Among the drivers of the rally in risk assets are the receding fear of a European financial crisis (at least for the time being), and positive U.S. economic data points, particularly with respect to employment, consumer sentiment and bank stress tests. However, the huge amount of debt in the developed world will continue to drive expectations in the years ahead. All options will involve economic pain compounded by political uncertainty.

As we move through 2012, it will be important to plan for a very significant date: January 1, 2013.  This is when the Bush-era tax cuts, the temporary payroll tax cut, and extended unemployment benefits are due to expire, and $1.2 trillion of automatic Federal spending cuts begin to kick in. Additionally, the current $5 million dollar per person estate and gift tax exemptions are set to revert back to $1 million each. It seems unlikely that it will actually play out this way without any modifications, but the risk of political dysfunction, particularly in an election year, remains very high.

Most clients’ balanced portfolios finished the year essentially where they started, although significant volatility along the way made the year feel anything but flat.  The S&P 500 was as high as +10% during the Spring and as low as -10% in early Fall.  While “risk off” asset classes such as Treasuries, municipal bonds and gold all materially outperformed their historic averages, “risk on” asset classes such as small cap, international and emerging markets stocks were hit particularly hard.  What is important to keep in mind is that while these “risk on” asset classes have consistently been the most volatile segments of a diversified portfolio, they have also historically been the best performing segments of the market over longer stretches of time.  Investors can be rewarded with the inclusion of these asset classes in their portfolios if they can stomach the short term volatility and resist the urge to sell during periods of sharp underperformance.  If you have any questions about specific fund managers or your portfolio in general, please do not hesitate to contact us.

On a planning note, as year-end approaches, a reminder to coordinate with your advisors to address tax planning; including any charitable giving, tax loss harvesting or IRA distributions, if applicable. As always, please contact us with any questions or concerns. We appreciate your continued confidence and wish you a wonderful holiday season.

The past three plus years in the markets have shown more than ever how important maintaining a proper perspective, asset allocation and regular reviews can be in determining one’s long term financial success.  Having a good plan prevents one from getting sucked in by the chaos and emotion of the moment – panic is not a strategy. Please contact us should you wish to discuss any of these issues and how they relate to your personal circumstances. We hope you enjoy the rest of the summer.

While the potential for a downgrade has been well  telegraphed for some time, U.S. Treasuries actually rallied last week and have continued to rally today as the markets focus has turned more to the growing concern about a global economic slowdown rather than the credit downgrade. Despite the credit downgrade, in times of uncertainly or volatility, the markets are making a clear statement that U.S. Treasuries are still the “safe haven” bet.  Equity markets have continued the selloff that began last week as concerns that the economic recovery in the U.S. and across the globe has stalled.

As history has shown us, markets by their nature go up and down over economic cycles.  Unfortunately for investors, this volatility can at times invoke instincts that are counter-productive to long term investing, such as panic selling and buying in at market highs or after a strong recovery (market timing).  In volatile markets like these, investors are best served by continuing to focus on their long term goals.  In today’s WSJ opinion piece, Burton Malkiel wrote: “No one has ever become rich by being a long-term bear on the fortunes of the United States, and I doubt that anyone will do so in the future. This is still the most flexible and innovative economy in the world.”  We emphatically agree.  The bulwarks of asset allocation and diversification provide the best protection against market gyrations and discomforting times.  Investors should evaluate whether their current portfolio is in line with their long term asset allocation and goals.  In cases where this is not the case, we encourage you to contact your advisor to discuss your concerns. 

In the coming days, we also expect to post more articles of interest on our website by respected industry leaders, as well as some of our investment partners.

We appreciate your continued trust and confidence.

Why is the US in this predicament?  In short, because although Congress passes budgets and laws fully aware of the debt needed to finance these obligations, the U.S. Treasury is not authorized to issue debt beyond a certain limit without the approval of Congress.

Will the debt limit be increased?  If history is any indication, yes.  According to the U.S. Treasury, the Debt-Ceiling has been increased / revised 78 times by Congress since 1960.  Further, public opinion has changed dramatically over recent weeks, with a rising number of those polled favoring an increase in the debt-ceiling.

