicts typically have a short-lived impact on the stock market. As such they shouldn’t change an individual’s investment philosophy or cause one to “abandon ship.”

A more prolonged conflict may cause an individual to take a more judicious approach by reevaluating his or her goals and making adjustments based on the current market environment. As always, it is prudent to seek advice from an experienced investment professional that can help you plan for and navigate your own voyage through our uncertain world.

 

Learn more about Smedley Financial>

smedley-staff

 

1. Research by SFS. Please see stock market disclosure at the bottom of page three.

2. Adam Shell, “What Wall Street is Watching in Ukraine Crisis,” USA Today, 3/3/2014

3. Adam Shell, “What Wall Street is Watching in Ukraine Crisis,” USA Today, 3/3/2014

4. Chris Isidore, “Impact of War On Stocks and Oil,” CNN Money, 9/3/2013

5. Chris Isidore, “Impact of War On Stocks and Oil,” CNN Money, 9/3/2013

6. Michael Shank, “Economic Consequences of War on the U.S. Economy,” Institute for Economics & Peace, 2011

7. Michael Shank, “Economic Consequences of War on the U.S. Economy,” Institute for Economics & Peace, 2011

8.Michael Shank, “Economic Consequences of War on the U.S. Economy,” Institute for Economics & Peace, 2011

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Escape Velocity: What Will Fuel Our Economic Breakout?

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Escape Velocity is simply the speed required to escape gravity’s pull. An object on earth’s surface would need an initial speed of 6.96 miles per second (Mach 34) to get out of the gravitational range of the planet.

As we continue to recover from the 2008 recession the question looms; “What will it take to escape the unseen gravitational pull of what is called the new normal economy?”

Slow economic growth has given Americans a feeling that the economy is destined to grow at 1 to 2 percent. The decades-long average prior to the 2008 recession was 3 to 4 percent.

Liftoff

Let us be clear. This article focuses on the economy, not the stock market. The market as measured by the S&P 500 formed a bottom 5 years ago. That index has reached around 50 all-time highs in the last 12 months. From January 1, 2009 to January 1, 2014 the S&P 500 went up over 100 percent.

Should it bother investors that the market has been making new highs? No, making new highs is normal for American stocks. Should we worry that five years is too long for a bull market? No, it is a healthy sign to have long periods of growth interrupted by smaller drops.

The question is “How long can the bull market in stocks last if the new normal continues?” Furthermore, what kind of rocket fuel will propel this economy beyond its current trajectory?

As the Federal Reserve stimulus winds down, something else will have to take its place. The U.S. economy needs to transition from a government-induced to a consumer-driven expansion.

Can consumers afford to spend any more? It has taken a long time, but unemployment levels are getting closer to pre-recession levels (currently 6.7 percent). Household debt payments are at an all time low as a percent of income, which is also really good. Unfortunately, the average income of American households is one economic measure showing no improvement over the last 5 years.

Household income may be the most important ingredient to current growth. It may improve soon. As unemployment numbers get stronger, the labor market will tighten. Employers will raise pay for their workers. When that begins to happen in the U.S. workforce, consumers will finally have more spending power to propel the economy.

While stock returns have been great in recent years, they cannot rise forever without better economic growth. The gravitational pull of the new normal is just too strong. Keep an eye on improving income in the United States. It may fuel the next breakout.

As the Sochi Olympics ended, many eyes turned to the other side of the Black Sea and the threat of war in Ukraine. With each successive turn of good or bad events, our U.S. stock markets1 seem to react in like manner. That begs the question, what impact do wars have on stock markets, and how should an individual react?

