A variety of topics are keeping investment experts busy this month. Happily, we saw positive trends continue in the markets – with just a few minor dips. Number-crunchers have been looking through data and analyzing trends to determine if the current rally is a new bull market –one that began on Oct. 3, 2011 – or if what we are experiencing is a continuation of the upsurge that began in March 2009. As long as it is moving in the right direction, why do the experts care? Some believe in looking to past performance patterns to forecast the future. History suggests that traditional bull markets usually last about three years, and if this is a continuation, we are now in year four. However, there are many types of bull markets – some short-lived and some longer lasting and less dramatic. Furthermore, if events have taught us anything, it is that the past has not helped predict the future in recent years.
When it comes to positive company news, Apple bested everyone with an announcement that the company plans to return some of its cash to shareholders in the form of dividends and stock buybacks. Apple’s dividend payments of $2.65 each quarter – set to begin in July – give it a yield of 1.8 percent (based on its current stock price). This dividend windfall raises a timely issue regarding taxation on dividends. When stocks were on a major roller-coaster (especially pre-2009), many investors moved money into dividend-paying stocks and bonds. With major uncertainty hanging over the tax situation for dividends after 2012, the market expects dividend-paying stocks to be less attractive.
A quick reminder: Unless Congress acts to extend the current rates after Dec. 31, 2012, the highest tax rate on most dividends will jump to 45 percent from its current ceiling of 15 percent. It is also important to remember that if no action is taken to extend the lower rate, the top rate of 45 percent would affect only a small percentage of investors. Before rushing to re-balance income and growth stocks in their portfolios, investors should consult with their tax and investment professionals to determine the best course of action. It is also worth remembering that tax-deferred accounts and pension funds hold a lot of dividend stocks, so the overall effect of changes in taxation might have less significance on the broader market.
When it comes to looking for good bets in the market, for every opinion there’s a counter-opinion. Some investment pros are researching small caps – however, by the time they’ve discussed them in print they are hardly unknown and inexpensive. Others are leaning toward blue chips – consumer staples that are somewhat protected from the vagaries of consumer confidence and spending patterns.
On the international front, Federal Reserve Chairman Ben Bernanke has said that “financial stresses in Europe have lessened.” This might be correct; however, it’s not true of all European nations. It would take an investor with a strong tolerance for high risk to explore investment opportunities in the PIIG nations (Portugal, Italy, Ireland and Greece). When it comes to emerging markets, experts advise caution. It is true that markets like Brazil have come back after a tough year, but future growth often is reflected in the current stock prices. In other words, stock is expensive and doing business across time zones is costly and often frustrating. If you are interested in emerging markets, you will need extensive professional advice up-front, because you might not find the same regulatory protection in foreign exchanges – the safeguards you are accustomed to here in the United States.