Client Newsletter: April 18, 2012

Wow, What a Quarter! 

We have just experienced one of the biggest first quarter gains for the Dow* and S&P 500* since 1998, and the Nasdaq* earned its best first quarter since 1991. (CNNmoney-4/1/12) The DJIA* increased by 8.84%, the S&P500* up 12.59% and the Nasdaq* rose by 18.67%.

The first day of the New Year set the tone with the DJIA* rising by 180 points. It was the best January for stocks since 1997. Stocks kept moving forward for the quarter with three big milestones being achieved:

  • On February 28th, the DJIA* closed above 13,000 for the first time since May, 2008.
  • The Nasdaq* crossed over 3,000 for the first time since the dot-com frenzy a dozen years earlier.
  • The S&P 500* also achieved a lofty status rising to over 1,400 on 3/15/12, the first time since May 26, 2008.

Some investors are looking at the record high for the DJIA* of 14,164.52 and the S&P 500* record close of 1,565.15 (which both occurred on 10/9/2007) and suggest that stocks are undervalued and we still have positive gains ahead. With the S&P 500* trading at 12.9 times expected earnings, compared to a historical 10-year average of 14.6, stocks should still have room to increase. Positive US economic news, impressive corporate profits and a great first quarter provide some investors comfort in maintaining stocks for the long term.

Other investors are saying it may be too late to get in the market. The S&P 500* is up 108% from its March 2009 lows and the past roller coaster volatility makes investors nervous about adding to stock positions at this time. Other issues such as high unemployment, a troubled housing market, substantial deficit, and potentially adverse world conditions, all do not instill confidence to buy stocks at these higher levels.

What Should an Investor Do Today? 

1. Our best advice is to take advantage of the stock market gains by rebalancing your portfolio and taking profits from the gains in your account. Selling when the market is trading high is always best. We are reviewing your accounts to make sure we capitalize on these gains. If we have not spoken with you regarding taking profits, please contact our office to discuss.

2. If you anticipate a big expense and think you will need monies from your portfolio this year, please let us know. Now may be a great time to withdraw monies while the market is high in value.

3. For those clients who must take their required minimum distribution from their IRA due to reaching age 70 . , now may be a great time to make sure those funds are available. You do not have to withdraw the funds from the IRA now unless necessary, but you may wish to sell equities within the portfolio so that the monies are available later in the year.

4. Now may be a great time to adjust your overall asset allocation of stocks and bonds to make sure it is appropriate given your personal financial situation. Please feel free to contact our office if you have any questions before your next annual review.

5. It also may be a good time to consider alternative investments since they should help to minimize volatility in a declining market.

Don’t Forget About Taxes. 

Now that April 15th has passed and you have paid your tax obligation for 2011, make sure your estimated tax payments are appropriate when you consider any realized capital gains from the sale of stocks in taxable brokerage accounts. Also, in our opinion, it probably will be a good assumption to expect higher capital gains distributed from taxable mutual funds at the end of the year. Make sure you talk with your accountant about proper tax planning for 2012 in light of potentially higher capital gains.

Also remember that unless the Bush tax cuts are extended, capital gain rates are legislated to increase in 2013 and will increase from the tax preferential rate of 15% for most taxpayers (10% for some lower income taxpayers) to ordinary income rates. This should mean that you may wish to sell appreciated assets and pay the capital gains tax in 2012 at potentially lower rates.

Now is a good time as well, to start a folder for your 2012 tax receipts. This folder should hold all documents that will make it helpful for you or your tax preparer to complete your tax returns in the future. Some of the receipts that you should keep would be:

  • Medical payments, including insurance premiums and mileage
  • Real Estate tax payments
  • Charitable contributions
  • College tuition payments
  • Child care payments

Mortgage Interest Rates 

With interest rates at record lows, refinancing your mortgage may also be considered. In January, the average 30-year mortgage interest rates had fallen below 4.25% for the first time on record (these rates include both conforming and jumbo mortgages to give a true picture of the overall mortgage market). It is a great opportunity to lock in some cheap mortgage money and save some interest expense each year.

Where Are Interest Rates Going? 

With interest rates at record lows, most people are expecting them to increase and high inflation to begin. While we certainly don’t expect interest rates to go any lower, we do not expect them to increase substantially in the short term. Recently, Federal Reserve Chairman Ben Bernanke said that with the current state of our economy, the central bank intends to hold short-term rates near zero at least through late 2014. “I wouldn’t overstate the Fed’s ability to massively change expectations through its statements,” Fed chairman Bernanke said, “It’s important for us to say what we think and it’s important for us to provide the right amount of stimulus to help the economy recover from its currently underutilized condition.” (New York Times – 1/25/2012)

For many of our clients, we suggest they do not invest in long term bonds, but continue with short to intermediate term maturities. This may help to protect the principal if interest rates start to slowly increase. Also, it is our belief that mutual fund managers can handle small changes in interest rates because they can purchase higher yielding bonds with ongoing dividend income, new deposits and bond redemptions.

New State Use Tax 

Many states are now implementing a “Use Tax” for purchases made over the internet, through toll free numbers, from mail order catalogs and from out-of-state locations when sales tax was not charged by the seller. If you purchase items or services subject to sales tax for which the seller does not charge and collect sales tax on the invoice or receipt, you are personally responsible for remitting the use tax directly to the state. This tax has been in force for many years, and many states are just beginning to enforce this policy. If you owe use taxes, they will be collected when you file your personal state tax return. Look for more information from our office on this tax later in the year.

What’s New at HFA! 

After many great celebrations with our clients during our 30th anniversary last year, we have had a quiet first quarter. As mentioned in past newsletters, we are continuing to improve our investment process by adding staff for additional research and analysis. We have been approved to use Dimensional mutual funds which we will talk about with you at future review meetings. This family of funds offers a unique style of investing that focuses on actively managed index funds with low cost and low turnover. Finally, we have adopted the Chester County Food Bank as our charity for the year and will provide service, food and contributions to the organization. You will have the opportunity to participate later in the year.

Be on the lookout for our educational event coming this fall. We will provide details during the summer.

As always, we are here to serve your needs to the best of our abilities. Please contact our office if you have any changes to your personal financial situation or if you have any questions or concerns about your investment portfolio. Thank you for the continued confidence you have placed in HFA for all your financial needs.


Peter K. Hoover, CFP®

* Indices mentioned are unmanaged and cannot be invested in directly. Past performance does not guarantee future results.

Note: Investors should carefully consider the investment objectives, risks, fees and expenses before investing. For this and other important information, please obtain the investment company fund prospectus and disclosure documents from your Rep/Advisor. Read this information carefully before investing.