The first half of 2012 is on the books. Our beginning of the year defensive posture came into play as equity markets pulled back substantially during the 2nd quarter falling 7.13% (as measured by the Morningstar aggressive equity portfolio). International markets fared worse as both the EAFE and emerging markets fell 10% and 12% respectively for the quarter. Fortunately bonds fared better as the Lehman Aggregate Bond Index was up 2.2%.
Rest of the Year Outlook
The rest of the year looks to be volatile as well due to various converging factors. Below are some of the major issues that we face during the second half of the year:
1) The Debt Ceiling
The debt ceiling will be reached sometime between September and December
The infamous debt ceiling debate will resurge as this country reaches the limits established last year. The debate this year boils down to 1) which expenses should be cut while increasing the deficit and 2) should we raise taxes. The challenge to this situation is that nothing fundamental will change during an election year, delaying the inevitable crossroad of having to determine when enough leverage is enough and the tough decisions associated with this determination. The most likely scenario is that this discussion is delayed until after the election.
Personal and Government debt have each grown faster than the U.S. population over the past 40 years.
2) The National Elections
Recent polls show a virtual coin flip as to who is more likely to win the elections. In other words, it’s about an even race right now. This creates policy uncertainty moving forward, in conjunction with the fact that 33 seats will be up for grabs during this year’s Senate election, of which 23 are democratic seats. Policy uncertainty, in turn, creates financial planning challenges for the business community not knowing how to allocate resources based on impending additional costs due to tax and other policy mandates.
3) Health Care Reform controversy
The Supreme Court upholding Obamacare last week does not bring an end to the healthcare issue but continues the conversation. Interestingly enough polls show that most Americans are actually against the reform and the law will most likely get repealed if a Republican wins the Presidential election. All this to say that an issue that has already caused so much controversy will continue to generate dispute and therefore uncertainty.
4) Expiring Bush Tax Reform
With the expiration of the Bush Tax reform come increased taxes for the whole population. This comes in mainly two forms: 1) marginal tax rates are increased and 2) capital gains and dividend taxes increase. Whereas the current marginal tax rates range from 10% – 35%….after the expiration, rates will range from 15% – 39.6%. There will also be an increase in capital gains and dividend rates which actually begin at 0% and cap at 15% currently. This will change to ranging from 10% to 20%
These, along with uncertainty in the European markets and a slowing of the emerging market economic growth, are a few of the issues that will effect and create volatility in the markets over the next six months.
Yet, regardless of market conditions, Allgen continues forward implementing its philosophy of 1) Strong, fundamental planning (i.e. no debt, sound risk management, tax minimization and cash flow maximization) that should prevail regardless of market conditions and 2) Active money management (targeting loss prevention first) as we look to capitalize upon the market’s downswings. Such volatile markets require even more careful attention to individual portfolio needs and monitoring being that legislative changes can and will impact the ultimate financial outcome of individuals.
As such, please feel free to contact us if you or any one you know should have any questions or feel that it is time to reevaluate where you are with respect to your financial goals.
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Allgen Financial Services, Inc. (Allgen) is an investment advisor registered with the State of Florida. The above information in no way represents specific advice regarding investments. In no way is past performance indicative of future performance. Please feel free to contact us with specific questions relating to your financial plan or portfolio. The Disclosure Brochure, Form ADV Part II, which details the business practices, services offered, and related fees of Allgen’s, is available upon request. The information contained herein, including links to third party web sites, has been obtained from sources believed to be reliable, but we do not guarantee its accuracy or completeness.