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From:The Intelligent Investor
By Jason Zweig
A time of political shock isn’t a time for investing action. Instead, it is a time to watch and wait. The worst possible moment to make clear and durable decisions is when you are surprised by what just happened.
What’s happening and what will happen with the markets in the wake of Donald Trump’s victory as the 45th President of the United States?
While the result was indeed a surprise to most, there is no panic necessary. We are a country governed by laws passed by two houses of Congress as well as the President. While some may agree or disagree with a particular brand of politics, nothing in the way of policy decisions is going to happen immediately.
In fact, while the initial market reaction to the news was significantly negative (overnight futures were down ~ 5% at one point), the open this morning has recovered as significantly (up a bit as of this writing).
What we will see over the next few weeks/months is continued volatility (which is normal) which will provide good entry points for those holding cash. In the short-term, the volatility, while unsettling, may actually give our fund managers opportunities to deploy cash and take advantage of dislocations to further enhance portfolio returns.
As usual, we have been closely following the economic environment. The facts are that corporate balance sheets are in very good shape and corporate earnings are rising. Consumer finances show that household debt service ratios are at historic lows and household net worth at historic highs. As a result, consumer sentiment has been and should continue to increase and bolster the already positive consumer consumption rate (nearly 69% of our economy).
We encourage you not to make any knee-jerk reactions based on the outcome of this election. Our investment strategy has always been one driven by asset allocation with a view to the long-term. As we have seen in the past, the shocks to our systems typically create temporary dislocations in the market (BREXIT, the Taper-tantrum, LTCM meltdown, etc.) Cooler minds will prevail which is why we firmly believe in our asset allocation approach. That is not to say we will not act to fine-tune our strategy over the next few weeks as we assess the changes in government policies and initiatives resulting from the election.
To summarize, what we do now is stay the course.
Please feel free to reach out to any of us on your wealth management team if you have any questions or concerns, but know that we are diligently watching/reviewing the situation.
We have spent much time this past few weeks digesting what a BREXIT would do to the US Economy, the World Economy and also what type of shock it would cause to the markets.
In our opinion, the United Kingdom’s exit from European Union will have, and has had, a shock affect on the markets. It will take some time for the emotional mist to clear and give way to logical financial facts that can be used to divine the health of the international economies and related stock markets. Stock markets are made up of companies and no company will sit idle while the world shifts around them, they will plan and act accordingly. So, while there will be and has been an immediate shock to the markets around the world (especially since most felt that REMAIN would get the winning votes), calmer heads will prevail in the coming weeks as the UK’s plans with the EU are solidified. Our sense is that this will effect the UK and Europe to some extent and may even cause some slowdowns or a small short-term contraction in economic growth, but the actual impact on the US economy will be muted.
There is much going on behind the scenes and the rhetoric to make this schism as constructive as possible to allow for a continued strong relationship between the UK and EU. As the political environment in the UK starts to gel, expect the UK to petition for release under Article 50 of the Lisbon treaty. After that, the exit negotiations will begin followed by, or in tandem with, laying the groundwork for trade agreements and relations with between the EU and the UK.
This is going to be a long process and there is no current crisis. The companies in the European stock exchanges are not worth 10% less simply due to the vote. The Euro-zone markets and FTSE will become oversold and then will recover. Any surprise shock to the system will cause a market reaction. The US was not immune to this emotional reaction; however, with only a bit more than 4% of US trade going to the UK, the impact on the US economy should be small. There is no US recession in sight, so our markets should quickly recover.
The bottom line is that you can use this as a buying in opportunity if you like, but at the very least you should stand your ground in your well diversified portfolios. Enjoy the summer as the fear dissipates and gives way to the reality of corporate earnings, job growth and general slow economic growth in the US and around the world.
“The People Have Voted and the U.K. Is Out”
On Thursday, Britain voted to leave the European Union. While this decision is most important for Britain itself, it will also have significant implications for the future of the European Union, exchange rates and global financial markets.
What is ‘Brexit’
Brexit is an abbreviation of “British exit”, which refers to the June 23, 2016 referendum by British voters to exit the European Union. The referendum roiled global markets, including currencies, causing the British pound to fall to its lowest level in decades. Prime Minister David Cameron, who supported the UK remaining in the EU announced he would step down in October.
