Stock Market Commentary
For the week of June 2, 2008
The Market
Wall Street ended the week on a positive note after the government reported that Americans’ spending rose in April to keep in line with rising costs. The Dow gained 1.27 percent to end the week at 12,638.32. The NASDAQ added 3.19 percent to close the week at 2,522.66 and the S&P grew 1.81 percent to finish the week at 1,400.38.
Planes Down – Orders for durable goods, excluding transportation, rose 2.5 percent in April, the largest gain since July, according to the Commerce Department. Economists had expected orders for U.S. manufactured big-ticket items would drop 0.5 percent. Transportation orders declined 8 percent, with orders for civilian aircraft dropping 24.4 percent. Non-defense capital goods orders, considered a proxy for business spending, rose 4.2 percent, the largest increase since December. Economists had expected that category to fall 0.5 percent. Electrical equipment orders rose a record 27.8 percent.
Breaks for Bonds – The Supreme Court has ruled that cities and states can continue offering special tax breaks on their municipal bonds, preserving a top incentive for investors in the $2.5 trillion municipal bond market, according to Reuters news service. Tax-favored status for bonds allows states to hold down financing costs for public projects. Without the tax breaks, issuers would have to offer higher interest rates to investors. The ruling reversed a Kentucky appeals court that found the common practice of states granting tax breaks on interest for bonds issued in the state – but not for out-of-state issuers – to be unconstitutional.
Stocks and Fed Policy – Since the end of 1973, the S&P 500 has gained 17 percent on an annualized basis following periods of expansive monetary policy (i.e., falling interest rates) and has gained 5 percent following periods of restrictive monetary policy (i.e., rising interest rates). The Fed has lowered interest rates seven times since Sept. 18, 2007 (Source: CFA Institute, BTN Research).
Estate Taxes – The maximum amount an individual can pass onto his/her heirs estate tax free with proper planning is $2 million in 2008, rising to $3.5 million in 2009. The federal estate tax table is then scheduled to disappear in 2010, only to return the following year (2011) with a $1 million exemption amount per individual (Source: IRS, BTN Research).
WEEKLY FOCUS – Your 401(k) Is Not An ATM
With the price of food and gas, that 401(k) balance may begin to look pretty tempting as a source for meeting living expenses. More than half of all 401(k) plans offer loan options for the lesser of 50 percent of the vested amount or $50,000. But there’s a reason they call it a “hardship” withdrawal, and that word should factor in to any decision you, your adult child or another family member make to tap retirement savings for anything other than retirement.
The temptation in using a 401k loan is similar to that of a home equity loan – the old “I’m paying myself back” rationale. Consider the implications, however, of not
being able to pay yourself back because of disability or loss of your job. Consider the loss of earnings and compounding opportunities by taking that money out of play. Consider you will be borrowing pretax dollars and replacing it with after-tax dollars, so you will have to work more hours to replace the same amount of money. And consider the fees that your plan may impose on loans, such as asset liquidation fees.
Another potential pitfall to a 401(k) loan: If you leave employment, whether of your own volition or at the request of your company, your employer can require repayment within 60 days. If you fail to do so, the IRS will treat the unpaid balance as a distribution, on which you will owe regular income tax and, if you’re under age 59½, a 10 percent penalty.
Vacations, new cars, going back to school for a second (or third) degree and even buying a home are not hardships. These are expenditure decisions that should be worked into your families budget – not borrowed from your future. If you or a family member is considering a 401(k) early withdrawal, hardship withdrawal or loan, please call our office for help in considering all the implications.
* 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. WMCSAI# 278909
