As you undoubtedly know by now, on February 27, financial markets around the world fell with a violence that investors had forgotten was possible. We had been concerned for some time that the markets had advanced virtually uninterrupted for, in some cases, a record period of time. Still, it was not pleasant to watch stocks in freefall.
Although a lot of heat has been generated by the talking heads on CNBC and other popular media outlets, little light has. In contrast, we confess that we do not know what caused, per se, the downdraft. A number of culprits were fingered, including the yen carry trade, rumored laws coming in China, subprime lending/housing woes, and even ol’ Alan Greenspan. In chaos theory, the flapping of the butterfly’s wings eventually causes a tsunami, but the butterfly is never caught. Similarly, there is no one cause or causes of the recent activity. Suffice it to say that investors had gotten far too complacent and were unprepared for increased volatility. Even today, volatility as implied by the VIX index, the “fear gauge”, remains below historic levels.
In response to the action on February 27 and the following weeks, investors became quickly pessimistic as evidenced by several measures, although not to the degree they were last summer, and corporate insiders stepped up their pace of buying their own stocks. The combination of these and other factors made for the proverbial buying opportunity, and, as of this writing, most indexes have recovered most, if not all, of their lost ground.
As of now, the weakness in the housing market remains contained there, although 44 mortgage lenders have filed for bankruptcy protection since late 2006, not having spread to other areas of the economy. The ultimate effects of housing on the economy, however, remain to be seen and could be substantial. For now, the national employment picture is still strong, as are other parts of the economy. The biggest threat to the economy appears to be lingering inflation. It does appear that the Federal Reserve’s 17 rate hikes will be sufficient to merely slow down the economy, which should naturally subdue inflation. With respect to stocks, their valuations are reasonable, but not cheap. Earnings estimates are coming down, and that could pressure stocks, but low interest rates and a Federal Reserve ready to lower rates should help stocks produce mid- to high-single digit returns in 2007. As always, call us with your questions and concerns.
Financial Planning Update – College Planning
Tomorrow belongs to those who prepare for it today. College may seem like a distant dream for your children or grandchildren, but it will be here before you know it. If you’re going to give them the advantages they deserve, your investments need to work as hard to prepare for college as they will.
By taking advantage of Section 529 of the IRS Code, the Indiana CollegeChoice 529 Plan offers families a simple way to invest for college. CollegeChoice combines attractive tax benefits with high contribution levels and flexible investment choices to provide a comprehensive solution to your college funding needs.
Unlike taxable investment accounts where you pay taxes each year on your earnings, a CollegeChoice account grows tax-deferred, and qualified withdrawals are free of federal income taxes. An additional tax benefit exists for Indiana residents. Beginning in 2007, Indiana taxpayers will receive a 20% state tax credit, up to a maximum of $1,000, for contributions to the CollegeChoice 529 Plan.
The Indiana CollegeChoice 529 Plan is available through Tower Investment Services. For additional information, please contact Bob Nicholas (427-7003) or Jackie Boersma (427-7163).