ECB Stimulus Disappoints

The European Central Bank (ECB) announced on Thursday that they would “step up” efforts to boost the eurozone economy. This included increasing bond purchases, as well as cutting already negative interest rates by 0.1% (the bare minimum). This shook global markets yesterday, as investors worried these measures are simply not good enough to boost low inflation in the eurozone and jump start the economy. U.S. and European stocks fell on the news, but the more telling moves came in the bond and currency markets. German bond yields jumped their highest amount in months and the euro rose against the U.S. dollar. The market seemed to be expecting Draghi to continue his “under-promise, over-deliver” ways, so when he just “delivered”, the markets reacted sharply.

U.S. Adds 211,000 Jobs in November:
The Labor Department announced this morning that the U.S. non-farm payrolls increased by 211,000 in November, marking another strong month of job gains. This was higher than the 200,000 average economist estimate. Also of note, October’s jobs gains were revised upward to 298,000 (from 271,000), making October the strongest month of job creation so far in 2015. September’s numbers were also revised upward to 145,000 (from 137,000), making the month a little less disappointing than originally thought. The unemployment rate held steady at 5%, matching economist estimates and remains the lowest unemployment rate since early 2008.

Janet Yellen Speaks:
Yesterday, Fed Chair Janet Yellen spoke in front of a Congressional panel and warned against putting too much emphasis on Friday’s report. Instead, she stated Fed officials are more concerned with underlying trends that show the domestic economy is improving. She pointed to stronger household spending, increased home building, and strengthening business investment as reasons to believe the overall economy is stronger.
Of course, investors are seeing her comments, along with today’s jobs numbers, as increasing evidence to support the Fed’s decision to raise interest rates. The Federal Open Market Committee (FOMC) meets next on December 16th. The futures market is now pricing the “odds” of a December interest rate hike at 75%, as of this morning. For a long time now, the markets have known this was coming. Investors feared the economy was on too shaky of ground to support higher interest rates. Other investors feared bond prices would fall, pinching the holders and would cause liquidity to dry up. What we seem to forget is that yields have been rising even while the Fed keeps interest rates unchanged. It is hard to imagine that the markets have not already priced in the “shock” of interest rates being raised. Unless the Fed raises interest rates a lot, it seems increasingly unlikely that the rate hike announcement will cause any sustained market pullback.

529 Contribution Deadline is Year End:
If you plan to contribute to a 529 College Savings Plan this year, be sure to do so by the close of business on December 31st so you’re assured of qualifying for any state tax deductions or incentives on your 2015 taxes. The tax deductions vary by plan and by state, but a Missouri resident opening a Missouri MOST 529 Plan can deduct up to $8,000 per year from their state tax returns ($16,000 for married couples).

If you do not yet have a 529 plan open, there is still plenty of time to open an account and fund it before year end. You will simply need to visit your state’s 529 plan website. In Missouri, the Missouri MOST website allows the account (and contributions) to be completed online. We can also help clients prepare and complete the paperwork, if needed.

We have covered the 529 College Savings Plan topic in the past, but in case anyone would like a “refresher”, a copy/paste from our weekly email in February is below explaining the 529 in greater depth:

With so many college students graduating with large amounts of student loan debt, clients often ask us how they can help plan for their child or grandchild’s college tuition. While it is possible to simply write a check, there are more efficient ways to help. Savings plans vary from state to state, but often times the best vehicle available is a 529 Plan. A 529 Plan is a state sponsored college savings plan that allows the account owner (parent, grandparent, etc.) to contribute to an account earmarked for higher education savings for a designated beneficiary. In Missouri, this plan is called the MOST 529 Plan. Below we have prepared some quick points regarding the advantages of opening (or contributing to) a 529 Plan:

• The earnings in a 529 Plan grow tax-deferred.
• Distributions are federal income tax-free (and in most cases state tax-free), so long as they are used for qualified higher education expenses (like tuition, room and board, books, etc).
• 529 Plans offer gift and estate tax benefits to the contributor. Individuals can contribute the annual gift tax exemption amount of $14,000 ($28,000 per married couple) to any number of beneficiaries. To utilize the five year contribution election, an account owner may contribute up to $70,000 ($140,000 per married couple) per beneficiary in a single year without incurring any gift taxes. Except for any prepaid portion of this accelerated gift-tax benefit election, the account values of 529 plans are not included for estate tax purposes.
• 34 states (Missouri included) offer additional tax benefits for residents by allowing a state income tax deduction on all or a portion of the amount contributed to that state plan. In Missouri, contributions are deductible up to $8,000 ($16,000 for married couples). 529 Plans do not have any residency requirements, so you are able to choose a plan from any state based on your specific needs. Only a handful of states (including Missouri) offer tax parity which allows tax deductions for contributions to out of state plans.
• The 529 Plan is considered to be an asset of the owner (not the beneficiary, i.e. the child) and therefore has a lower weighting in financial aid eligibility formulas.
• 529 Plan assets can be used at any U.S. school and is not restricted to a school in the state in which you establish an account.
• Anyone can contribute to a 529 Plan. So if a parent opens a 529 Plan for their child, the grandparents, other relatives, or even non-relatives can all contribute to the account.
• Depending on the plan, a variety of investment options are available.
• Unlike a Custodial account, a 529 Plan is property of the owner (the parent/grandparent) and not the beneficiary (the child). Therefore, the beneficiary can be changed, should the child receive a scholarship or simply choose not to attend college. The Plan is also fully revocable, meaning the owner can “re-claim” their assets, should they decide the plan is no longer necessary (though taxes are due on the gains).

We encourage anyone considering to help out with a child’s or grandchild’s higher education expenses to establish a 529 Plan, for the tax and estate planning advantages.

This publication is provided as a service to our clients and associates of PFA solely for their own use and information. The material is derived from sources believed to be reliable but its accuracy and the opinions based thereon are not guaranteed and have not been verified. The content in this publication is for general information only and not intended to serve as individual investment advice. You should seek independent advice from a professional based on your individual circumstances.