“Fiscal Cliff” or “Speed Hump”?

fee-only financial planningAre you sick of this “fiscal cliff’ metaphor? I am. Sure, Washington needs to deal with taxes and spending. But, to constantly hammer into peoples’ minds the metaphor of us going over the cliff is absurd.

Of course, the media loves to catch our attention with fear. Our brains, particularly our amygdala, are hard-wired to be aware of potential dangers. The amygdala is one of our first filters for incoming information; always looking for problems. The media knows this and continues to saturate us with a disproportionate amount of bad news.

Certainly, Washington needs to deal with the scheduled tax increases and spending cuts. Without an agreement, there could be a $640 billion impact on the economy; $500 billion of increased taxes and $140 billion in spending cuts. That could reduce our GDP by 4%-that’s not good. Without an agreement, our annual deficit of $1 trillion or more would be cut in ½. That’s good.

The politicians actually agree on more than half of the $640 billion in question. Republicans and Democrats alike want to continue the low tax rates for the middle class, minimize the impact of the AMT, and not cut defense spending. So, $375 billon of agreement already. In addition, spending cuts and tax hikes, if they happened, would be phased in over time. Lastly, agreements and legislation can occur in December or early 2013 and be applied retroactively. These ticking clocks that show the number of days, hours, minutes and seconds to December 31 when we go over the fiscal cliff drive me crazy.

The bigger picture is how we are going to handle our long-term budgets. The last four years have been tough. $5 trillion has been added to our national debt. Our debt is currently 70% of GDP. Without change, it will likely exceed 100% in the next decade and could be twice that in the next 20-25 years. Those are real problems. With all the talk of non-discretionary spending cuts and taxes on the wealthy, the real focus needs to be on the entitlements; particularly social security, Medicare, Medicaid and the like. Without change, we are on a slippery fiscal slope.

At the same time, there’s lot of good news. Consumer sentiment and net worth are up, debt is down and housing has seemingly hit bottom and is more affordable than ever. Business sentiment is up; businesses are making money, have cash and can borrow at the lowest rates since the 60s.

In my opinion, we are not approaching a fiscal cliff; but, rather, another fiscal speed hump. Hopefully it causes Congress and the White House to slow down and deal with important issues rather than kicking the can down the road. If Washington could just help lift us all out of the uncertainty of both short-term and long-term financial issues, things could really be looking up.

DWM 3Q12 Market Commentary


fiscal cliff, multiple asset allocationWith current readings of anemic economic domestic growth, a recession widening in Europe, and a possible “Fiscal Cliff” on the way, it’s ironic how well the stock market and frankly most markets have done in 3Q12 and year-to-date (YTD) 2012.  It certainly didn’t hurt in mid-September when the Fed announced QE3 which is yet another round of government bond-buying designed to jumpstart the US economy and job market. Just how effective is this prolonged monetary policy? Weak US economic data, political unrest in the Middle East and Africa, even a slowdown in growth in China, are just a few of many things that show the situation really hasn’t gotten much better. At some point, the market will no longer reward this so-called “Quantitative Easing”.

But let’s talk about the good news for a little bit – the 3Q12 results:

The average US diversified stock fund posted a 5.3% return for the third quarter and is now up close to 13% Year-To-Date (“YTD”)! Results were also quite nice outside of the US with diversified international stock funds averaging 6.8% in the 3Q12 and now up almost 11% YTD. DWM equity portfolios enjoyed these run-ups.

Bonds chugged along with the riskier debt securities seeing more inflows and thus better returns. This was evidenced by the Barclays Capt’l US Aggregate Bond Index being only up a respectable 1.6% for the quarter (and almost 4% YTD) yet the Barclays US High Yield Index up 4.5% for the quarter (and 12% YTD). It should be noted that DWM fixed income portfolios have really enjoyed great performance both on the quarter and YTD and as such is reflected in your overall return. 

 Our DWM Liquid Alternatives portfolio showed it participates in bullish quarters like this, up around 3.6% for the qtr and up almost 9% YTD. This alternative part of the portfolio will really be needed when, not if, equities markets (and fixed income markets for that matter) turn bearish. 

Nice results, huh?! Unfortunately, that’s where most of the good news ends. Besides some improving housing data, which simply shows a bounce off a very low bottom, it really isn’t pretty out there. Now is not the time to “get out the Dom Perignon” and start dancing in the streets. Now is the time, for those who aren’t DWM clients, to make sure you have reviewed your financial plan, your risk tolerance, and your portfolio asset allocation to make sure it’s ready for the challenging near-term future. DWM clients already have these areas covered. We have many potential big risk events on the horizon: the Presidential Election, a possible replay of the debt ceiling debacle, and then the possible Fiscal Cliff, which is the term referring to the simultaneous spending cuts and tax increases that are slated to take place at the end of 2012 unless Congress takes action and actually comes to agreement on something. 

Frankly, this is a good example to show it’s impossible to time the stock market, as it does not necessarily operate in-line with fundamental data. It’s another reason why a well-diversified, low-cost, multiple asset allocation approach like ours is so prudent in times like these. Rather than trying to “time it”, we use disciplined strategies and vehicles to produce stable and steady returns over time, thereby helping you achieve your long-term financial goals. 

Hope to see you at one of our Fall seminars in either Charleston or Palatine where we will discuss these important items in more detail.  

Brett M. Detterbeck, CFA, CFP®