Year In Review 2007
Winter 2008
By now, the trimmings and decorations are probably all put away at your house and you are wondering how the Christmas season came and went so quickly. I am wondering how the entire 12 months of 2007 could have passed so fast! We turn the page of the calendar and begin planning for the new year – vacations to look forward to, more time with family and certainly more exercise. Even tax planning (which I discuss later in the letter) is on our mind. Looking back at what has passed and to what is ahead is even wrapped up in the name of this month.
January is named for Janus (Ianuarius), the god of the doorway – the god of two faces looking in opposite directions. The name has its beginnings in Roman mythology, where the Latin word for door (ianua) comes from - January is the door to the year. I mention this because the Year in Review newsletter is becoming somewhat of a tradition in which we do a bit of the road behind us in the rear view mirror and a bit of the road ahead through the windshield. And, as a lighthearted bonus, I’m again including the list of banned words/phrases you’ll want to avoid in 2008. So let’s get started…
News
If one word captured the spirit of Wall Street in 2007, it was VOLATILITY (and it seems 2008 is starting off in the same pair of clothes). But a second, more frequently repeated word, SUBPRIME, might make a more complete picture of 2007. Needless to say it wasn’t a year for niceties and at-a-boys around the trading floor either. In fact, it was downright nasty at times. Even the boards of some of the biggest financials including Merrill Lynch and Citicorp said “Off with their heads” to their highly paid CEOs. There was a lot of splainin’ to be done this year and plenty of blame to go around.
For the year, the S&P 500 Index managed to squeak out a 3.5% gain, but both bonds and foreign stocks with 6.9% and 8.6% returns respectively handily beat the slowing U.S. overall stock market.1 Once again, being well diversified within an appropriate asset allocation kept portfolios in the black last year. We said good-bye temporarily to the long-run dominance of value stocks over growth in 2007. In fact, the total return difference between large U.S. growth companies to small value oriented ones was a whopping 21.6%.2
Volatility could be seen increasing all year but became exceptionally strong in August when the news of the mortgage market blow up hit the wires. From those lows, the markets climbed back in October to post an all time closing high for the S&P 500 of 1565. That close on 10/09/07 was exactly 5 years after the index bottomed at 777 on 10/09/02, after 2½ years of a bear market that began in 2000. The fun wasn’t over yet as the markets had to put in yet another milestone – a 10% or better “correction”. Well, that happened on November 26th with the S&P closing 10.1% down from that ‘all time high’ less than two months earlier.
Looking back on my use of the term “rollercoaster” to describe the wild swings in the market in our Fall newsletter, I regret not finding a stronger term to use. Seasoned pit traders and market watchers daily commented of volatility not seen in a great while. If we are in the slowdown or are about to be in it, my feeling is that the second half of 2008 will be positive as the recession and housing crisis fade.
Commentary
2007 was ‘Gentle Ben’ Bernanke’s first full year as Fed Head and his soft touch and mostly understandable Fed-speak were good medicine for the markets this year. This approach is in sharp contrast to my least favorite Fed Chief, ‘Easy Al’ Greenspan – a man who never met a bubble he didn’t like and who rarely communicated for the masses. So far, Bernanke has responded to multiple challenges with a “not too hot and not too cold” approach. While a slowdown/recession may not be avoided, regardless of monetary policy, the Fed deserves high marks this past year.
In the Hall of Shame category for 2007 was the do nothing Congress and President Bush for passing a lame one year patch to the mother of all tax schemes – the alternative minimum tax or AMT. If there was ever part of the tax code that could be ‘found missing’ (certain to be a banned phrase at some time), it was the AMT. It wouldn’t have taken much chutzpah for the President to stand up and tell Congress he would accept nothing less than a complete overhaul of this onerous tax, but, well, they don’t call it lame duck for nothing.
Speaking of politics, and who isn’t, the candidates seem to be taking their cues from the roller coasters down on Wall Street and the NCAA college football season. First it was Hillary versus Rudy. Now it’s Huck and Obama and probably won’t be that way come November. Not to worry though, the markets don’t care if it’s a D or an R after the President’s name. What is important is where tax and spending policies end up, especially as we face tougher and tougher competition overseas. BTW, the last time we were in a recession during an election year was 1980. That 6-month recession ended in July with Ronald Reagan defeating Jimmy Carter in November 1980.
