2012 was a year full of significant events such as the Supreme Court upholding the Affordable Care Act (Obamacare); a terrorist attack on the US Consulate in Libya; Superstorm Sandy; and a Presidential election. Overall 2012 was better than it felt on the financial front:
- Global Equity markets had their best year since 2009
- 2012 was the least volatile year in the equity market since 2006
- Inflation slowed around the world
- Ratio of consumer financial obligations (mortgage, loans, credit cards, etc.) to Disposable Personal Income hit a 29 year low @ 15.7%
Even the fiscal cliff was avoided, albeit not without political drama and not until early evening on January 1st 2013.
From my perspective, the “fiscal-cliff” deal passed by Congress accomplished some good things on the tax issues but failed to address the more important, and chronic, issues of fiscal deficits and federal debt.
On the positive side, maintaining capital gains and dividend tax rates at 15% (20% for households with adjusted gross income over $450,000) is significant, as is finally fixing the Alternative Minimum Tax (AMT) to adjust it for inflation. Maintaining the estate tax exemption at $5 million per person is also a positive. Finally, several tax breaks, such as the child tax credit, an education tax credit, and mortgage forgiveness debt relief (enables struggling homeowners to avoid paying taxes on forgiven mortgage debt from short sales or loan modifications) were all extended for at least 1 year.
On the negative side, the 2% payroll tax reduction that has been in effect the last 2 years, was not renewed. This will impact all wage earners (an estimated 125 million households) and will likely have an impact on consumer spending in 2013.
Perhaps most disturbing is that nothing was done about current deficits and reducing long-term debt. In fact, the US federal government hit the limit on its outstanding debt ($16.394 Trillion) on Monday December 31, 2012. The President and Congress now have until approximately March 3, 2013 to craft legislation to increase this limit or we face the possibility of defaulting on our government debt. You may recall back in August 2011 we were in a similar position and the solution at that time was to push the problem off until 12/31/12. Therefore the next 3 months will be full of political rhetoric and market uncertainty. My sense is that some solution – even if just another extension of time – will be implemented prior to the deadline.
Having painted this gloomy picture of the state of our government, let me tell you how I am approaching 2013 from an investment perspective. Overall, I expect that the current “fiscal-cliff” deal and the upcoming “debt ceiling” issue will cause a one percentage point drag on the economy. The recovering housing and automobile markets should offset some of this fiscal drag and allow the economy to keep growing at roughly 1.5%.
I continue to favor US equities (especially large-cap dividend paying companies) for 2 reasons: US equities are attractively priced on a historical basis and US corporations are in the best financial shape they have been in years. Additionally, Fed policy continues to be supportive of risk assets such as equities. In fixed income, I prefer high yield to US Treasuries, although Treasury prices could rise during periods of higher volatility. On a risk/reward basis, I feel that global equities offer the most compelling opportunities in 2013. European stocks appear undervalued and have the potential for significant rebounds from historically depressed levels (much as US equities did – rebounding over 100% since their March 2009 lows). New political leadership in Japan and China create optimism that economic reforms will fuel growth in the Asia region. Overall, I anticipate a balanced portfolio (60% equity/ 40% fixed income) to generate returns between 5% – 10% for 2013.
Please feel free to pass this update on to anyone you feel would benefit from it.
Sources: Riverfront Investment Group, International Strategy and Investment
Although the information included in this report has been obtained from sources we believe to be reliable, its accuracy and completeness are not asserted. All opinions and estimates included in this report constitute the judgment of the financial advisor as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.
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