Stock Market Commentary
For the week of December 22, 2008
The Federal Reserve dropped its fed funds rate to vary between 0 – 0.25 percent on Tuesday, sparking a 360-point rally for the Dow. On Friday, the White House promised to provide General Motors Corp. and Chrysler LLC with $13.4 billion in short-term financing, and another $4 billion at a later date, contingent on the two automakers proving their viability by March 31. For the week, the Dow fell 0.58 percent to 8,579.11, the S&P rose 0.94 percent to end the week at 887.88, and the NASDAQ gained 1.53 percent to finish the week at 1,564.32.
Falling Inflation – The Consumer Price Index fell by a record 1.7 percent in November, according to the Department of Labor, exceeding the 1.3 percent drop that analysts expected. The decline, led by falling energy costs, was the largest since the Labor Department began publishing seasonally adjusted changes in February 1947.
Gas – On Sept. 6, 2008, the nationwide average price of a gallon of gasoline was $3.67. The average gas price fell for 86 consecutive days, a streak that ended Dec. 13. One hundred days later, the cost of a gallon of gasoline had dropped to $1.66, down $2.01 (Source: AAA, BTN Research).
Mortgage Rate Drop – Mortgage rates have fallen to an average of 5.19 percent for a 30-year loan, reaching levels last seen in the 1960s. According to HSH Associates, a financial market research firm, home loan refinancings have tripled in the past month as the government’s efforts to stabilize mortgage markets begin to have an effect.
Home for the Holidays – The economy is expected to keep more than a million Americans home this year. AAA estimates that although 63.9 million Americans will travel 50 miles or more during this holiday season, that’s 1.4 million fewer – about 2.1 percent – than last year. That’s the first slowdown in December travel in the past six years. Air travel will be the hardest hit, with about 8.5 percent fewer fliers than during the 2007 holidays.
WEEKLY FOCUS – Wait ‘Til Next Year
Americans over age 70½ did not get the gift from the federal government they may have hoped to receive. The Treasury Department confirmed last week that there will be no eleventh-hour reprieve from their 2008 required minimum distribution tables (RMD), the payments that those 70½ and older must take from their qualified accounts before year-end.
Congress did grant relief for 2009 minimum distributions. That measure of the Worker, Retiree and Employer Recovery Act of 2008, passed on Dec. 11, 2008, is intended to help retirees who have seen their retirement savings depleted by market declines this year. Those over age 70½ will not be required to take distributions from their accounts in 2009, leaving those monies to continue recovering.
Many had hoped that the same logic would apply for 2008. Congress, however, did not address 2008 RMDs, and last week the Treasury determined it does not have the authority to waive payments. To do less than that by requiring smaller distribution amounts, for example, would have been complicated, confusing and unfair to those who had already taken their 2008 RMDs.
Penalties for failing to take a required minimum distribution can be hefty – 50 percent of the amount that was not taken. For example, if the RMD for 2008 was $5,000, but the account holder took only $1,000, the fine would be $2,000 (50 percent of the remaining $4,000 originally slated to be taken).
Ordinary income tax will be due on all retirement account withdrawals except Roth accounts. Combined with the 2009 moratorium on RMDs, that gives those who turned 70½ in 2008 a slight reprieve. First-time withdrawals can be delayed until April 1 of the following year, but the withdrawal for year two must also be taken. Normally that combined amount has the potential to push a person into a higher tax rate. Since there are no RMDs for 2009, those who reached 70½ this year could delay until April 1, 2009, without the risk of a higher tax rate. A tax advisor can help determine the potential impact of delaying a first-year RMD.
If your parent or grandparent – or you yourself – have not taken a 2008 required minimum distribution, you must do so by Dec. 31, 2008, or face the 50 percent fine on the remaining amount to be taken. We help our clients take care of this and other aspects of retirement accounts. If you have a loved one whose financial advisor has not discussed the impact of 2008 RMDs and the 2009 moratorium, we will be happy to assist them. Just give our office a call.
* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Morgan Stanley Capital International Europe, Australia and Far East Index (MSCI EAFE Index) is a widely recognized benchmark of non-U.S. stock markets. It is an unmanaged index composed of a sample of companies.