To see the impact of war, let’s first examine the most recent war that started on American soil. The impression that many people have is that the recession of the early 2000s started with the terror attacks on September 11, 2001. The reality is that stocks were already on a downward trend when September 11th happened. Yes stocks dropped sharply in the 10 days following that awful event, but once America grasped the reality of the situation, stocks rebounded, recovering the losses directly related to the shock of that event.2

There is a similar pattern for each conflict involving the United States. “In 14 shocks dating (back) to the attack on Pearl Harbor in December 1941, the median one-day decline has been 2.4%. The shocks, which also include the September 11th terror attacks and the 1962 Cuban missile crisis, lasted eight days, with total losses of 7.4%…The market recouped its losses 14 days later.”3

Similar patterns of decline occurred during several Middle Eastern conflicts such as Desert Storm in 1991, the Iraq War in 2003, and the Syrian Conflict in 2011. Leading up to each of these events, the market dropped, but recovery happened shortly thereafter.4
Mark Luschini, the Chief Investment Strategist for Janney Montgomery, put it this way, “It’s not that it’s welcome, but once it gets underway, you can quantify what the situation might look like. When you’re left in the dark about when it will start, what will be the result, it gives investors trepidation.”5

Short-term shocks to the system cause short-term consequences for the stock market and the economy. On the other hand, major periods of conflict can have more lasting effects on the economy and the stock market.

One of the most harmful economic effects of war is a supply shock. A major shock in the supply of goods or labor can severely impact economic productivity. Sources of these setbacks include economic sanctions, manufacturing destruction, infrastructure damage, etc. This has not been a factor of major concern within the United States as it has been a long time since there has been a war fought on American soil.

Public opinion supports the belief that war and its associated spending creates positive economic outcomes for the U.S. economy. This is mostly due to the higher GDP growth that was exhibited during conflict periods like World War II, the Korean War, the Vietnam War, and the Cold War. The only outliers have been the Iraq and the Afghanistan wars.6

8 Million

While war tends to generate some positive economic benefits, it is more of a mixed bag for stock markets. “During WWII stock markets did initially fall but recovered before its end, during the Korean War there were no major corrections while during the Vietnam War and afterwards stock markets remained flat from the end of 1964 until 1982.”7

Another typical impact of major conflicts is inflation. This is due to the increase in government spending through various financing methods. “While inflation may be good for reducing debt burdens, high inflation has many harmful effects, such as wealth redistribution and erosion of international competitiveness.”8

Short-term conflicts typically have a short-lived impact on the stock market. As such they shouldn’t change an individual’s investment philosophy or cause one to “abandon ship.”

A more prolonged conflict may cause an individual to take a more judicious approach by reevaluating his or her goals and making adjustments based on the current market environment. As always, it is prudent to seek advice from an experienced investment professional that can help you plan for and navigate your own voyage through our uncertain world.

*Research by SFS. Data is from the Federal Reserve Bank of St. Louis. Investing involves risk, including potential loss of principal. The S&P 500 index is often considered to represent the U.S. market. One cannot invest directly in an index Past performance does not guarantee future results. The opinions and forecasts expressed are those of the author and may not actually come to pass. This information is subject to change at any time, based on market and other conditions, and should not be construed as a recommendation of any specific security or investment plan.

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Living in The Great Rotation

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Picture a giant wheel moving ever so slowly up a hill. When you look at it from the side, you can see two dots on the edge that are directly opposite each other. As the wheel moves, those dots rotate. As one dot is on top the other is on the bottom. As the wheel continues to rotate, the dot that was on the bottom will eventually get back to the top and vice versa. This mental illustration that you have drawn demonstrates the relationship between stocks and bonds over time.

When the stock market1 dropped over 55 percent, from October 2007 to March of 2009, the giant wheel ended up with stocks on the bottom and bonds on top. This happened as people and institutions pulled some of their money out of stocks and put it into the relative safety of bonds.

Leadership in performance between stocks and bonds rotates like a rolling wheel.

Leadership in performance between
stocks and bonds rotates like a rolling wheel.

Fast forward almost five years and now that trend is reversing. 2013 saw some of the largest outflows from bonds with the money going into stocks.2 As CNBC writer Dhara Ranasinghe puts it, “A ‘Great Rotation’ out of bonds into stocks is only just underway and is setting up to be one of the major investment themes of 2014.”3

Great Rotation quote It is important to note that this great rotation takes time. It doesn’t just happen overnight. It has been almost five years since the stock market bottom of 2009 and it may take more time before stocks hit the top.

One of the drivers of the great rotation is inflation. Inflation is bad for bonds as it makes them worth less. Inflation could ensure that bonds stay on the bottom of the giant wheel for a while.
There are long-term signs that are positive for the economy and stocks. The housing market is coming back, U.S. oil and gas production is booming, and a manufacturing renaissance is taking place.4 This could lead to good long-term growth for stocks.

