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Fiscal Cliff

You probably have noticed the media’s never-ending commentary relating to the “Fiscal Cliff.” The “Fiscal Cliff” is the confluence of two factors; the first, the expiration of the Bush tax cuts and the second, the automatic spending reductions that the Republicans in Congress negotiated for, during the 2011 debt ceiling debate. It was feared that if both of these events were triggered at the beginning of 2013, economic contraction would result. According to the non-partisan Congressional Budget Office (CBO), the combination of higher taxes and lower spending could reduce GDP by four percentage points, resulting in recession. The CBO estimated this could result in the loss of 2,000,000 jobs. From a positive standpoint, it was estimated by the same CBO that these automatic tax increases and spending reductions if left in place, would reduce U.S. government borrowing by $7.1 trillion over the next ten years or 70%.

On Tuesday, January 2nd, Congress passed and the President signed a partial compromise that deals with the tax issues, but defers the spending cuts. A summary of the changes:

  • Raises highest tax rate to 39.6%, while preserving rates for all other taxpayers
  • Increases the capital gains and dividend rates for high-income earners from 15-20%
  • One year extension of unemployment benefits for the long-term unemployed
  • Two month delay in the discretionary and non-discretionary spending cuts
  • Permanent fix for the AMT (alternative minimum tax)
  • Increase in the estate tax rate from 35-40% with the first $5 million exempt
  • One year deferral of a 27% cut in Medicare payments to doctors
  • Provision permitting businesses to write off 50% of new investments in the first year

Will the above compromise avert a recession? We are not sure, but perhaps a better question is, if a recession were to take hold how would it likely impact our clients?

To answer that question, we look at how recessions tend to impact markets. Since 1950, there have been ten recessions and the average decline of the stock market or S&P 500, has been 20.69% during these periods. The market tends to decline in advance of recessions as market participants anticipate the economic decline. Nine out of the ten recessions since 1950, were preceded by at least a 10% decline in the market. This sounds fairly predictive until you observe that there have been 47 corrections of 10% or more since 1950. Therefore, only 19% of corrections have predicted recessions accurately. Furthermore, the average decline in stocks, after a 10% correction, is 8.3% for all periods, but 10.3% during recessions. So, accurately predicting the recession by observing market corrections is tenuous and not terribly rewarding. Another challenge is when to get back in the market. The average increase in stocks during the first twelve months, after the end of a recession is 43% and roughly half of that return tends to occur in the first three months (making it easy to miss the recovery)! The bottom line is that unless you can properly time both the buy and sell decision, you will be hard pressed to improve your results over time. Mutual fund research firm DALBAR, suggests that, due to poor timing, the average equity investor earned 3.8% per year for the twenty years ending December 31st, 2010, while the market averaged 9.1%.

At MutualWealth, we orient our client portfolios towards a diversified combination of stocks, bonds commodities and other asset classes. This tends to produce results that are less volatile than the stock market.  We model our balanced portfolios to experience a standard deviation (measure of risk) of three to five, versus the stock market standard deviation of around twenty. This means we expect our clients to experience a fraction of the volatility of the S&P 500 during recessions. While we do not look forward to the potential for the “Fiscal Cliff” to rile markets, we are also confident our clients will be adequately insulated from the excessive volatility that may result. Diversification and prudence are better weapons against these uncertain times than attempting to predict recessions and other macro-economic events. We welcome any questions you may have regarding this topic and any other wealth management concern. 

Shayne Nagy, CTFA - Senior Vice President, Trust and Investments

Contact a Representative Today

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  • MutualFirst Financial, Inc. Declares 20% Increase in Dividend

    Muncie, Indiana – MutualFirst Financial, Inc....

    Monday, February 23, 2015

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Proactive Steps to Take in Light of Anthem Data Breach

Chances are you are a person who has Anthem insurance coverage or you know someone who does. As a result, either you or your friend has a reason to be concerned.

A typical data breach includes a compromise of debit card numbers or partial personal identifying information. This kind of breach, though inconvenient, can typically be ‘fixed’. An initial investigation indicates that the Anthem breach includes a compromise of name, birthday and/or social security number. This kind of information is all one needs to steal someone’s identity.

According to Anthem this particular breach could affect up to 80 million people. Instead of trying to ignore this has happened or just being upset, it’s now time for you to be educated and try to protect yourself as best as you can. We have some tips that will help you accomplish that.


1. Review Your Statements


First, take a moment each month to view your eStatement or monthly statement. You can monitor your accounts throughout the month with Online Banking and the MutualBank App. Monitoring your accounts will give you the quickest opportunity to see if your accounts have been compromised. If you notice any transactions that are unfamiliar or questionable, please get in touch with your MutualBanker. Call us at 800-382-8031.


