Judging by the headlines in the financial press, investors spent much of the past year anxiously awaiting one calamity after another that failed to occur. The plunge off the so-called fiscal cliff was averted. The euro zone did not fall apart. China’s economy and stock market did not crash. The bond market did not implode. The re-election of President Barack Obama did not derail the US market. The “flash glitch” in early August did not lead to further trading disruptions. Doomsday did not arrive on December 21, as some interpreters of the Mayan calendar suggested it would.
Instead, the belief that owning a share of the world’s businesses is a sensible idea appears to be alive and well, despite suggestions from some observers that the “cult of equity” is dead. For the year, total return was 16.42% for the MSCI World Index in local currency, and 16.00% for the S&P 500 Index. Among forty-five global stock markets tracked by MSCI, only three posted negative results in local currency (Chile, Israel, and Morocco), and twelve markets had total returns in excess of 25%, with Turkey leading the pack at 55.8%. Although much of the financial news over the past year highlighted Europe’s fragile financial health, most of the region’s equity markets outperformed the US, including Austria, Belgium, Denmark, France, Germany, the Netherlands, Sweden, and Switzerland.
As is so often the case, earning the rewards offered by the world’s capital markets may have required a combination of discipline and emotional detachment that eluded many investors.
Follow the jump to read the highlights of our new tax law, enacted by the Congress on January 1st in an effort to avoid the so-called Fiscal Cliff.
Tax rates have become somewhat more progressive, with higher tax rates for the ‘Top 1%” who earn over $400,000 a year ($450,000 for married couples). The good news is that tax rates for long-term capital gains and qualified dividends did not increase at all for those whose adjusted gross income is below these thresholds.
Estate tax rates increased from 35% to 40% for estates over $5 million. In addition, decedent spouses can now rollover any unused estate tax exemption amounts to their surviving spouses, who can add it to their own $5 million exemption amount. These changes are ‘permanent,’ to the extent anything in Washington can be considered permanent.
Also good is a permanent fix for middle income earners from being clobbered by the Alternative Minimum Tax. Congress has been passing one-year patches to this law for years, and now the fix has been made permanent.
With the Fiscal Cliff now behind us, we are closer to being able to simply focus on the fundamentals of the U.S. and global economies. With housing finally on a more solid footing and housing prices increasing once again, we can be optimistic that some bump in economic activity is in our future. With stock prices very inexpensive, that bodes well for our portfolios.
The fly in the ointment (and there’s ALWAYS a fly someplace) is that we have another bruising showdown coming up in a couple of months in Washington, D.C. The federal government is running up against another debt ceiling and it will need to be increased in order for the government to continue borrowing to fund its operations. The Republicans will want to use this crisis to their advantage, forcing cuts to federal spending and trimming future benefits for Social Security and Medicare. The president and the Democrats what these programs left alone, though everyone privately admits that we are on an unsustainable trajectory with these programs and something will have to be done.
We encourage you not to let the fear mongering by the media get to you when this gets down to the wire. The financial markets might react and the reaction might even be somewhat violent. At the end of the day, the debt ceiling will be raised and some amount of budget and entitlement cuts will undoubtedly be part of the final plan. Because any market declines will likely be temporary, we do not anticipate having to take any significant actions in your portfolio. If the equity markets decline significantly, we might use this temporary dip to add to your holdings. However, any attempts at market timing will almost certainly turn a temporary loss into a permanent one, which we want to avoid like the plague.
Highlights of the American Taxpayer Relief Act of 2012
What was included:
Income tax rates: Maintains current tax rates on income below $400,000 for singles and $450,000 for couples. Would permanently increase tax rates on income above that to 39.6 percent from 35 percent.
Dividends and capital gains rates: Permanently increases tax rates to 20 percent from 15 percent for single people with income over $400,000 and couples over $450,000.
Exemptions and deductions: Reinstates provisions that phase out personal exemptions and deductions for incomes over $250,000 for singles and $300,000 for couples.
Alternative minimum tax: Permanently indexes the alternative minimum tax for inflation, preventing millions of taxpayers from being affected.
Estate tax: Permanently increases tax rates to 40 percent from 35 percent on the value of estates over $5 million. Allows decedent spouses to pass on any unused portion of their $5 million exemption to their surviving spouses, who can add it to their own $5 million exemption upon their own death.
Tax credits: Extends tax cuts in the 2009 stimulus law for five years, including a child tax credit, an expanded earned income credit and a refundable credit for college tuition. Extends some business tax credits for one year.
Payroll tax increase: Allows payroll taxes to rise on Tuesday to 6.2 percent from 4.2 percent on workers’ first 113,700 of income.
Unemployment insurance: Extends expansion of unemployment insurance for one year.
Medicare provider payments: Prevents a 27 percent reduction in payments to Medicare providers for one year.
Automatic spending cuts: The two sides came to a deal to pause for two months the $110 billion in automatic spending cuts set to go into effect in 2013, paid for with unspecified spending cuts elsewhere.
Farm bill extension: Extends for nine months portions of the current farm bill, including provisions that would prevent milk prices from increasing and continued direct payments to farmers. Eliminates conservation programs and financing for fruit and vegetable growers and organic farmers and does not include disaster assistance.
What was left out:
Debt ceiling: The country officially hit its debt limit Monday, and the Treasury is undertaking “extraordinary measures” to put off default. If Congress does not raise the ceiling by late February or early March, the Treasury will not be able to pay all of its bills. Expect this to be another flash point for the financial markets.
Additional deficit reduction: Earlier proposals by President Obama and Speaker John A. Boehner included hundreds of billions more in deficit reduction, with Mr. Obama favoring increased taxes on the wealthy and Mr. Boehner favoring spending cuts.
Calling all neighbors in the Alamo, CA area and beyond! You work hard for your money, and now we want to help make it work for you. At Del Monte Group, we offer out-of-the-box wealth management planning that is clear and actionable at every step. If this sounds like the type of financial support you need, schedule an appointment to meet with Richard or Angela today. Visit APlaceOfPossibility.com/Calendar to get your meeting on the books. Need more help or have another question? Feel free to contact our team by calling 925.736.6410 or sending an email to Info@APlaceOfPossibility.com.