Investors barely had time to savor the post-election lift-off before a few stark words on November 19th from Federal Reserve Chairman Alan Greenspan, and a sudden surge in oil prices, sent stock prices tumbling. These concerns over the impact of rising interest rates, a spiraling deficit, and a weakened dollar are not new. However, Greenspan’s unusually blunt words took investors by surprise when he warned that foreign investors would eventually have a "diminished appetite" for financing the U.S. deficit, and that those who were unprepared for higher interest rates were "desirous of losing money." The ensuing sell-off, which dragged the main market gauges into weekly losses for the first time since the Presidential election, gives us a timely reminder that - important as the election results are - the market’s health is contingent on many economic and fiscal factors.
Before we look ahead, let’s not forget that taxes are one aspect of your investment strategy where you do have some control - if you act now. December is the time to make sure you keep as much of your 2004 investment income as possible. Your tax advisor can work with you on your specific situation, but here are a few "broad brush" pointers:
- Sell losing stocks (that are not tax-sheltered) to offset capital gains realized from other investments in your portfolio. If you have no gains to offset, you can still realize losses and use them to reduce up to $3,000 in ordinary income.
- Reorganize your portfolio with taxes in mind. Don’t fall foul of the "wash-sale" rule. You will forfeit your tax-loss benefit on a laggard if you buy a substantially similar investment within 30 days of the sale of the loser.
- If you plan to off-load shares of a fund that is losing money, do it as soon as possible. The fund may be distributing capital gains near year-end - despite being down for the year - and so, in effect, will be preparing a tax bill for you.
- If you plan to give stocks to your children or to charities this holiday season, your tax professional can outline possible tax benefits that may benefit both you and the recipients.
December is the time to review your investment strategy for the coming years, too. Let’s take a look at what some experts are predicting:
- The rebound in the economy suggests that we probably won’t see a major bear market for a while. Many bullish analysts believe that the patchy nature of the recovery has left some sectors undervalued, and that many growth stocks have been beaten down to levels that represent real buying opportunities. They anticipate that corporate spending is slated for a much-needed boost, and that this will help many technology companies who have lagged behind the overall market.
- Dividend paying stocks - especially from the larger, blue chip companies - look as if they will continue their strong performance for a while.
- Although many factors influence the market, some experts anticipate that certain sectors will get a boost from another four years of Republican control of the White House. Some fund managers and other experts predict that health care, financial services, utilities, energy, and military contracting will be among the winners in Bush’s second term. There is little consensus among these experts as to which specific segments or companies might offer the best investment opportunities. However, pundits who favor energy stocks tend to steer their clients away from the major, global corporations and more towards producers with operations in North America, or ventures outside the volatile Middle East. Many experts believe that oil may not reach or exceed recent peaks but that prices will continue to make more exploration ventures economically feasible.
- Some experts believe that the overhaul of Social Security will place more investment control into the hands of individuals, and they recommend stock in financial institutions that provide asset management or financial/retirement advice. Others think the contentious nature of the issue means that we won’t see any major changes anytime soon, or any flood of money into the market.
Whatever 2005 brings, the stock market still holds the best long-term promise for most Americans. May you and your portfolio have a Happy and Prosperous New Year!