Market turmoil could create opportunity
This time the opinion polls got it right. The “Remain” and “Leave” camps were running neck-and-neck coming into yesterday’s U.K. referendum on membership of the European Union and in the event some 52% of U.K. voters opted to reject the status quo and pull out.
Markets have responded dramatically. U.K. equity index futures have slumped and the pound sterling has tumbled to 1980s levels. Safe havens such as gold, German Bunds and U.S. Treasuries are seeing substantial investor demand. The euro has also come under pressure.
Fears of ‘Lehman Moment’ Overblown
No doubt this will be the first of many volatile trading sessions, and the major central banks may intervene if necessary. But we caution against reacting as though this were a second “Lehman moment,” as some commentators have suggested.
The likelihood of at least medium-term damage to the U.K. economy from a “Leave” vote, as well as pronounced market volatility on the back of political uncertainty for the U.K. and the EU as a whole, might lead our investors to overreact. Still, the U.K. has chosen the rockier of two paths. It piles up the political distractions that have dogged the administration of U.K. Prime Minister David Cameron and his chancellor, George Osborne. The “Brexit” camp is clearly in the ascendant but the vote revealed a lack of national consensus. And even consensus would not wish away the complexity of this exit, a “monumental,” multi-year task in the words of one legal expert.
Economic Damage Likely to Be Contained
That complexity is likely to prolong the period of low corporate investment we have seen leading up to the vote, both within the U.K. and in the form of foreign direct investment. This, together with the higher costs of trading, is what led mainstream economists to forecast a 3-7 percentage point negative long-term impact on U.K. GDP.
The pain may not be felt evenly. Many of the large companies in the FTSE 100 Index are global rather than U.K. businesses—80% of the index’s revenues come from overseas. This should help insulate them from any domestic downturn and potentially deliver a windfall from the weakened pound. Smaller, more domestically-focused companies are more vulnerable to a fall in consumer demand and higher import costs. That could be a source of opportunity during a sell-off in U.K. assets, particularly if the U.K. makes its new status work over the longer term.
Elsewhere, the economic impact is likely to be felt most keenly in Europe and, in the words of one Federal Reserve Bank president, to have only “moderate direct effects on the U.S. economy in the near term.” Again, we expect an excessive market reaction to be a potential source of opportunity.
Another Blow for Globalization?
A more pessimistic reading of the vote would see it as one more crack in the edifice of international political and economic co-operation built over the past 70 years. Anti-EU parties in countries like France, Germany and Italy may take heart from the result and attempt to further exploit the euro-skepticism increasingly evident in opinion polls across the Continent. But to us this merely confirms that globalization is under siege, a trend already well-advanced and understood by financial markets.
Look Through the Noise to Fundamentals
Most importantly, this vote will probably exert only a marginal effect on global economic fundamentals, which remain stable but weak. We still live in a slow-growth, low-inflation, low-interest rate environment, characterized by sluggish productivity and investment. “Brexit” has been a tail risk stalking markets in the same way that the oil price, the strong dollar and concerns about China created volatility back in January and February, but we think its implications are overstated. For that reason, we again stress the importance of looking through the noise to focus on fundamentals and watching for opportunities to address risk in portfolios. The market reaction may provide opportunities to add to some positions once the worst of the initial volatility has passed.
Looking further out, in a lot of places in the world we still need structural reform and a more appropriate fiscal response to the current malaise if we are going to allow our economies to grow on a proper footing, and our companies to generate sustainable earnings growth. Part of that progress will involve addressing the legitimate concerns of those who have failed to benefit from globalization, but populism and political division is not the way to do it. In that respect, today’s result is hardly good news. But we believe its effect will be marginal and the market’s initial response is likely to create opportunity for patient investors with cool heads.
The impact of traders over the next couple of market sessions will continue to test the soundness of a portfolio’s resilience to withstand volatility. We continue to monitor the markets and underlying model positions and although our exposures to currency sensitive and European focused positions are light we stand ready to make changes to address downside and risk to portfolios.
This material is provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness or reliability. All information is current as of the date of this material and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.
