With the benefit of hindsight, few tasks look easier than pointing out a market peak. Looking at a price chart of the stocks market, it is easy to point to the top and say, “Here is where to sell stocks.” Unfortunately, there are few indicators that help anticipate market tops. While market valuation is useful over 10-year periods, it is a poor indicator over a 1-year period. At Crestwood, we believe that trying to beat the market by attempting to anticipate the stock market’s ups and downs is a fool’s errand due to the sporadic nature of returns, importance of tax-deferred compounding and irrational behavior of investors.
Every day matters
Over the past seven calendar years, if you missed the best 5 days in the stock market your return drops significantly, falling from 132.7% to 87.6%! The below chart shows the outsized effect of missing days in the market can have on long-term returns: Continue reading
World headlines continue to be mostly negative and rotate between the crisis in Europe, the economic slowdown in China, the ongoing unrest in the Middle East, and the upcoming U.S. election and “fiscal cliff”. In addition, the recent declines in retail sales and slowing in manufacturing and business spending has heightened fears of a double dip recession. As the U.S. experiences the slowest recovery from a recession in the last 70 years, it is not surprising that investors have little confidence in investment markets.
With all of the focus on what can go wrong, it is hard to see the pockets of strength. Importantly, we have now had six months of improving housing market data and declining gasoline prices which have been helpful to household budgets. Though this data is not enough to offset a slowing economy, we would not be surprised to see some short-term rallies as investor sentiment is very pessimistic (which is often a good contrarian indicator) and the Federal Reserve is hinting at another round of quantitative easing.
Across the country and certainly in Washington D.C., there is all too much discussion about the year-end “fiscal cliff”. This commonplace headline refers to the possibility of inaction by Congress that would ultimately lead to significant automatic tax increases and deep cuts in federal spending. In theory, these two activities should have a positive effect on reducing the U.S. deficit considerably. But, it is widely feared that such drastic increase in taxes and reduction in spending would lead to slower GDP growth and potentially place the U.S. back into a recession.
As investors, what should we be considering as we look towards the year end though the debate continues in Washington?
Long Term Capital Gains
In cases where there is an overweight holding of legacy stock or other appreciated investments which our research suggests should be pared back, we are working with clients to trim gains prior to year-end. This is not a one size fits all approach and we do not think that a strategy to sell investments simply to “reset the basis” is sensible. It is important to consider current valuation and growth potential of investments with low cost basis and, as is usually the case, there’s no need to force through a sale of a worthwhile investment simply to incur the lower tax. However, if it makes sense to trim or sell investments, especially those held over one year, this year is likely more tax advantageous than next year given that capital gains rates are likely to increase from the historically low rate of 15% to over 20%.
Investors are no doubt weary of hearing about all of the geo-political and economic risks in the world. The last five years have been exhausting, filled with unprecedented volatility, global turmoil and uncertainty. Unfortunately, the world is unlikely to simplify anytime soon.
Israel and Iran continue to edge closer to conflict, the European debt crisis remains unresolved, China’s growth is slowing and near zero US interest rates are punishing savers as the Fed has pulled out all of the stops in an attempt to restart the economy. In the US, we are facing a transformative election ahead of a self-imposed fiscal cliff that could subtract, by some estimates, as much as 5% from U.S. GDP growth under the worst case scenario.
Regardless of what your personal political leanings are, most can probably agree that compromise will be the key to avoiding the negative drag that higher taxes and sequestration could cause. We can also agree that compromise might be a bridge too far for most politicians these days. While the scale of the economic drag these spending cuts and tax increases will cause is uncertain, investors should expect to see headwinds to economic growth in 2013.
From the stock market lows in 2009 until midyear 2010, the more economically leveraged stocks had largely outperformed less economically-sensitive, “higher quality” stocks. As a result, many high quality businesses (i.e. those with more consistent revenues, earnings and economic returns) were trading at very attractive valuations. During this time, we took advantage of the disconnect between the attractive fundamentals and discounted valuations and purchased a number of these businesses at attractive valuations.
Now, as the economic recovery sputters, investors have flocked to these high quality companies and, as a result, many of these stocks have outperformed the broader market. Given the inherently stable nature of these businesses, and the fact that many pay attractive dividends, we are pleased to be participating in the relatively stronger returns, especially in light of the relatively lower risk assumed.
We survived the Mayan’s “end of the world” on December 21st and today we live to tell the tale of surviving the Fiscal Cliff. The Biden-McConnell compromise locks in $620 billion in revenue over the next ten years, but still leaves many unanswered questions. As of today, this is what we do know.
Income Tax Cuts: The Bush-era income tax rates will be permanently extended for incomes up to $400,000 for singles, $450,000 for married couples (now considered “high income earners”). Households above these thresholds will see their top rates rise to 39.6%, up from 35% in 2012.
