News that the recession officially ended some 15 months ago failed to generate much excitement among Wall Street pundits. Economic growth and unemployment have yet to perform significantly better than during the official recessionary period. Truth be told – and semantics aside – analysts and individual investors alike are most concerned with implications of the slow pace of recovery and resolution of the current tax cut debate. Caution is understandable in an environment of volatility and uncertainty – everyone is dealing with economic and geopolitical realities that have no precedent. However, amid the uncertainty there is good news. Here’s a quick overview of current issues and trends.
Durable goods news for August suggests that U.S. manufacturing is coming back to life. Although total orders declined 1.3 percent in August, core capital goods rose 4.1 percent and new orders (excluding transportation) climbed 2 percent.
Similarly, the Conference Board’s index of leading indicators showed a slight increase in August, suggesting that the economy would continue to grow slowly into 2011. Some of the indicators were positive, including interest rate spread, money supply, average weekly manufacturing hours, building permits, stock prices and new orders for capital goods. Unemployment claims, vendor performance and new orders for consumer goods were in the negative.
New residential construction rose for the second month against expectations and the news from the housing sector was positive – though results remained low by historical standards.
Tax Cuts Conundrum
The upcoming November elections and the possibility of a Republican-led Congress and Senate represent a big question mark for investors. Hand-in-hand with the election issue is the matter of whether the Bush tax cuts will be extended.
Until Congress makes some hard decisions, investors will continue to face a lot of uncertainty. Though opinions vary, the majority of investment experts believe that tax cuts for the middle class will be extended; however, households above this threshold will take some tax hits. Investment planners anticipate higher tax rates for bond and dividend income for taxpayers in higher brackets, and many suggest that investors hold their higher-paying dividend stocks and bonds in IRA or 401(k) accounts, where future investment income won’t generate higher tax bills.
Trying to develop a tax-savvy investment strategy is fraught with many variables. Be sure to consult your tax and investment planning professionals to discuss the best approach and to determine when you should review your investment strategy to ease next year’s tax bill.