This material may include estimates, outlooks, projections and other “forward-looking statements.” Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed. Investing entails risks, including possible loss of principal. Investments in hedge funds and private equity are speculative and involve a higher degree of risk than more traditional investments. Investments in hedge funds and private equity are intended for sophisticated investors only. Indexes are unmanaged and are not available for direct investment. Past performance is no guarantee of future results.
This material may include estimates, outlooks, projections and other “forward-looking statements.” Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed.
The U.S. Supreme Court has ruled that same-sex couples in the United States have a constitutional right to marry, no matter where they live. This means that same-sex marriage is now legal in all 50 states.
The central questions
On April 28, 2015, the Supreme Court heard oral arguments in the collective case of Obergefell v. Hodges, which bundled together challenges from four states. The Court considered two questions: (1) Does the Fourteenth Amendment require a state to license a marriage between two people of the same sex? and (2) Does the Fourteenth Amendment require a state to recognize a marriage between two people of the same sex when their marriage was lawfully licensed and performed out-of-state? On June 26, 2015, the Court ruled 5-4 that “The Fourteenth Amendment requires a State to license a marriage between two people of the same sex and to recognize a marriage between two people of the same sex when their marriage was lawfully licensed and performed out-of-State.” This ruling effectively means that the 13 states that currently prohibit same-sex marriage must reverse their bans.
Highlights of the opinion of the Court
The majority opinion was written and delivered by Justice Anthony Kennedy, joined by Justices Ruth Bader Ginsburg, Stephen Breyer, Sonia Sotomayor, and Elena Kagan. In the opinion, Justice Kennedy writes that “The history of marriage is one of both continuity and change. That institution–even as confined to opposite-sex relations–has evolved over time.” (p. 6)
He continues, “The limitation of marriage to opposite-sex couples may long have seemed natural and just, but its inconsistency with the central meaning of the fundamental right to marry is now manifest. With that knowledge must come the recognition that laws excluding same-sex couples from the marriage right impose stigma and injury of the kind prohibited by our basic charter.” (p. 17-18)
Justice Kennedy ends with, “No union is more profound than marriage, for it embodies the highest ideals of love, fidelity, devotion, sacrifice, and family. In forming a marital union, two people become something greater than once they were. As some of the petitioners in these cases demonstrate, marriage embodies a love that may endure even past death. It would misunderstand these men and women to say they disrespect the idea of marriage. Their plea is that they do respect it, respect it so deeply that they seek to find its fulfillment for themselves. Their hope is not to be condemned to live in loneliness, excluded from one of civilization’s oldest institutions. They ask for equal dignity in the eyes of the law. The Constitution grants them that right.” (p. 28)
Chief Justice John Roberts and Justices Antonin Scalia, Clarence Thomas, and Samuel Alito filed dissenting opinions. Opinions on this case can be read at the Supreme Court’s website, www.supremecourt.gov.
In the case of King v. Burwell (Case Number 14-114), petitioners argued that the language of the Affordable Care Act (ACA) specifically provides that health insurance subsidies can only be issued through state-based exchanges (also referred to as marketplaces) and not through the federal exchange. In a 6-3 decision issued June 25, the U.S. Supreme Court upheld the ACA by confirming that health insurance subsidies may also be offered through the federal exchange.
What is the issue?
A goal of the Affordable Care Act (ACA) is to provide more Americans with access to affordable health care. One of the ways the ACA attempts to make health care affordable is through federal subsidies that reduce insurance premiums and out-of-pocket costs for eligible consumers who purchase health insurance through a health insurance exchange. At issue is a specific provision in the ACA authorizing subsidies for health-care coverage purchased “through an exchange established by the State.” The IRS has interpreted the law to include subsidies for health insurance purchased through either state-based exchanges or the federal exchange. The petitioners alleged that the IRS could not promulgate regulations to extend tax-credit subsidies to coverage purchased through exchanges established by the federal government.
What did the Court decide?
Writing for the majority, Chief Justice John Roberts acknowledged that the language of the ACA relative to exchange tax credit provisions is ambiguous. However, given the intent of the ACA as a whole, “the statutory scheme compels us to reject petitioners’ interpretation because it would destabilize the individual insurance market in any state with a Federal Exchange, and likely create the very ‘death spirals’ that Congress designed the act to avoid.”
