Presidential Cycle
Market indicators for an uncommon 2nd term president
Spring 2006
Our quarterly newsletters are a timely way of communicating with you. We share our views on the economy and the markets, ideas or opportunities for you to use, and commentary on aspects of financial planning that may be applicable to your life. We’ve organized the letter into three broad categories -- News, Ideas, and Commentary -- to make it easy for you to quickly find topics of interest. Please feel free to call or email your feedback and ideas for future topics. So as the TV anchors say… First, the news.
News
The major stock markets as measured by their indices were positive for the quarter, including the Dow Jones Industrials up 3.66%, the S&P 500 up 3.73% and the Morgan Stanley EAFE (foreign) up 8.78%. The bond market wasn’t so lucky, as the former Fed chief Allan Greenspan and his predecessor, Ben Bernanke have continued raising the prime rate. Not surprisingly, the Lehman Bro’s Aggregate Bond index fell 0.65% during the quarter.1
I want to share with you a presentation by Liz Ann Sonders, chief investment strategist for Charles Schwab & Co., on the market indicator known as the presidential cycle. We are at the mid-term of this cycle in a historically uncommon 2nd term of a US president. She says the Dow has performed much better (18% better) in the mid-term year of a two term president than as compared to the Dow’s performance of one term presidents. Sounds good so far.
Additionally, President Bush’s approval rating is currently running below 50 which she believes, is normally a contrarian indicator translating into positive historical market returns. Still sounds good. She sums up however, with this cautionary note. “Although Bush’s low approval ratings (due largely from the Iraq war, not the economy) may send to some a bullish signal, in my opinion, it would only be bullish if the economy were weaker, ironically.” 2
The financial press is fond of reporting on phenomena and cycles like this one and while interesting to look at, it’s good to remember they are based on the past, on average – not on what will actually happen. While market indicators can many times help us understand some short term events and appropriately respond, our management approach takes the longer view of the market and your investment allocation should be based on your situation and unique risk tolerance.
Commentary
Did you know that 21% of the U.S. adult population provides unpaid care to an adult family member or friend?3 This figure may not be surprising because you either give care to someone (or are yourself the recipient) or you may know someone receiving or giving care to a family member or friend. We bring this up for a couple of reasons. First, the U.S. population 65 or older will rise to 1 in 3 by the year 2030, from just 1 in 5 only 11 years ago.4 So, your chances of dealing with this are increasing.
Secondly, if you are providing caregiving right now, it is important to understand several things. There are emotional and physical impacts to caregiving that go unchecked because the time and financial demands are now more ever-present. Our advice is to be aware of this and seek out strategies to ease the burden of caregiving such as hiring a geriatric care manager, finding a caregiver support group in your community, or holding regular family meetings to build consensus and delegate the work load. Other solutions are respite care, adult day care centers and ultimately home health care or residential care. A range of options exists for residential care including assisted living communities and continuing care retirement centers. Contact our office for additional resources like the Eldercare Locator helping caregivers locate local assistance.
For those of you for whom this is not a current demand, planning is really the key. Discussions with your spouse, family member or trusted friend are the first step. Ask questions about their expectations of being cared for and under what kind of circumstances. Next talk to us about whether long term care (LTC) insurance makes sense for you. Among the reasons to consider LTC insurance are the desire to preserve a spouse’s standard of living, keeping the burden of care off of family members, and because you might have had the experience of putting a loved one into a care facility.
Other proactive steps to take include updating your healthcare powers of attorney and living wills. Your family attorney can assist you with making appropriate updates to your legal documents and inform you of law changes in this area.
Ideas
Tax reform as it was passed in 2001 (EGTRRA) has had a generally positive impact on overall tax rates for individuals, but many of its provisions expire at the end of 2010. Some provisions are only being made available now in 2006. One such provision is the ROTH 401(k), which is our first “idea” for this quarter.
ROTH 401(k)
Many existing 401(k) plans can be amended to permit ROTH contributions to their plans. The benefit to you is receiving a portion of your future retirement income tax free, since the ROTH grows & distributes tax free. This tax diversification of your retirement income sources could be a big benefit if tax rates rise significantly. Also, the ROTH portion is not subject to required minimum distribution, allowing it a longer period of time to compound tax free.
Increased Contributions to IRAs
If you are lucky enough to be over 50 this year, you can contribute up to $5,000 to a ROTH or traditional IRA. SIMPLE IRA contributions have increased to $12,500 for 2006.5
Be aware also of some EGTRRA provisions that are no longer available this year including the deductions for sales tax, tuition & fees and the educator’s deduction. AMT exemption levels were reduced this year also likely causing a lot more people to pay AMT, which is a topic for another newsletter.
Closing thoughts… I just reviewed the movie trailer to United 93 about the hijacked flight that crashed in Pennsylvania. While the full length movie may be too strong for some, even the trailer reminded me of how it felt on 9/11 and how the world has changed since. Look for it in theatres April 28th.
2 Liz Ann Sonders’ Audio webcast, March 24, 2006
3 National Alliance for Caregiving/AARP/MetLife Foundation
4 US Bureau of the Census, 2000
5 1040 Quickfinder® Handbook, Internal Revenue Service
Quarterly Newsletters
Enter your e-mail address in the field below and click Sign-up to receive our quarterly e-mail newsletter.
Newsletter Archives
Autumn 2008 »
Maximum Optimist
Summer 2008 »
It’s Déjà Vu All Over Again
Spring 2008 »
March Madness
Winter 2008 »
Year In Review 2007
Autumn 2007 »
Roller Coaster Ride ’07
Mid-Summer 2007 » A Mid-Quarter Briefing From Clarus Financial
Summer 2007 » Mission Accomplished
Spring 2007 » Our Interests May Not Always Be The Same
Winter 2007 »
The Year In Review
Autumn 2006 »
FILL’ER UP
Summer 2006 »
Summer Doldrums?
Spring 2006 »
Presidential Cycle: market indicators for an uncommon 2nd term president