Tax Cut Plan

I hope this finds you safe, warm, and dry. Winter has arrived early before the official start date. This is a lot like what happened this past week on the tax cut plan, it got started before the official start date of the next group of US House of Representatives and US Senators. This blog will include information from Vanguard, and the proposed tax cut plan that has people really talking. Just as the weather has changed this past week so has the investing climate.

We now have fiscal policy that is attempting to grow the ecomony at the same time the Federal Reserve has monetary policy that is also attempting to grow the economy. We have both feet on the gas pedal and we are going into the first turn on the track. Any NASCAR driver or fan knows the real pickup in speed will occur on the back straightaway. This means that it will take awhile for this action to have an impact on the economy.

Vanguard

While Washington buzzed contentiously over tax rates and other domestic policy items, this week's activity suggested the economy is still trying to sound a positive note. Consumer sentiment improved and new jobless claims dropped, but unusual short-term volatility in the fixed income markets depressed bond prices and bumped mortgage rates to their highest level since June. For the week ended December 10, the S&P 500 Index rose 1.3% to a 2-year high of 1240 (for a year-to-date total return of about 13.4%). The yield on the 10-year U.S. Treasury note jumped 26 basis points to 3.29% (for a year-to-date decline of 56 basis points).

Tax Cut Plan

This past week the news of the Obama compromise plan with the Republicans has really gotten people talking. I am going to avoid any political comment and focus on the impact for investing. I view this as positive for stocks and neutral to negative for longer term bonds.

Stocks go up and down with future growth rate. Since growth rate increases with this move so does the price of stocks. I have stated that we have been in a trading range with stocks. This move in my opinion changes things and allows stocks to go higher. We still have some end of year selling for tax reasons so some volatility will exist for awhile. It will be interesting to see what happens going into 2011.

Bonds are another story and they are in a tug of war. The 10 year treasury bond rose 0.26% last week based upon the news, a significant move. This tells us that the lower rates of about 1 month ago, when I wrote that it was a good time to re-finance your mortgage, are probably gone. While investors are selling long term bonds and driving prices up the Federal Reserve is buying them to keep prices down in a classic tug of war. This means that any rise in longer term rates should be muted. The significant move occurs next year when the Federal Reserve unwinds their position and sells these bonds.

This means that now is a good time to fund your IRA or savings account as we have a new buying opportunity. Do not let fear of the future keep you from enjoying life and investing today.

I understand the statements of growing our national debt. Remember that debt is measured as a function of GDP. The people who drafted this legislation is looking at the annual level of debt as well as long term level of debt relative to GDP. The growth of GDP for the longer term is the current focus.