Citing studies that suggest that eliminating the tax credits could lead to insurance premiums increasing by as much as 47%, while enrollment might decrease by upwards of 70%, Roberts opined that “it is implausible that Congress meant the act to operate in this manner.”
What states have their own exchanges?
As gleaned from the Court’s majority opinion, 16 states and the District of Columbia operate their own state-based exchanges. These states include California, Colorado, Connecticut, Hawaii, Idaho, Kentucky, Maryland, Massachusetts, Minnesota, Nevada, New Mexico, New York, Oregon, Rhode Island, Vermont, and Washington. The federal government operates exchanges in the remaining states. Most consumers access federal exchanges through the federal government website, www.healthcare.gov.
What if the Court ruled against the ACA?
According to the Wall Street Journal, more than 6 million people would have lost health insurance tax credits if the Court ruled against the ACA. As of March 2015, the Department of Health and Human Services estimates that 16.4 million are covered due to the ACA.
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For a number of years we watched as the brinkmanship in Washington led to last minute and harried tax changes. In 2013 some of these went into effect and you should keep them in mind as you look to prepare for your 2013 tax filings.
The passage of the American Taxpayer Relief Act of 2012 (ATRA) permanently extended the Bush tax cuts, unless you are a high income taxpayer. A new Net Investment Income tax was applied and an additional Medicare Tax levy will also affect those in the higher income levels. Additionally, same sex married couples got equal treatment under the law and can file “Married filing jointly.”
With those changes and many more hitting us in 2013, compounded with the Government Shutdown, we are on track for a delayed and complicated filing season. If you prepare your taxes yourself, software is recommended, but be sure to update it and wait to file your return for a bit until they work the changes through the system. If you are using a professional preparer (like us!), be sure to get your information in by the end of February so we can get a jump on things and keep the process moving forward. Further, if you file financial aid forms for education, remember to file with estimated numbers and then you can update your FAFSA or Profile applications with the actual numbers once they are available.
The tax laws are not getting any easier so be sure to call us with questions. Tax simplification seems to be far away and certainly won’t help us this year! Remember, proper planning and preparation can propel a princely refund, or at least solid tax savings!
If you want a brief guide to 2013 tax rules and changes, give us a call at 877-448-3400 or email us at email@example.com.
Congress failed to agree on a spending bill for the fiscal year starting October 1, 2013, resulting in the first government shutdown since 1995. According to the Congressional Research Service, this is the 18th time the federal government has shut down as a result of a failure to agree on an annual appropriations bill. Most shutdowns have lasted only a few hours or a few days. The most recent shutdown, in 1995, lasted three weeks.
When the government shuts down, federal agencies must generally suspend operations and furlough their employees. However, there are significant exceptions for government functions that promote national security, or protect human life and property. As a result, a shutdown doesn’t impact certain essential functions like the military, law enforcement, TSA, air traffic control, border patrol, emergency and disaster assistance, food safety, foreign embassies, prisons, and federal medical care (among others).
A shutdown also doesn’t impact federal entitlement programs (like Social Security and Medicare) that aren’t funded by discretionary annual appropriations. Funding for these programs is considered mandatory, because the legislation creating the benefit obligates the government to make payment. So benefits under these programs continue uninterrupted, and the employees who administer those benefits are generally exempt from furlough.
Finally, some agencies are funded by multiple year appropriations. Even though these agencies don’t yet have any funds appropriated for the new fiscal year, they may still have funds remaining from prior appropriations, which they can use to continue operations until those funds run out.