Along the way there will always be bumps in the road which result in short-lived reversals of the great rotation. However, the giant wheel keeps moving slowly. For now, that means that stocks are king of the mountain. Of course there are no guarantees.

1. The stock market defined as the S&P 500
2. Roben Farzad, “In Search of the Great Rotation,” Bloomberg Business Week, Aug 23,2013: http://www.businessweek.com/articles/2013-08-23/ in-search-of-the-great-rotation
3. Dhara Ranasinghe, “And We’re Off: the Great Rotation Gets Into Gear,” CNBC, Nov 20, 2013: http://www.cnbc.com/id/101212837
4. Fidelity, Investment Themes Quarterly Update, July 2013

Research by SFS. Data from public sources. This is not a recommendation to purchase any type of investment. Investing involves risk, including potential loss of principal. The Barclays U.S. Aggregate Bond Index, Dow, and S&P 500 are indexes considered to represent the U.S. market. One cannot invest directly in an index Past performance does not guarantee future results. The opinions and forecasts expressed are those of the author and may not actually come to pass. This information is subject to change at any time, based on market and other conditions, and should not be construed as a recommendation of any specific security or investment plan.

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Powerful Performance

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Economic growth in the United States was slow last year as the federal government dropped one potential bomb after another. However, none of these exploded and U.S. stocks had their best year since 1997. With all this positive momentum would it be too much to ask for an encore?

In January we escaped a close call with the fiscal cliff. Then came sequestration. By May, Ben Bernanke had dropped another bomb: tapering. Before the end of 2013 we endured a government shutdown.

Duds

Interest rates shot up last year with fear the Federal Reserve (Fed) would slow its bond-buying program. In 2014, this action is slated to become a reality.

Each month the Fed plans to slow its purchases by $10 billion. As it does, let’s keep in mind that any purchase is extra stimulus to the economy. The Fed is still flooding the economy with money. Some may compare this to pushing on a string, but the last few years have helped validate the phrase “Don’t fight the Fed!”

As the Fed becomes less involved as a driver of economic growth we may see more ups and downs in the stock market. In all likelihood, the coming year will be more volatile than last year.
When the next drop comes, let’s keep in mind that it is perfectly normal even in a healthy market to have some hiccups. A fall of 10 percent in stock markets occurs on average about once a year. These drops can even be healthy for long-term growth.

According to the Wall Street Journal, strategists believed the economy would slowly improve and the market would rise 8.2 percent in 2013. It rose 30.
This year, the economy is expected to grow faster, but predictions for stocks are more moderate.

The driving forces of growth should be similar. Domestic energy production is still rising. The housing recovery is underway. Employment is improving. Wages are expected to rise and changes in consumer spending are trending in a positive direction.

Improving economic growth does not necessarily mean more stellar stock returns. Sometimes the two can be out of sync as investors look to the future for something to get excited about. Nevertheless, stocks and the economy are closely related and the economy is still heading in the right direction for now.

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Women and Investing – Defining Your Future

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Understanding money – how to make it work for you – is important to everyone. But, it is of utmost importance to women. Why women you ask? Women face some staggering statistics when it comes to money.

Women live longer than men.

This well-known fact has a significant impact on women and their finances. Of the people living to age 90 today, 72 percent are women.* This requires them to have more money than men if they want to maintain the same lifestyle throughout their retirement years.

one_woman

Women earn less money.

Women earn less for many reasons. They often put their work lives on hold to care for others; raising a family or helping aging parents. They seek careers that offer more flexibility, often for lower salaries. Unfortunately, sometimes women make less because they are women.

As a result women save less money for retirement. This is compounded by the realization that only 33 percent of workers today have a company pension plan.* As a whole, the burden to pay for our golden years has been shifted to us.

three_women

Women sidestep long-term finances.

Women often handle the household budget and leave the long-term financial decisions to a spouse. At some point in time, whether because they are single, widowed, divorced, or their spouse is disabled, women will be responsible for making all of the financial decisions. For many women this is like being thrown into the fire. They must take on a new role in handling the finances at a time when they are likely facing emotional strains.

senior woman

Be proactive, not reactive.

