Paper Chase: New Cities
The market rebounded last week after concerns about Europe, falling oil prices, ebola, and the economy subsided. New home sales rose 0.2% above estimates. The sale of new homes in the U.S. is the highest annual pace since July of 2008. In 2015, 401k regular contribution limits will increase from $17,500 to $18,000 and the catch-up contribution (for those over 50) increases to $6,000 from $5,500.
The End of the “Crash”
Better valuations have ended the onset of this latest “crisis”. Data points on both earnings and the economy reinforce the fact that we are not falling of a cliff. Jobless claims, mortgage refinancing, and mortgage applications, and consumer sentiment are all strong. Europe is slowing but I believe that is priced into the market. I expect no further selloff unless we are entering some sort of global crisis.
The markets had a similar experience with the bird flu, which was much scarier and killed more people. In actuality this latest panic was inspired mainly by fears in Europe causing credit markets to deleverage and the dollar to rise which in turn weakened energy prices and drove down inflation rates. That is the recipe for a short-term selloff.
QE will most likely end this week. It would actually lend credence to fears of economic concerns if it were not. While the global economy and geopolitics are worries, the Fed will still want to monitor inflation and see unemployment drop to 5%. To the Fed’s credit, labor markets are improving and inflation expectations have come down, and the continued focus on inflation is pivotal as employment can improve as it has provided wage pressures aren’t created.
Elections do matter for stocks. Consensus to be that the GOP takes the senate. In an environment with an opposition party controlling both the House and the Senate, we can expect trade policy to be enacted which will be good for global growth, immigration reform, the possible passing of the Keystone Pipeline. The budget deficit is at a staggeringly low 2.8% of gdp so we can expect some sort of fiscal stimulus as well.
Earnings have been stable for the last few years. Companies that have weaker earnings are normally due to the global economy. Only 13% of the U.S. economy’s gdp is exports. Companies mainly exposed to the domestic economy are in great shape.
Many cities are coming out of bankruptcy as costs are lower and young people move in. While there has been a significant increase from the bottom of the housing market in 2009, millennials are getting married later, delaying kids and incurring the most student debt in history are causing millennials to rent in cities rather than buy in the suburbs and commute to work. I am of the opinion that businesses are better when moving into cities. Having worked in cities and on suburban campuses, there is an energy in an urban core you can’t find anywhere else.
Airlines will not be passing on fuel savings from lower prices to consumers. In fact, airfares over the holiday are up this year in comparison to last year according to Orbitz and Expedia due to increased demand. A few years ago, airlines cut capacity which has resulted in fuller loads and a lot more money made off of each flight.
I suggest TSA pre-check. Originally only offered to frequent flyers with airline loyalty, there are now enrollment opportunities in airports and major cities. Proof of citizenship and $85 is required to enroll. I also suggest travel insurance such as insuremytrip.com or aircare. Finally, expect more people on the road as gas prices are lower.
The treasury wants to expand retirement options to include deferred income annuities inside of target date plans inside of 401k plans. An annuity is a financial product designed to accept and grow funds from an individual and then pay out a stream of payments to the individual at a later point in time. Annuities allow savings to build tax deferred, protection of what has already been saved, and guarantee a stream of income. If you want more in guaranteed income, an annuity may make since. The important questions are how much you want guaranteed, and what do you want to keep invested? Max out your 401k and IRA before you choose an annuity.
Annuities are basically insurance policies. It’s a contract stipulating individuals invest your money and companies promise to pay you regular income either now or in the future. You either pay the company in a lump sum or in a specific amount of payments. It’s important to understand the expenses, management fees and surrender charges associated with them. It’s a contract and an insurance product.
Types of Annuities
An immediate annuity pays a lump sum and you receive payment in about 30 days. A deferred annuity builds up funds over time which are collected in retirement. Fixed annuities offer a fixed rate of return. Variable annuities invest the money you contribute. Indexed annuities try to capture the potential upside from investments by tying to an index.