What you can do during the shutdown:
• Receive and send mail–the post office is an independent agency unaffected by the budget process
• Buy insurance through one of the new health insurance Exchanges
• Receive your Social Security and Medicare benefits, or apply for new benefits
• Get a passport or visa–but only until the State Department’s available funding runs out (during the 1995 shutdown, 200,000 U.S. applications for passports went unprocessed)
• Conduct business with the United States Patent and Trademark Office–but only until the USPTO’s available funding runs out
• Receive unemployment benefits and food stamps
• Get an FHA or VA mortgage
• Receive medical care at a veterans hospital
• Use the federal court system–but only for about 10 days
What you can’t do during the shutdown:
• Stop paying taxes–the IRS will continue to process electronically submitted tax returns, but if you’re being audited, you’ll get a temporary reprieve
• Get taxpayer assistance from the IRS
• Get a small business loan
• Go to a national park, zoo, or museum–if you’re already overnighting in a national park, you generally have two days to leave
• Get a paycheck, if you’re a federal employee–unless you’re the president, a member of Congress, or in the military; however, in the past workers were paid retroactively after a new appropriations bill was passed
If you need more information, most government agencies have posted their shutdown contingency plans on their websites.
And there’s more to come…
The shutdown is separate and distinct from another looming crisis–the debt ceiling. According to Treasury Secretary Jacob Lew, it’s anticipated that the United States will run out of funds as soon as October 17, and will default on its debts, unless Congress acts to raise the debt ceiling before then. More on that crisis to follow…
Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2013
|The U.S. Department of the Treasury and the Internal Revenue Service (IRS) have announced that same-sex couples who are legally married in jurisdictions that recognize same-sex marriage will be treated as married for all federal tax purposes. Guidance has been provided in the form of a Revenue Ruling (Rev. Rul. 2013-17) and associated Frequently Asked Questions.
State granting marriage is key, not state of residence
If a same-sex couple is legally married in a state that recognizes same-sex marriage, the couple will be treated as married for all federal tax purposes. This is true even if the couple resides in a state that does not recognize same-sex marriage. So, a same-sex couple legally married in a state that recognizes same-sex marriage, but residing in a state that does not recognize same-sex marriage, will be treated as married for federal tax purposes even though it’s possible the couple may not be treated as married for state tax purposes. Recognition also applies to same-sex couples legally married in the District of Columbia, a U.S. territory, or a foreign country.
Registered domestic partnerships, civil unions, and other formal relationships recognized under state law do not qualify–only couples legally married under state law will be treated as married for federal tax purposes.
Applies for all federal tax purposes
Legally married same-sex couples are treated as married for all federal tax purposes. This applies for federal estate and gift tax purposes, and for federal income tax purposes, including:
2013 tax year implications
If you are legally married on the last day of the year, you generally have to file your 2013 federal income tax return as a married individual. That means same-sex couples treated as married for federal income tax purposes will generally have to choose whether to file their 2013 federal income tax return as married filing jointly, or as married filing separately.
Prior tax years
If you were married prior to 2013, you may also amend prior year federal income tax returns, choosing to be treated as married for federal income tax purposes (assuming that you were legally married on the last day of the tax year(s) being amended). You’re only able to file an amended return, however, for any tax year still open under the statute of limitations. Generally, the statute of limitations for filing a refund claim is three years from the date a return was filed, or two years from the date tax was paid, whichever is later. For most individuals, that means claims can still generally be filed for tax years 2010, 2011, and 2012. You are not required to amend a prior year return, however.
It’s important to note that if you choose to amend a prior year federal income tax return in order to be treated as married, all items on the return must be adjusted to consistently reflect your marital status (i.e., married filing jointly or married filing separately). That is, if you amend a prior year tax return to be treated as married, you are treated as married for all items and issues related to the return.
Note: If your employer provided health coverage for your same-sex spouse and included the value of that coverage in your adjusted gross income (AGI), amending your prior year return to reflect your status as a married individual may allow you to recover the income taxes paid on the value of this coverage. Similarly, if you paid premiums for health-care coverage for your same-sex spouse with after-tax dollars, you may be able to reduce your income by these premium amounts.
Note: For tax year 2012, same-sex spouses who filed their federal income tax returns before September 16, 2013 (the effective date of the Revenue Ruling) may choose–but are not required–to amend their 2012 federal income tax returns to file as married (i.e., married filing jointly or married filing separately). Same-sex spouses who file an original federal income tax return for the 2012 tax year (or for any prior tax year, for that matter) on or after September 16, 2013, will not have a choice–if legally married for the tax year, they will generally have to file their federal income tax return as married filing jointly or married filing separately.
Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2013.