If you get involved now you’ll have little to fear if you are forced to take charge of your family’s finances in the future. To make it simple, compare your financial life to taking a journey across the country. Here are some steps to consider for your financial journey.

Step One: Where are you going to go?
No one shows up at the airport without a ticket. You start with a vacation plan. Knowing where you want to end up is the first step of the process. This requires some real thought on your part.
Ask yourself, “What is important about money to me?” Determine what you want to accomplish financially throughout your life and write it down. These are your financial goals.

Step Two: What will you need to take?
When packing for a trip, most people make a list so nothing is forgotten. Breaking your goals into small steps will help you find ways to accomplish them.

If your goal is to get your children through college, determine what it will take. When you know the answer, decide how much of your monthly cash flow can be allocated to reaching this goal. The same can be said of retirement. While you have longer to plan, the cost will be much greater and the planning more crucial. These decisions are your financial plan.

Step Three: How much is it going to cost?
Leaving for a vacation not knowing how much it will cost or if you’ll have enough money once you reach your destination seems crazy. But it’s surprising how many people look forward to retiring without knowing how much money they will need to replace their monthly income or what the real costs may be.

Running out of money during retirement is a legitimate fear for many. Having an income plan prior to retiring can mean the difference between living the lifestyle you want and just getting by.

If you’re feeling a little overwhelmed thinking about making a plan, you’re not alone. Both women and men find putting together a reliable financial plan to be intimidating. Not because they are not smart enough to make it happen, but rather because of the depth of knowledge required to address all of the sophisticated intricacies of the plan.

Engage an experienced professional. Rely on our years of experience and knowledge to help you design a plan specific to your unique situation and goals. We can help you define your goals and increase the likelihood of reaching them. It’s never too late to get started.

 

*Source: U.S. Department of Commerce and Employee Benefit Research Institute

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Division of Labor

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Over the years the financial roles of men and women have transformed. In the 1700s, men handled financial matters and women had little insight on finances. Today men and women generally view family finances as a joint effort.

While it makes sense to share responsibilities in a family, it is critical that each person have defined roles. Otherwise, some things will be done twice while others will never get done. The consequences of missing payments for bills can be costly over time. This is why we encourage defined roles.

One spouse may handle the household budget and day-to-day spending while the other may focus on long-term, big-picture finances such as retirement planning and investing. This divide-and-conquer approach works well.

No matter how it is done, it is important that participants have a clear understanding of all financial aspects that impact them and their families. Here are some guides to help in your joint planning:

Couple

The big picture
Together, create an inventory of all financial assets, liquid and non-liquid. This is valuable in two ways. First, your spouse will have a clear understanding of the financial assets that determine your net worth. Second, there is a list to rely on should something happen and the designated spouse is no longer able to handle that portion of the finances.

The list should include all relevant information such as: the type of asset, who owns it, where it is held, who the beneficiary is, and who can be contacted for more information. Is there a login and password?

Creating a list of other assets is also important. These assets are not liquid but are part of your net worth and hold a great value.

Financial_assets

Day-to-day finances
Managing the monthly finances is not an easy task. It requires more time and often juggling of financial resources. Sometimes the spouse who handles the big picture is not aware of the challenges faced each month. Communicating on a regular basis helps keep each spouse informed and allows them to participate in resolving short-term financial issues.

Together, create a written spending plan. This helps both spouses see how the monthly cash flow is prioritized. Working together in this exercise will help you focus on your joint short-term and long-term goals. The spending plan should address:

  • All sources of monthly income
  • Saving and investment contributions
  • Non-discretionary expenses: mortgage, utilities, food, car, gas, and other necessities
  • Discretionary expenses: gifts, cell phones, personal-care items, etc. (This list is general and not intended to be all- inclusive.)

The division of labor is a valuable arrangement that helps couples balance time and resources. Though divided in responsibility, it is important to stay united and informed on the objectives. An uninformed spouse may face a great deal of frustration at a time when he or she may not be emotionally ready. For more information on creating an asset list and spending plan, contact one of the Smedley Financial wealth managers at (801)355-8888.

