As we enter a new year, we often reflect on the successes of the prior year (as well as not so successful moments) and we look to improve in the coming year. Resolutions about our habits (good and bad) are often made. No matter what type of changes, if any, you have chosen to make this year, they usually come down to two things, happiness and success.
If we look at society and societal norms, a lot of weight is given to success when it comes to defining happiness. If we see a person who is successful, it is often assumed that they are happy. In reality, we actually have no idea whether or not that person is either happy or successful; for a couple of reasons: First of all, we can only measure someone else’s success or happiness by what we know about them. Secondly, and more importantly, we can only measure someone else’s success or happiness by how we define success and happiness. There is really no way of knowing whether their measures are even similar to our own.
There has been much discussion in the news recently about new nominal highs in stock indices like the Dow Jones Industrial Average and the S&P 500.
When markets hit new highs, is that an indication that it’s time for investors to cash out? History tells us that a market index being at an all-time high generally does not provide actionable information for investors. For evidence, we can look at the S&P 500 Index for the better part of the last century. Exhibit 1 shows that from 1926 through the end of 2016, the proportion of annual returns that have been positive after a new monthly high is similar to the proportion of annual returns that have been positive after any index level. In fact, over this time period almost a third of the monthly observations were new closing highs for the index. Looking at this data, it is clear that new index highs have historically not been useful predictors of future returns.
A few weeks ago the Federal Reserve met and decided to raise short-term interest rates by 25 basis points (a basis point is equal to 0.01%). Looking ahead to 2017, the bond market has already priced in additional interest rate increases. If the economy continues to improve additional rate increases will likely occur. The price on bonds already issued will decline. While higher interest rates have a negative impact on bond prices in the short-term, higher interest rates also means more income will be paid from new bonds being issued. This means higher total returns for bond investors.
Tax cuts are likely, but what form will they take? Corporate, estate, income, all of the above? While taxes will probably be lower in 2017, we focus on what we have control over right now. Here are some tactics we are currently employing on behalf of clients throughout the year, as well as over the final few weeks of 2016.
Those in higher tax brackets generally have the most to gain by taking advantage of these tactics, but middle-income taxpayers, including retirees, should also consider taking some of these steps now in order to save some extra money in the event of a tax cut.