Stock Market Commentary
For the week of February 9, 2009
Investors shook off news that U.S. companies cut 598,000 jobs in January, the most since 1974, to focus on the economic stimulus plan before Congress. Although the unemployment rate now stands at 7.6 percent, the highest rate since 1992, the major indexes posted their first week of gains after four consecutive weeks of losses. The Dow ended the week up 3.7 percent to close at 8,280.59, and the S&P gained 5.3 percent to end the week at 868.60. The NASDAQ climbed 7.81 percent to finish the week at 1,591.71, pushing into positive territory for the year to date.
Service Shrink Slows – The U.S. service sector contracted for the fourth consecutive month in January, but at a slower pace than previous months. The Institute for Supply Management’s service sector index rose to 42.9 last month, from 40.1 in December. A reading above 50 indicates growth, while a reading below 50 signals contraction.
7-Year Itch – The Treasury Department announced last week that it would reintroduce its seven-year note and double the number of 30-year bond auctions from four to eight this year to address the soaring budget deficit. The seven-year notes will be offered beginning later this month. The Treasury will auction $67 billion worth of three-year, 10-year and 30-year Treasury securities this week, a record for a quarterly refunding, according to the Associated Press.
Payback – Every $1 billion spent to upgrade the country’s infrastructure creates an estimated 18,000 jobs, according to an economist from the University of Massachusetts (Source: BusinessWeek, BTN Research).
California Dreaming – California Gov. Arnold Schwarzenegger warned that his state could become insolvent “within weeks” on Thursday, Jan. 15, 2009. California is anticipating a $42 billion budget deficit over the next year. If California was a country, it would have the eighth largest economy in the world (Source: AP, FT, BTN Research).
Baby Costs – The hospital cost to have a baby (excluding the physician’s fee) has increased 5.7 percent per year over the past 25 years (i.e., 1984-2008), almost twice the 3 percent annual Consumer Price Index (CPI) rate over the same period. The CPI is a measure of inflation compiled by the Bureau of Labor Studies (Source: WSJ, DOL, BTN Research).
WEEKLY FOCUS – IRS Allows Second 529 Plan Change in 2009
In a recently issued notice, the Treasury Department and the Internal Revenue Service announced that owners of 529 college savings and prepaid tuition plans can change investment options twice during calendar year 2009, rather than just once. The exception, made only for this year, is intended to help 529 owners adjust to the dramatic changes in the financial markets.
529 plans, also called Qualified Tuition Plans or QTPs, allow a family to make after-tax cash contributions for the purpose of covering education-related expenses. Every state sponsors at least one plan, and plans are managed by investment companies. Withdrawals are tax free, provided they don’t exceed the educational expenses, which can include tuition, room and board, fees, books and other required equipment. Grants and scholarships offset the expenses, and any excess from the 529 plan is then taxed. One winning feature of 529 plans has been the ability to roll the account to another beneficiary type. That way, if one child decides not to attend college, or there is more money in the account than one child needs, the account balance can be used for another child.
Plans can vary greatly from state to state in regard to using the funds at an in-state or out-of-state institution, and most states allow residents from other states to invest in their plans. While federal law requires a cap on allowable contributions to 529 plans, the cap amount differs from state to state. In addition, plans can range greatly on the fees they charge, from enrollment fees to yearly maintenance and management fees.
All those variations can make comparing plans and selecting one for your child or grandchild a daunting task. Now you have the additional concern of whether to change investment options, and when. Our office can help you determine whether a 529 plan makes sense for your child or grandchild, and can guide you in selecting a plan that suits your family’s needs. Call our office for an appointment.
As with other investments, there are generally fees and expenses associated with participation in a 529 savings plan. Qualified withdrawals are tax-free. Non-qualified withdrawals are subject to ordinary income tax and the earnings may incur a 10 percent penalty. The tax implications of 529 plans can vary significantly from state to state. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents and taxpayers.
* 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 representative of the market structure of 20 European and Pacific Basin countries and includes reinvestment of all dividends. Written by Securities America. SAI# 293823