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Shutdown Showdown Can’t Sink Stocks

By | 2013, Money Moxie, Newsletter, Viewpoint | No Comments

In October, the U.S. Government operated under a partial shutdown for 16 days. During that time only those federal employees determined to be essential were working. Up to 850,000 federal workers were sent home to wait for an agreement between Democrats and Republicans. National parks were closed. Economic reports were delayed. Consumers were worried. Investors were . . . optimistic?

From October 1st – October 16th, the time period when the federal government was shutdown, the S&P 500 gained 2.38 percent. This was a shockingly positive outcome in what might have been viewed as a dire financial situation. Let’s put the number in perspective. If it were somehow possible for the stock market to continue at that 2.38 percent rate for an entire year, the annual return would be 63 percent. We all know that would be absolutely crazy and it raises some questions.

Why is it important to look at the impact now that the shutdown is over? The current law, passed on October 16th, only keeps the government running until January 15, 2014. In other words, another shutdown could be right around the corner. (The debt limit is expected to be reached on February 7, 2014.)

Why were investors feeling so good during the shutdown? The main reason is likely to be that Wall Street always assumed that the shutdown would be temporary. Eventually politicians would come to an agreement. According to the Washington Post there were similar halts in government services in 1995, 1990, 1987, 1986, 1984, 1983, 1982, and 1981.

Did the shutdown save the government money? This one is simple: no. In fact, it cost extra. Furloughed workers were given pay for every day they did not work. That added up to around $2 billion. For example, national park employees were paid even though there was no revenue from visitors. Zions National Park in Utah missed out on approximately 72,000 visitors during the first ten days of closure.

Local governments also took a hit, Utah in particular. The state agreed to send $1.67 million to the federal government to reopen national parks inside the state. It was worth it since the local communities estimated revenue of over $100 million in areas around these parks. As of the time this article was written, the federal government had not paid back the state.

How did consumers react to the halt? Consumer confidence dropped significantly during the shutdown. However, they did not put their money where their mouth was. According to Thomson Reuters, retail sales increased by 3.7 percent in October (compared to October 2012). That would normally be considered good. In light of the shutdown, 3.7 percent seems strong.

Did the shutdown hurt the economy? The overall cost of the shutdown to the U.S. economy has been estimated at $24 billion (source: Standard & Poor’s). How bad is that? It is a little more than one tenth of one percent of GDP—just enough to show up in the numbers when quarterly annualized numbers get reported. However, the long term impact on economic opportunity seems muted. The energy renaissance in the United States continues. Consumers kept spending in October on homes, cars, iPhones, and whatever else they needed. They are likely to do the same in November and on into the future. All these will help job creation to continue just as it has all year.

Will we have another shutdown? The most likely answer is yes. Hopefully it does not happen in 2014. The political fallout alone may be incentive enough to avoid a February shutdown. Recent history tells us that the market will expect a deal and consumers will keep spending no matter what. Therefore, it is safe to conclude that while the possibility of another
shutdown is scary, a short shutdown may not be as negative in the long term to investors. Of course, there is no guarantee.

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Obamacare Medical Costs on the Rise

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There is no shortage of controversy surrounding Obamacare. Apparently there is also much confusion around its name. Jimmy Kimmel, the late night comedian, proved that people don’t have their facts straight. He had a camera crew ask people on Hollywood Boulevard which they liked better: Obamacare or the Affordable Care Act. One woman explained that Obamacare has “a lot of holes in it, and I think it needs to be revamped.” The same woman felt that “the Affordable Care Act is better.” She wasn’t the only one. Most people had similar opinions. Just to clear up any misconception, they are one in the same.

One thing that is certain is many Americans will have their medical insurance costs increase this next year. This is largely due to medical carriers revamping their plans to be in compliance with the new law.

Forbes reports that 41 states will experience premium hikes. In Utah, individual-market premiums are expected to increase by 24%.1

Average_Age

In one case, a single mother with 5 children had the cost of insurance increase from $827 per month to $1045. That is a 26% increase for one year.2

Seniors may also be indirectly impacted by the new law, which imposes spending cuts by reducing payments to hospitals and doctors, while increasing incentives for more efficient care. Supporters say this will strengthen the Medicare program in the long-term. Opponents say that seniors in Medicare will find it harder to access their benefits because more doctors are refusing to treat Medicare patients.3

The silver lining to all of this is that 30 million Americans will now have access to health care, and
many of those will be eligible for subsidies.