2. Be Cautious with Any Anthem Emails You Receive


Next, if you receive an email stating it is from Anthem, be cautious. Anthem’s website warns customers not to reply with information, click any links or open any attachments within the email. Anthem is not calling their customers and will not ask for information. Never give your credit card information, social security number, or other sensitive information to someone via email or over the phone.


3. Consider Freezing Your Credit


If you are a resident in Indiana, the Attorney General’s office website (http://www.in.gov/attorneygeneral/2853.htm) is offering and encouraging you to sign up for a free credit freeze with each of the three credit bureaus. A credit freeze places a hold on your credit where a new line of credit could not be obtained without you unfreezing your credit. This doesn’t affect already open credit lines like an existing credit card, yet helps to protect you against someone opening new lines of credit in your name.


4. Keep in the Know


Finally, try to keep in the loop on the Anthem Breach. The best source for current information about this breach can be found at Anthem’s Frequently Asked Questions. (http://www.anthemfacts.com/faq)

MutualBank is here to help inform you of ways to help protect against identity theft. Thank you for trusting us.

Sunday, February 15, 2015

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Fiscal Cliff

You probably have noticed the media’s never-ending commentary relating to the “Fiscal Cliff.” The “Fiscal Cliff” is the confluence of two factors; the first, the expiration of the Bush tax cuts and the second, the automatic spending reductions that the Republicans in Congress negotiated for, during the 2011 debt ceiling debate. It was feared that if both of these events were triggered at the beginning of 2013, economic contraction would result. According to the non-partisan Congressional Budget Office (CBO), the combination of higher taxes and lower spending could reduce GDP by four percentage points, resulting in recession. The CBO estimated this could result in the loss of 2,000,000 jobs. From a positive standpoint, it was estimated by the same CBO that these automatic tax increases and spending reductions if left in place, would reduce U.S. government borrowing by $7.1 trillion over the next ten years or 70%.

On Tuesday, January 2nd, Congress passed and the President signed a partial compromise that deals with the tax issues, but defers the spending cuts. A summary of the changes:

  • Raises highest tax rate to 39.6%, while preserving rates for all other taxpayers
  • Increases the capital gains and dividend rates for high-income earners from 15-20%
  • One year extension of unemployment benefits for the long-term unemployed
  • Two month delay in the discretionary and non-discretionary spending cuts
  • Permanent fix for the AMT (alternative minimum tax)
  • Increase in the estate tax rate from 35-40% with the first $5 million exempt
  • One year deferral of a 27% cut in Medicare payments to doctors
  • Provision permitting businesses to write off 50% of new investments in the first year

Will the above compromise avert a recession? We are not sure, but perhaps a better question is, if a recession were to take hold how would it likely impact our clients?

To answer that question, we look at how recessions tend to impact markets. Since 1950, there have been ten recessions and the average decline of the stock market or S&P 500, has been 20.69% during these periods. The market tends to decline in advance of recessions as market participants anticipate the economic decline. Nine out of the ten recessions since 1950, were preceded by at least a 10% decline in the market. This sounds fairly predictive until you observe that there have been 47 corrections of 10% or more since 1950. Therefore, only 19% of corrections have predicted recessions accurately. Furthermore, the average decline in stocks, after a 10% correction, is 8.3% for all periods, but 10.3% during recessions. So, accurately predicting the recession by observing market corrections is tenuous and not terribly rewarding. Another challenge is when to get back in the market. The average increase in stocks during the first twelve months, after the end of a recession is 43% and roughly half of that return tends to occur in the first three months (making it easy to miss the recovery)! The bottom line is that unless you can properly time both the buy and sell decision, you will be hard pressed to improve your results over time. Mutual fund research firm DALBAR, suggests that, due to poor timing, the average equity investor earned 3.8% per year for the twenty years ending December 31st, 2010, while the market averaged 9.1%.

At MutualWealth, we orient our client portfolios towards a diversified combination of stocks, bonds commodities and other asset classes. This tends to produce results that are less volatile than the stock market.  We model our balanced portfolios to experience a standard deviation (measure of risk) of three to five, versus the stock market standard deviation of around twenty. This means we expect our clients to experience a fraction of the volatility of the S&P 500 during recessions. While we do not look forward to the potential for the “Fiscal Cliff” to rile markets, we are also confident our clients will be adequately insulated from the excessive volatility that may result. Diversification and prudence are better weapons against these uncertain times than attempting to predict recessions and other macro-economic events. We welcome any questions you may have regarding this topic and any other wealth management concern. 

Shayne Nagy, CTFA - Senior Vice President, Trust and Investments

Contact a Representative Today

Back to Education Resources

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