“Pay no attention to that man behind the curtain”
The Wizard of Oz
(A 1939 film)
PLANNING Commentary
We have written often about owning up to the truths our country is facing. When we mention the country we think of political leaders, taxpayers, business owners and future generations, who will arguably feel the effects of decisions - good or bad - that are made today. Each of us has a choice when it comes to factors that can greatly affect our future (financial or otherwise) - go along as you are told by the booming voice, or yank the curtain open to see what lies behind it (and deal with what you find).
In our planning work there are assumptions used about the future - investment rates of return, social security income received, medical costs (outside of what government programs cover for seniors) and other significant measurements. The goal in this work is to find the truth – look behind the curtain - understand what is really reasonable to use in planning your financial future - then deal with those truths in the ways most appropriate.
We are now only reflecting a portion of promised social security income in wealth plans we are building for those in their forties and younger. In three of the past five years, we have increased the future growth rate used for medical costs that retirees will be responsible for. Due to economic headwinds and global challenges we reduced our expected investment rate of return earlier this year. These efforts are not in an attempt to be pessimists, but merely to prepare plans for our clients that can withstand whatever surprises may lie behind the curtain.
Market Commentary
As we write this letter on April 29, the S&P 500 index is up 8.9% this year. The bond market has been quite resilient, generating a small gain of 1.5% since December 31 as measured by the Barclays Capital Aggregate Intermediate Bond index. International stock markets have also shown more strength over the past couple months so that now the MSCI EAFE Developed Market stock index is up by 8% year-to-date. Emerging market stocks have been volatile and were down for most of the first quarter; however, thanks to gains in March and April they have now advanced 4.3% this year.
As part of his long-standing campaign to be more open and accessible, Fed Chairman Ben Bernanke stepped out from behind the curtain this week with the first ever press conference by a Fed Chairman following an FOMC meeting. No other Chairman has done this in the Fed’s 98 year history. Previously, the Fed released a short policy statement after their meeting and then their actual meeting minutes were released about 20 days later. Before 1994, the Fed didn’t even release a statement after its meetings. This move to a more open and transparent Federal Reserve should help the financial markets better understand and anticipate future changes in Fed policy.
In his news conference, Bernanke said that “the economy is growing steadily, but it is still weighed down by a period of prolonged unemployment.” The Fed expects the economy to continue to grow through 2012 and 2013. He acknowledged that higher gas prices are creating a hardship for many Americans, but he said the Fed doesn’t think gas prices will continue to rise at their recent pace. He also acknowledged that the Fed can’t take additional steps to try to ease high unemployment without escalating inflation. Specifically, “It’s not clear that we can get substantial improvements in payrolls without some additional inflation risks, and in my view we can’t achieve a sustainable recovery without keeping inflation under control.”
The Fed has clearly stated that June 30 of this year will mark the end its “QE2” program under which it purchased $600 billion of U.S. Treasury securities (80%+ of recent issuance). The Fed will maintain its holdings of these instruments for the time being; meaning that whenever an instrument matures the proceeds will be reinvested in a new instrument. Although the market seems very comfortable with this concept as indicated by the 10-year Treasury yield of about 3.3%, we do wonder what the effect of losing this buyer will be on interest rates - seems to us that they should go up. Therefore, we are investing the bond portion of client portfolios with anticipated future interest rate increases in mind.