To see if you may be eligible for a subsidy, go to the calculator at http://kff.org/interactive/subsidy-calculator/.

If you are eligible for a subsidy, you will need to apply for insurance through an exchange. When an exchange determines that a person is eligible for a tax credit based on expected income, subsidies will be paid directly to insurers to lower the cost of premiums.

Consumers purchasing insurance through an exchange “can pick from four levels of coverage, from bronze to platinum, with the greatest differences appearing in cost sharing features such as annual deductibles and copayments. Bronze covers 60 percent of expected costs; silver covers 70 percent; gold covers 80 percent; and platinum covers 90 percent.”4

After subtracting subsidies, a 27-year old in Salt Lake City earning $25,000 per year would expect to pay $95 a month if he chooses the bronze plan. A family of four in Salt Lake City with an income of $50,000 per year would expect to pay $122 per month for the bronze plan.5

The bottom line is that health care subsidies will be beneficial for low-wage and middle-income families. If you make too much to qualify for subsidies or if you are covered by an employer plan, most likely your premiums are going to increase. As the Supreme Court said, this increase is a “tax.” Make sure to plan those increased “tax” expenses in your monthly budget.

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The Federal Reserve Will Soon End its Easy Money Stimulus

By | 2013, Money Moxie, Newsletter, Viewpoint | No Comments

When Lehman Brothers collapsed in 2008, all lending essential stopped. The U.S. Federal Reserve (Fed) feared that all five investment banks in this country would cease to exist. No one fully understood the financial calamity coming, but we were beginning to feel what the worst recession in 80 years would be like.

The Fed acted to stop the financial infrastructure from imploding. It believed cushioning the blow was necessary to help all Americans. It started the Troubled Asset Relief Program (TARP). It added to that program over the years with Quantitative Easing (QE) one, two, and three.

Recent years may not have felt like easy money to us, but there is likely no organization more profitable in recent years than the Fed.

The Fed doesn’t literally print money (a responsibility of the U.S. Treasury). It doesn’t have to. Money is created electronically by the Fed and infused into the financial system through open market actions. Its effectiveness is questionable. Its impact is global. And at some time soon it may be ending.

What Is the Fed’s Impact?

Currently, the Fed is spending roughly $85 billion each month to buy treasury bonds in order to keep long term interest rates at historically low levels. The goal is to encourage risk taking. The Fed wants banks to lend, businesses to hire, and consumers to borrow.

If you have purchased a home, refinanced a loan, or bought a car with debt, then you have benefited from these unprecedented efforts of the Fed.

All this money the Fed is creating seems to be working to a small degree. The U.S. stock market* is on track for its fourth positive year in the last five. If you have invested in stocks or bonds consistently during this time, you have probably benefited from the Fed’s actions. Experts have been debating how well the Fed’s historic efforts have worked. One theory is that each time the Fed spends, it has less positive impact than the previous effort. This would explain the lackluster growth in the economy.

Why Is the Fed Still Involved?

Simply stated, the benefits still appear to outweigh the risks.

Low interest rates are meant to be enablers for businesses and consumers to increase borrowing. If the debt gets out of hand, then we will be facing similar problems to those that got us into this mess.

If spending and demand increase too much, then inflation could rise to levels considered too high for a developed economy (greater than 4 percent). At that point, the Fed will have to react to try to slow down the economy even if it means job losses.

At this point, official inflation is tame and private debt levels do not appear inflated like in 2007.

As long as the risks appear low and unemployment is above 7 percent, the Fed is likely to keep spending.

What Will Happen When the Fed Slows Stimulus?

Interest rates will rise from the unusual levels where they currently are to a more natural rate determined by investors. We experienced a taste of what this will feel like this spring and summer. Rates on the 10 year treasury almost doubled in just a few months. Investors saw an increase in volatility.

Where Is the Silver Lining?

Don’t fight the Fed is a common phrase for investors. The Fed is powerful and it is working for what it believes is best for Americans. It plans to cut stimulus only after it determines that the U.S. economy is strong. If rates rise that should bring better yields for savers.

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