Tip:
Highlight text to annotate it
X
News about the fiscal cliff has been dominating the headlines, and we think it creates a lot
of noise for investors. We believe the real focus an investor should be looking at is
how is the federal government going to deal with the budget deficit, and how are we going
to deal with our accumulated debt? Now, all this uncertainty leads to both opportunities
and challenges for investors. One opportunity we see is in the municipal bonds space. If
tax rates, in fact, do rise for at least some taxpayers, that would increase the value of
the tax-exempt interest that municipal bonds throw off.
The challenge, along the same lines, is that part of the discussion on the fiscal cliff
involves potentially taxing interest, or at least some of the interest, that municipal
bonds generate. So that would be a negative for the market. But we think that it may not
be as big a negative as one thinks or one normally would expect because, on a relative
basis, municipal bonds look very attractive compared to all other fixed-income alternatives.
The Fed did announce on Wednesday that they are not only going to continue the quantitative
easing programs that they've had in place for quite some time, but they're going to
additionally purchase $45 billion per month of long-term U.S. treasuries. Now, this is
going to have the impact of keeping a lid on interest rates for quite some time, even
though interest rates are at very low levels now, given the drain on the economy, based
on higher taxes and potential government spending cutbacks, the Fed has said that we're going
to be in this low interest rate environment for quite some time, and instead of setting
a end date on the calendar for when they might start removing some of this easing, they've
made it more economically dependent, and they've done that by aligning it with their dual mandate
of both maximum employment and price stability so the thresholds that they set are an unemployment
rate of 6.5 percent and an inflation rate of 2.5 percent.
Well, an investor should not focus on the noise in the market but rather stick to their
long-term plan, work with an advisor who's looking at the bigger picture and stay focused
on that plan. And this will be our last market commentary for the year, so we wish you and
your family a happy holiday season.