Ideas
The one year “fix” to the AMT might have been cynically just enough to get the politicians through this election cycle without being tarred and feathered, but here’s the real breakdown. The AMT provision was drafted in 1969 to ensure “high income” citizens pay at least a minimum amount of taxes. According to the New York Times, $150,000 in income in 1969 would be equivalent to $850,000 in today’s dollars. Since the law has not been adjusted properly for inflation, couples with income of $45,000 could have been snagged by the AMT in 2007. The bill passed in Congress upped that figure to $66,250 for married taxpayers, saving them from paying potentially $4,000 to $5,000 in tax.3 It might be a great idea this year to tell your campaigning congressmen that the AMT needs to be fixed once and for all.
On the retirement savings front, contribution limits rise from $4,000 to $5,000 in 2008 for ROTHs and traditional IRAs (those over 50 get the benefit of maturity and an additional $1,000). Two other things to be mindful of this year are the elimination of the ability of some taxpayers to be able to make donations from their IRAs direct to charity. The other change is how the so called kiddie tax has become effective at a child’s unearned income over $1,800 and up to the child’s age 19, and for some full-time students up to age 24.
On a lighter note, here are some highlights from Lake Superior State University’s 2008 “List of Banished Words & Phrases”. On December 31, 1975, former LSSU Public Relations Director Bill Rabe and his colleagues cooked up an idea to banish overused words and phrases and issue a list on New Year’s Day. Much to the delight of language enthusiasts everywhere, the list has stayed the course into a fourth decade. LSSU describes its 2008 list as “a perfect storm of overused and abused words and phrases that pops organic, to a post-9/11 world decimated by webinars. It is what it is.”4
- BLACK FRIDAY: The day after Thanksgiving that retailers use to keep them out of the “red” for the year. Way to spoil the holiday spirit.
- ORGANIC: Overused and misused to describe everything from T-shirts to computer software. The possibility of food being IN-organic is nil.
- RANDOM: My 11-year old daughter agreed wholeheartedly on banning this popular teenage misused, over-used word from everyday speech.
- SWEET: Made popular by the television show “South Park”, it really sounds silly coming out of the mouths of adults. Please kill this particular use of an otherwise fine word.
- DECIMATE: Decimate simply means a 10% reduction – not complete destruction. I think the news or sportscaster meant to say “annihilate”.
- IT IS WHAT IT IS: Used in the sports world mostly by team members and coaches on the losing side of the game attempting to explain their loss, but it means absolutely nothing. “Only Yogi Berra should be allowed to utter such a circumlocution.” J. Holloway, Belcamp, MD.
Hope you had a little laugh. Have a great New Year!
Gregory T. Busch, CFP
Clarus Financial, LLC
1Total return for the 12 months ending on 12/31/2007 for the Lehman Brothers Aggregate Bond index (www.lehman.com), Standard & Poors 500 Index (www.standardandpoors.com) and for the MSCI EAFE index (www.MSCIBarra.com)
2As measured by the difference between the Russell 3000 Growth Index (11.81%) total return for the 12 months ending 12/31/2007 and the Russell 2000 Value Index (-9.78%) (www.russell.com)
3“The AMT smack-down held off for one more year”, December 20, 2007; www.walletpop.com
4Lake Superior State University 2008 “List of Banished Words” www.lssu.edu, Jan. 1, 2008
This newsletter and the ideas expressed herein are my own and is provided for informational purposes only, and does not constitute an offer or solicitation to buy or sell any security discussed herein.
Information and any statistical data contained herein is obtained from other sources which we believe to be reliable, but we do not represent that they are accurate or complete, and they should not be relied upon as such. All opinions expressed and data provided herein are subject to change without notice.
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Maximum Optimist
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It’s Déjà Vu All Over Again
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March Madness
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Year In Review 2007
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Roller Coaster Ride ’07
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The Year In Review
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Summer Doldrums?
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Presidential Cycle: market indicators for an uncommon 2nd term president