• So, what is the top tax bracket next year?  For couples with earnings over $450,000, it is 39.6%.  Oh, no.  We’re sorry.  It’s potentially another 1.19% which is the amount that is added to the marginal rate due to the cut-backs in itemized deductions.  Therefore, the top tax rate is 40.79%.  Oh, no.  We’re sorry.  You could also lose your personal exemptions, which will add as much as another 1.05%, so the top tax bracket is 41.84%.  Oh, no.  We’re sorry.  We forgot the Medicare surtax on high wage earners of 0.9%, making the top tax bracket 42.74%.  Oh, no.  We’re sorry.  There is a Medicare surtax on net investment income which could add another 3.8%, which means that the top tax bracket would be as much as 46.54%.  You followed all of that, didn’t you?  That’s the whole idea.  Congress and the President did not want to admit just how much they raised the top tax rate, so they did so using “smoke and mirrors” to disguise the total impact.

• The Dow Jones Industrial Average and many of the other major indexes powered their way through January, producing the best return for the January indicator since 1997.  The enthusiasm carried over into February, with the Dow reaching 14,000 for the first time since October 2007 (the beginning of the fiscal crisis), bringing cheers from many investors.  The S&P 500 also hit a five year high a few days later.  What’s not to like about this market and the economy, especially after the government revised last year’s employment numbers upward by over 400,000 new jobs?  We have always said that the in the long-run the market will be driven by earnings, not by the headlines from day-to-day, and even at today’s numbers, the market is trading at a reasonable level based on historical averages. 

Having said that, we must consider that there is much to be concerned about over the next couple of months and especially over the next few weeks, as Congress grapples with sequestration, budget cuts, and higher taxes.  The President’s State of the Union address may have solidified the extremes between the two political parties, which might make all that is to come even more difficult.  On March 1^st, sequestration sets in.  Then, in May, the debt ceiling is back in the news and all the while the President is pressing for more taxes, mostly in the form of closing “loopholes”, but tax increases nonetheless.  All of this will eventually weigh on the minds of Wall Street and Main Street. 

Consumer confidence tumbled as Congress stumbled through a year end debate over the tax increases, and, of course, every working consumer has 2% less each month to live on.  By no means do we want to diminish the events at Newtown, but all of the time being spent on gun control (which can be done at any time), or anything else,  is taking time away from Congress’ ability to pay attention to the economy, which should be its number one priority at this time.  The concern over the fiscal cliff in the fourth quarter of last year led to the lowest defense spending since the Viet Nam War, and along with Hurricane Sandy, helped take us to a modest decline in GDP for the first time since 2009.  Having automatic budget cuts kick in come March 1^st is once again going to set investors on edge.  The President’s desire for additional revenue on top of what he has already gained in the American Taxpayer Relief Act of 2012 is also a very troubling point for the economy.  While on a long-term basis we continue to see a slow and steady economic recovery, it would not take much for it to stumble, just as we saw in the fourth quarter of last year. 

While the recent gains in the market are making investors happy and there does seem to be a new enthusiasm for equities, investors need to continue to focus on the long-term and not the short-term.  At some point, the market is going to take a breather and perhaps even retreat by more than 10%.  That is when it will be important to stay the course.  While investors poured money into equities during January and early February, they still found a way to increase their investments into bonds as well.  We continue to be concerned that, if investors retreat quickly from bonds and put that cash into the equity markets, we could see the bubble burst on the bond side and a bubble begin to form on the stock side.  While it will feel good on the way up, it could be ugly on the way down, so we remain cautiously optimistic.  The rest of this year has potential for growth, and if the jobs number were to pick up it would be a healthy sign leading into 2014.    

• Baby Boomers are feeling healthier than previous generations, but not necessarily wealthier. According to a report from the Conference Board, almost 62% between the ages of 45 and 60 intend to delay retirement.  Two years earlier, this same group indicated that 42% would be putting off retirement.  There is no doubt that some remain working because they want to, but there is also no doubt that many are remaining because they have to.  This has many implications, which we have written about previously.  Older employees tend to cost corporations more than younger employees, and thus could reduce future earnings.  Younger employees are waiting for the seniors to move out of the way so they can move up the employment ladder and improve their lifestyles.  Should Boomers work longer, it could be good news for programs like Social Security as it will keep people from applying for benefits early, and allow them to contribute more money into the system as they continue to work.  One caveat is that the way people feel today in these difficult economic times may be quite different 10 or 15 years from now when they actually reach retirement age.

• Canada has officially decided to eliminate the Canadian penny.  Thank goodness.  Now, we’ll never get a Canadian penny in exchange for our Lincoln head.  While a penny will still be accepted in Canada as legal tender, there won’t be any more made and they will be taken out of circulation.  Retailers are being urged to price everything in a round “nickel”.  Of course, that does not apply to on-line purchases which will still go all the way down to one penny.  Can the U.S. be far behind with this type of sensible move, or are we so stubborn that we will continue to waste time, resources, and money, producing something that has increasingly less significance?

As always, we encourage you to give us a call if you would like to discuss anything further.  We will visit again soon.  Proudly and successfully serving our clients for over 26 years.

RAY, KIM, ERIC, BRUCE, LOU, NANCY, TINA, and JON

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