Market Commentary 5/3/2013

The markets kicked off the month of May with a strong start this week as earnings continue to exceed expectations.  GM and Visa both reported and surpassed expectations for the quarter.  However, corporate revenues are coming up short.  In the first quarter, revenue is coming in 0.6% lower than in the year-ago period, down from the 0.9% growth expected at the beginning of the year.  Fifty six percent  have missed revenue estimates, making it the third quarter in the past four with more cases of revenue falling short than coming in better than expected.  Much of the revenue weakness is hitting companies with a significant portion of their sales in Europe.

The Federal Reserve announced this week it will continue its stimulus campaign and keep the current level of monthly bond purchases the same.  They hinted at the possibility of increasing the amounts if the current pace does not produce the desired outcome of stimulating the economy through low interest rates and manageable inflation. While the likelihood of ramping up purchases is slim, it reinforces their commitment of maintaining the status quo and not reducing stimulus in the near future.  These low rates should provide borrowers the opportunity to refinance their existing debt at lower rates and therefore provide consumers more money to spend.

Jobs

The Labor Department reported this morning that 165,000 new jobs were created in April, lowering the unemployment rate to 7.5%.  Economists had been expecting job creation of about 145,000 to 150,000.  While an improvement and a step in the right direction, the overall consensus is that the effects from the sequestration have not truly been felt yet and may take some time to impact the overall economy.  The housing recovery could help offset this somewhat in the meantime.  We continue to believe that the road to recovery will be a slow process.

M&A

Merger & Acquisition activity started off strong with headline deals such as the Dell leveraged buyout deal, NBC Universal,  and Berkshire Hathaway’s purchase of Heinz. However, like other indicators, it too has slowed. We track M&A as it tends to benefit our portfolios, but it is also a good barometer of business confidence. Globally announced M&A transactions declined by over 20% versus the fourth quarter and are up double digits versus last year. However, much of that increase is attributed to a handful of large dollar transactions which is obscuring some weaker trends. Possible explanations could include concerns over the sequester and its fall out, the events in the Eurozone, North Korea and recent erratic economic data. Assuming North Korea does not do anything foolish and the perception of upcoming economic data improves, we would expect M&A activity to pick up in the second half of the year.

Capital spending is also a classic indicator of business confidence. After most companies underspent their 2012 budgets, we have seen higher initial guidance for 2013. One example is Honeywell which budgeted for $1.1 billion in 2012, but only spent $884 million. Their 2013 budget is now up to $1.2 billion.  Events will likely dictate whether companies such as Honeywell follow through on these plans this year.

Around the Globe

In another blow to the recovery of the European economy, consumer confidence fell across the region in April. The reading was the lowest since December and is another marker that whatever brief recovery there might have been late last year is over.  Italian Prime Minister Enrico Letta said Italy was still in a serious economic situation after more than a decade of stagnation and the country must focus immediately on reviving its economy.  He said he will also lobby its European partners to obtain more growth-oriented policies at the EU level.  On Thursday the European Central Bank cut its key interest rate to a record low 0.50 percent and announced other measures to spur lending in hope to help lift the area out of recession.   Despite the low interest rates, European banks continue to be risk-averse on lending to companies, and many companies are hesitant to borrow in this period of slow growth.

Personal planning

With the original due date for 2012 income tax returns behind us, now is a good time to again review tax changes effective for 2013 and beyond.  The two year relief on taxable Social Security earnings expired and is once again back to 6.2% up to the earnings cap.  For 2013 this cap amount is $113,700 and early estimates indicate it will be $115,800 for 2014.

The annual maximum contributions amounts for IRAs and qualified retirement plan accounts increased this year.  Eligible individuals are able to contribute $5,500 towards IRA accounts (with a $1,000 catch up for those over 50) and $17,500 towards 401k type investment vehicles (with a catch up of $5,500 for those over 50).

Also starting in 2013, taxpayers with modified adjusted gross income (MAGI) above $200,000 for individuals and $250,000 for married couples filing jointly will incur an additional Medicare Hospital Insurance (HI) tax of 0.9% (2.9% + 0.9% totals 3.8%) for earned income above these amounts.   The same individuals will also have a Medicare contribution tax of 3.8% for any unearned income (interest, dividends, capital gains, etc.) above these limits.  This tax is in addition to any regular income taxes and is calculated by multiplying the 3.8% tax rate by the lower of the following two amounts:

  • net investment income for the year; or
  • modified adjusted gross income over a certain threshold amount.

The additional tax will be calculated on personal income tax returns.