When Good News Is Really Good News

The Department of Labor today announced that the unemployment rate in October dropped to 7.0% as 203,000 new jobs were added in the month. Almost 300,000 fewer people were counted as unemployed while the labor force participation rate increased, both of which are good things. In addition, the average work week increased a bit, as did average wages. To sum it all up, this was probably the best employment report since the beginning of the financial crisis in 2008.

In recent months, this type of good economic news was often seen by the market as bad news because it suggested that it would force the Federal Reserve to accelerate its timetable to begin tapering QE. Following that logic, without QE to prop up the stock market, equity prices would fall. This convoluted thinking has left us with the backwards reality of “bad is good” and “good is bad” for the past few months.

So as an investor, where does today’s action leave us? At this moment, the Dow Jones Industrial Average (#DJIA) is up 193 points to 16,015. It could be that stock market participants finally understand that it’s good to have better employment; that it’s a good thing to have better than expected GDP growth (the second estimate for Q3 was 3.6%) and that the housing market should not collapse with the 10-year treasury around 3%. I believe that the Fed will not begin to ease before April. And if they do it right, they can reduce their monthly bond purchases slowly enough that it shouldn’t do any real harm to the economy. Indeed, if the economy is strong enough to stand on its own, that’s good for everyone, including the stock market.

Therefore, my clients and I remain fully invested in the market. I expect this rally to extend through the rest of this year and into 2014. And if the rumor is true that Congressional leaders are inching closer to a bi-partisan budget deal on the debt ceiling and the deficit which will include getting rid of the harsh sequester cuts, then we could really be looking at a very bright picture for the stock market for months to come.

The Cliff, The Deficit and What It Means To You

A few weeks ago (the December 8th entry) I told you that the world wasn’t coming to an end because of the Fiscal Cliff. I said that “it is HIGHLY UNLIKELY that every tax increase and spending cut will, in fact, come to pass. Some compromises will certainly be made by our leaders in Washington, despite the radical bleatings of the far right and far left. Whether the deal is brokered in the next two weeks or the next two months, I’m confident a deal will be made that will leave both sides less than happy but will stave off the worst result, which would be simply doing nothing.

As I predicted, a deal was struck with much fanfare and with thundering applause from Wall Street which rewarded the hack show by staging a huge two-day rally. That’s the good news. The bad news is that the deal accomplished virtually nothing for the long-term health of our economy. It is simply a tiny band aid on a festering wound. It feels better now but it does nothing to stop the internal bleeding.

The bigger problem is looming: the fight over the deficit and increasing the debt ceiling. And this time, the Republicans in Congress hold the power. Mr. Obama is going to have to negotiate legitimate spending cuts in Social Security, Medicare/Medicaid and other sacred cows whether he wants to or not. I don’t think there’s really any way to avoid it much longer. It’s time to take the medicine. It’s past time for America to tighten its collective belt and start living within its means. As anyone who runs a household or a business implicitly understands, you simply cannot spend more than you earn, going deeper and deeper into debt. Eventually, you either go bankrupt or someone breaks your kneecaps. I believe the national debt is now approximately $17 trillion, give or take a trillion. It’s time to start to reducing this of our own volition before our creditors force Greece-like austerity measures down the road.

But before we get to the debt ceiling drama, let’s see what the Fiscal Cliff agreement means to you and your money. First of all, if you make less than $400,000 (or $450,000 as a couple), you should be pretty happy. The only real change for you is your payroll taxes will rise 2%. The dividend and capital gains taxes remain at 15% and your income tax levels remain where they are. For those high income citizens, you will face the same 2% payroll tax increase, plus you’ll be subject to a higher tax bracket and capital gains and dividend taxes of 20%. None of this is end-of-the-world stuff. The estate tax exemption remains at $5 million which is good news for everyone. So, in the end, this really isn’t a horrible agreement; it could have been much worse. But the flip side is that while it isn’t bad for people, it’s bad for the government as it actually reduces its long-term tax receipts. Hence the looming fight over the deficit.

And what does all of this mean for our investments? The agreement on the capital gains and dividend tax rates are a plus for the stock market. The higher estate exemption is also good for the market. Any increase in payroll taxes, or income taxes, is a net negative, but it really isn’t a huge problem. So for now, we’re ok. We just need to listen to the rhetoric about the deficit and pay close attention to what kind of spending cuts are forthcoming because that will directly affect the economy, which will immediately impact the stock market. So stay tuned.

Musings on Death and Taxes

Last night my family enjoyed our blended holiday celebration. We shared gifts, laughter and hugs and kisses just days after an entire community was devastated by the horrific act of a madman and less than two months after Superstorm Sandy cut a path of devastation through much of the New York/New Jersey area. There are 27 families in Newton, CT who will not be celebrating the holidays this year as they mourn the loss of their children or siblings or parents. And there are likely hundreds of additional families still homeless or trying to piece their shattered lives back together. It truly makes you appreciate life’s blessings and reminds you to never take them, or your loved ones, for granted.

This random act of senseless violence in the Newton massacre once again brings the issue of gun control front and center. It’s hard to understand how any logical, sane person can oppose the idea of keeping automatic and semi-automatic weapons of mass destruction out of private hands. The Founding Fathers, when they crafted the 2nd Amendment to the Constitution, never envisioned weapons such as these. There is simply no place for them in civilized society. Period. I challenge any gun advocate to reply with a cogent reason why those types of weapons should not be banned. It’s time for our politicians to stand up to the NRA, and the rest of the gun lobby, and loudly proclaim that enough is enough; that they will not be bullied any longer and that’s it’s time for a national debate on what weapons can and cannot be owned by private citizens. President Obama, if you’re reading this, since you are not up for re-election, it’s your job to take a stand and get something done.

And Mr. President, while I have your attention, it’s time to get a deal done on the Fiscal Cliff. Enough is enough. Both sides MUST stop the posturing, eliminate all the partisan BS and craft a compromise that the entire country can live with. It shouldn’t be that difficult. You all have to agree that taxes will go up on many, if not all Americans. And those tax increases will likely be tilted towards those Americans who make the most money. Republicans, just accept it and move on. And at the same time, the government must spend less. There is simply no alternative. Democrats, deal with it and move on. So lock yourselves in a room until an agreement is reached. Because if you can’t get this deal done, then as a nation we are truly screwed because the bigger debate is forthcoming.

What nobody is talking about is that the Cliff negotiations are just the first act in what will be a much more contentious debate over the big issues of what to do with Medicare and Medicaid and Social Security. Those expenditures represent about 41% of the entire federal budget. Throw in another 15% or so for the military and you see that those three programs account for a staggering 56% of the entire $3.5 trillion spent by our government. Cutting a billion here or a billion there is simply noise. We, as a nation, must accept that we have been living well beyond our means for far too long. That unless we want to leave our massive debts for our children and grandchildren to deal with, leaving them with far diminished prospects and lives to that which we’ve enjoyed for so long, we must all make sacrifices for the common good. As a society, are we ready to do that? We’ll find out. And in the meantime, let’s talk about it. Write to me and let me know what you think.