WEEKLY STOCK MARKET COMMENTARY
For the Week of December 10, 2007
THE MARKETS
November job growth, reported last week by the Department of Labor, fell just below expectations, while unemployment held steady at 4.7 percent and inflation showed a slight up tick. The combination may give the Federal Reserve a little added incentive to lower interest rates at its final 2007 meeting tomorrow. The Dow, up 900 points over the past nine trading days, ended the week up 1.96 percent to close at 13,625.58. The S&P gained 1.66 percent to finish at 1,504.66, and the NASDAQ rose 1.70 percent to close the week at 2,706.16.
Source: Morningstar.com. * Past performance is no guarantee of future results. Indexes are unmanaged and cannot be invested into directly. Three and five-year returns are annualized. The S&P, excluding “1 Week” returns, is a reflection of return to an investor, by reinvesting dividends after the deduction of withholding tax.
More Productive – American workers increased their productivity in the third quarter by an annualized rate of 6.3 percent, the largest increase since 2003, according to the Department of Labor, which revised its numbers last week. Initial estimates had placed this summer’s productivity at 4.9 percent higher. Wage pressures as measured by unit labor costs fell 2 percent in the third quarter, the biggest drop in four years. The combination could relieve concerns about inflation and encourage the Federal Reserve to make another interest rate cut at its meeting this week.
To The Rescue – The Pension Benefit Guaranty Corporation took over 110 failed pension plans in the 2007 fiscal year, up from 94 in 2006, but less than the 120 terminated pension plans in 2005(Source: PBGC, BTN Research).
Stock Correction – The S&P 500 fell to 1,407 on Nov. 26, down 10.1 percent from its all-time closing high of 1,565 set on Oct. 9, 2007. The correction marks the first time the stock index has fallen at least 10 percent from a previous closing high in 1,187 trading days, a streak that began in March 2003. The longest stretch ever for the S&P 500 without a 10 percent correction is 1,767 consecutive days, a streak that ended in October 1997 (Source: BTN Research).
That’s Not An Option – Americans previously were able to retire at age 65 and receive full Social Security benefits, but the law was changed in 1983. The normal retirement age is now a function of your date of birth and can be as great as 67 years old. You may still receive retirement benefits as early as age 62 but with as much as a 30 percent reduction to your monthly check. However 21 percent of Americans surveyed believe they are eligible for unreduced Social Security retirement benefits even if they retire before age 65 (Source: EBRI, Wall Street Journal, BTN Research).
Buying Power – Inflation has increased the level of prices in the U.S. 81 percent over the past 20 years, an annual increase of 3 percent. Thus, an individual retiring in 1987 on a fixed-income (i.e., with no cost-of-living adjustment) would have only 55 percent of the purchasing power today that he/she originally had. The consumer price index is a measure of inflation compiled by the U.S. Bureau of Labor Studies (Source: Department of Labor, BTN Research).
WEEKLY FOCUS – AMT Update
On Thursday, the Senate passed its own version of Alternative Minimum Tax (AMT) relief, voting against opening debate on the House version. At issue is how to compensate for the estimated $50 billion in lost revenues. Democrats want to levy new taxes, while Republicans want to add the loss to the national debt, according to CNNMoney.com. So with just 15 days left until the end of the tax year, the Senate bill now goes back to the House, where Ways and Means Committee Chairman Charles Rangel (D-NY) has agreed to drop a tax hike on private equity and hedge fund managers that would have paid for the loss of revenue from the AMT.
Either way, Congress fails to fix the fatal flaw that has made the AMT such a threat to tax-payers and the national budget. Created in 1969 to ensure that the nation’s wealthiest citizens could not tax shelter all of their income from the IRS, the AMT did not include a provision for indexing the tax to inflation. As a result, as the average American income grows, the number of taxpayers affected grows exponentially. Last year, 4 million taxpayers were hit. This year, an estimated 25 million Americans, 12 million of them in the $100,000 to $200,000 income range, will be subject to the tax, at an average of $2,000 per AMT filer.
For years, Congress has passed an annual fix to stop the AMT from affecting more people. This year, that effort has been thwarted by a fundamental difference in fiscal policy between the two houses – pay now or pay later. It’s looking more and more like the millions of Americans expecting tax refunds will get paid later. The IRS says tax return processing, which normally starts in mid-January, may be delayed as it revises and tests computer programs and forms to reflect the AMT patch – or lack thereof.
If you haven’t finalized your strategies for minimizing your 2007 tax obligation, call our office soon for a review. We will gladly work with your tax advisor to analyze your situation under either AMT scenario.
* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Morgan Stanley Capital International Europe, Australia and Far East Index (MSCI EAFE Index) is a widely recognized benchmark of non-U.S. stock markets. It is an unmanaged index composed of a sample of companies representative of the market structure of 20 European and Pacific Basin countries and includes reinvestment of all dividends. WMCSAI# 263336
