The investment landscape became unsettled during the summer months due to a combination of geopolitical risks, interest rate policy uncertainties and mixed economic data figures. Additionally, market and investor participation are historically much lower as volumes stagnate due to a greater number of “vacationers” causing higher volatility in the markets. This all led to a whipsawed market where single data points or events had greater influence on stock and bond prices.
We are in the midst of an equity market trying to weather uncertainties in the global economy. The largest companies excelled this quarter, particularly in the technology and financial sectors. Investors rewarded companies exhibiting strong growth and healthy balance sheets. Money also poured into the US dollar as volatility increased during the quarter. Small and medium sized companies lagged amidst questions about the overall strength of the US consumer. International markets were pressured as flare ups in the Middle East and Ukraine continued. Emerging markets were impacted by varying views on the overall strength of the Chinese economy. Any sustained slowdown in growth will have ripple effects across those stock markets.
Bond markets continue to defy many as interest rates remain at an all-time low. Rates are being impacted more so on international issues than based on domestic economic data. With our economy recovery at its current pace, interest rates should be 1-2% higher across the maturity spectrum. However, the bond market is reacting to other sovereign bond markets and their interest rates. To illustrate, I have provided a chart listing the current 10-year sovereign bonds of various countries:
Country / Current 10-Year Bond Yield
Germany - 0.89%
France - 1.29%
Japan - 0.52%
Italy - 2.36%
Spain - 2.17%
United States - 2.49%
The bond markets of these countries are being heavily influenced by their central banks. When comparing the yields of various sovereign bonds, the U.S. bond is attractive and thus a popular investment for bondholders worldwide. At some point, there has to be a mean reversion or equilibrium between sovereign yields and their true overall risk. There is no economic or fiscal reason why Italian and Spanish bonds are cheaper than U.S. bonds. Our economy is much stronger and the risk of default is much lower. This is where the power of coordinated monetary policy can greatly influence valuations while also creating major dislocations in risk/return criteria. Our economic cycle should result in bond yields being higher but they continue to be propelled lower based on comparable valuations. Our yields will either continue to drop or other country’s rates must increase in order to achieve equilibrium. At this time it looks like the former is playing out.
As we enter the last quarter of the year, we anticipate some heightened volatility within the stock and bond markets. In addition, we have an election in November that will decide who controls Congress for the next two years. Currently, we view any weakness as a buying opportunity and we plan to capitalize on adding to our core holdings.
Traditional Year-End Considerations
As year-end is fast approaching, we wanted to highlight a few important financial planning strategies that may be an option for you and your family.
Retirement Plan Contributions - 401(k), 403(b) and 457(b) Elective Deferrals – For 2014, the maximum contribution you can make is $17,500. However, if you are 50 years of age or older, you can make an additional $5,500 catch-up contribution for a total of $23,000.
IRA and Roth IRA – For 2014, the maximum contribution you can make is $5,500. However, if you are 50 years of age or older, you can make an additional $1,000 catch-up contribution for a total of $6,500.
Gift Giving - For 2014, the annual gift tax exclusion is $14,000 per beneficiary ($28,000 for married couples making split-gifts).
529 College Savings Plan - For 2014, contributions cannot exceed the amount necessary to provide for the qualified education expenses of the beneficiary. If you contribute to a 529 plan, however, be aware that there may be gift tax consequences if your contributions, plus any other gifts, to a particular beneficiary exceed $14,000 during the year.
Required Minimum Distributions (RMDs) - RMDs are generally minimum amounts that a retirement plan account owner must withdraw annually starting with the year that he or she reaches 70 ½ years of age or, if later, the year in which he or she retires. Retirement plan participants and IRA owners are responsible for taking the correct amount of RMDs on time every year from their accounts, and they face stiff penalties for failure to take RMDs. Do you own an inherited retirement account? When a retirement plan account owner or IRA owner dies, different RMD rules apply to the beneficiary of the account or IRA. If you have a retirement account at Generation Capital Management, and haven’t already taken your 2014 RMD, we will be in touch to get this matter taken care of.
(With any financial planning matter, please consult with your advisor as restrictions may apply and deadlines can differ.)
We thank you for your continued support and look forward to a prosperous 4th quarter.
Scott D. Nasca, CFA
Generation Capital Management (GCM) is an independent, SEC-Registered Investment Advisor located in Rochester, NY. Since 2003, we have provided value to our clients through a premium level of investment service and an unbiased, effective investment process. If you have questions or need additional information, please feel free to contact us at: (585) 232 – 8560. Generation Capital Management can help you meet your objectives today, tomorrow and for generations to come. We're ready to work for you.