Capital Gains & Dividends: Capital gains and dividend tax rates increase from 15% to 20% for “high income earners”. Per the Affordable Care act there is an additional surcharge of 3.8% on capital gains and dividends beginning in 2013. For everyone else, investment tax rates will remain at 15% or below.
AMT: The bill makes permanent the inflation adjustment for the income exemption levels for the Alternative Minimum Tax, retroactive to 2012.
Estate tax: The legislation will preserve the current estate tax exemption level of $5.12 million but index it to inflation for future years. Top estate tax rate rose to 40%. Continue reading
Hurricane Sandy is bearing down on much of the east coast and is expected to make landfall along the coast of New Jersey and New York City within hours. Many major cities and local communities along the path of the storm have preemptively cancelled schools and transportation services, encouraging citizens to stay home and off the roads. For the first time in 27 years, the New York Stock Exchange was closed today as a result of weather and both stock and bond markets will remain closed through Tuesday.
Here in Massachusetts, yesterday, Governor Patrick requested that schools and businesses close today and, with the safety of our team in mind, we took the precautionary action to close our offices Monday. We do have the capability to work remotely and all of us are available to you as both emails and phones calls are forwarded directly to our smart phones. We will decide later this evening whether we’ll open our offices tomorrow depending on the impact of the storm this evening. Importantly, all of our systems and technology is backed up remotely and we do not have any concerns should the greater Boston area be impacted by any extended loss of power.
We hope that those of you in the direct line of the hurricane remain safe and are spared any meaningful impact from the storm. Please let us know if you have any questions and, despite the investment markets being closed today and tomorrow, please do not hesitate to reach out to us if we can be helpful to you over the next couple of days.
Investors had reasons to celebrate by the end of 2012. Despite somewhat tepid economic growth of only 2% during the first three quarters of 2012, which slowed into the 4th quarter, the S&P 500 was up 16% and the MSCI All World Index (ex-U.S.) was up almost 17% through the end of the year. While robust economic growth was lacking last year, investment markets had extraordinary assistance generating these gains as central banks around the world continued to pump money into the system. While this aggressive money printing raised asset prices and lessened the risk of economic collapse in still struggling economies, it also continues to set the stage for potential inflation and currency devaluation, highlighting some of the reasons we continue to hold gold in client portfolio. Investors should be pleased with the performance of nearly every asset class 2012; however, 2013 is likely to be a bit more challenging.
The compromise on taxes coming just after the ball dropped in Times Square to welcome the New Year provided at least some short-term resolution regarding the 12/31 fiscal cliff and an enthusiastic investor reaction to start the year. As a result of the compromise, most tax-payers will pay a bit more in federal taxes in 2013 with the wealthiest feeling the biggest pinch and higher payroll taxes ensuring that all wage-earners will pay a little more this year. Difficult discussions regarding the debt-ceiling and structural changes to entitlement programs and other government spending will surely cause additional political drama in the months ahead. Whatever the ultimate compromise turns out to be, we know that the mix of higher taxes and spending cuts will negatively impact GDP growth and serve as yet another headwind to business in 2013. Continue reading
As you may have seen, gold has traded off dramatically in the last few days, intensifying the magnitude of the metal’s slide this year. Since the beginning of 2013 gold is down 16% while the S&P 500 is up 12% (as of 4.15.13). This radically divergent performance is the result of many different gold price drivers coalescing to put an incredible amount of downward pressure on the metal. In times of uncertainty, gold is an attractive asset to hold as it provides a hedge against global economic risk, however, when investors feel that those risks are beginning to abate gold is liable to trade off. This is the dynamic affecting the price of gold in 2013.
The fundamental drivers of gold prices all stem from the markets for other investable securities. When the US dollar looks weak, or interest rates are low, or the stock market is volatile, gold looks more attractive on a relative basis as other assets are losing value. That drove gold returns through the financial crises and well into the recovery as the Fed kept interest rates artificially low in an attempt to weaken the US dollar and spur an economic recovery via improved exports and asset price inflation. Continue reading
FOR IMMEDIATE RELEASE
Crestwood Advisors LLC is pleased to announce that Nick Gaskell has been hired to the position of Research Associate.
“Nick brings significant asset allocation experience and will be a welcomed addition to the research effort”, said Robert Ix, CFA, Managing Partner. “We are fortunate to have Nick on the team and excited to continue to invest in our research capabilities”.
Prior to joining Crestwood Advisors, Nick was an Investment Analyst at John Hancock Financial Services in Boston where he was responsible for oversight, due diligence, and manager selection for multi-asset portfolios. Previously, Nick was an Investment Associate at Kraemation Investment Advisors in Wellesley, MA. Nick earned his undergraduate degree at Suffolk University and, in June, sat for the level III CFA exam.
Crestwood Advisors LLC, based in Boston, Massachusetts, is a boutique investment and wealth management firm serving high-net-worth individuals and families. For additional information, please contact John W. Morris, Managing Partner at 617.523.8880 or visit our web site at www.crestwoodadvisors.com.