Ultimately, we do not see default as a realistic outcome and expect some resolution, hopefully prior to August 2^nd, if not, immediately following.  The drama playing out in the media is more political brinkmanship than reality.  We are not recommending any tactical portfolio changes before the negotiations are finalized.

Please find below a link to a more detailed overview of the situation from Liz Ann Sonders, Chief Investment Officer at Charles Schwab (dated July 18^th).  This piece goes into greater detail on the negotiations and the potential for a ratings agency downgrade.

If after reviewing the article, your risk tolerance and personal feelings lead you towards taking action within your portfolio, please contact us to discuss this further.

Staring at the Ceiling - July 27, 2011

The economic themes that have weighed on the markets in recent quarters continued in the first quarter of 2011. Concerns over inflation and the price of oil, US municipals and European sovereign debt continued to create headwinds for the markets. At the same time, consumer confidence continues to creep upward, unemployment continues to creep downward, and corporations are by and large reporting record earnings. Real U.S. GDP came in at an annualized 1.8%, however, most economists are forecasting a full year 2011 GDP rate of between 2.80% and 3.25%. We expect the economic recovery and expansion to continue, albeit slowly, for the remainder of the year. While an uptick in inflation is certainly a possibility, we do not see inflation becoming a major problem in 2011.

Now that tax filing season has passed, we look forward to helping you review your financial plans throughout the Spring and Summer.

Please contact us should you wish to discuss any of these issues and how they relate to your personal circumstances.

The S&P 500 surged over 10% in the 4^th quarter and ended up 15.1% for 2010. Small and Mid Cap sectors of the U.S. market did even better, as did Emerging Markets, while Developed International Markets underperformed on a relative basis.  On the fixed income side,  a larger than normal supply of municipal bonds, slight uptick in interest rates and several headline stories about State finances helped fuel a 4^th quarter sell off. This sell off did not prevent most segments of the municipal and taxable bond markets from finishing 2010 with solid overall performance.  Increases in exports and consumer spending helped the U.S. Gross Domestic Product (GDP) grow at 3.2% in the 4^th quarter, up from 2.6% in the 3^rd quarter.  Although current levels of Federal and State debt  and spending concern us, as do the recent events in Egypt, we continue into 2011 cautiously optimistic about the continued economic recovery.  

Please contact us should you wish to discuss any of these issues and how they relate to your personal circumstances.

The Federal Reserve’s announcement of “QE2” (a $600 billion dollar Treasury bond purchase program) and the landslide victory by Republicans in November elections may very well provide the environment necessary to propel the economy towards a more robust recovery. The Fed hopes its latest round of quantitative easing will help push borrowing costs lower, helping homeowners refinance and businesses feel more confident in borrowing to expand, and most importantly, hiring people. As the dust settles from the elections, Congress will gather for their final 2010 “lame duck” session with a list of very important items to address. Among the most critical issues is deciding what to do with the expiring Bush tax cuts, the seemingly annual AMT debate, as well as attempting to eliminate the uncertainty surrounding the current estate tax laws. With the Congressional houses now divided among the major parties, progress will only be made if party leaders on both sides of the aisle are willing to meet in the middle on issues affecting Americans. A bright note in an otherwise unattractive political environment: More often than not, political “gridlock” is almost always good for the markets, as is the third year of a Presidential term.

Please contact us if you would like to discuss any of these issues and how they relate to your personal circumstances. As always, we thank you for your continued confidence and we extend our best wishes for the holiday season.

Our overall outlook is characterized by concern over the challenges faced by the global economy in the years ahead. In fact, sharp swings in stock prices this year reflect a sort of tug of war between improving fundamentals on one side and serious concerns about debt-related stresses and their potential to derail the fragile recovery on the other. The developed world must walk a tightrope as it deals with the pressing need to slow and ultimately reverse debt growth without also seriously harming economic growth. During these volatile economic times, it is imperative that you examine your true level of risk tolerance as you review your current financial plan and make any adjustments necessary to achieve your long term goals.  As always, we are available to address any questions or concerns you may have.