May 28, 2013

Bernanke's Quantitative Easing

Like guests feeling the first rain drops at a Memorial Day barbeque, markets responded uncertainly to Federal Reserve Board Chairman Ben Bernanke's congressional testimony and the newly released Federal Open Market Committee (FOMC) minutes last week.

Generally, both Bernanke's comments and the FOMC minutes reiterated what the Fed has been saying for some time. According to FOMC minutes, quantitative easing - the Fed's purchase of $40 billion of mortgage-backed securities and $45 billion of longer-term Treasury securities each month - will continue "until the outlook for the labor market has improved substantially in a context of price stability." The minutes also suggested the Fed's other method for stimulating the economy - low interest rates - "will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens."

Initially, stock market investors responded positively to these messages. On Wednesday morning, both the Dow Jones Industrial Average and the Standard & Poor's 500 Indices gained more than 1 percent. By afternoon, the indices had lost more than 1 percent each. By week's end, the indices had experienced their first weekly losses since late April.

Uncertainty about the future of quantitative easing affected bond and gold markets, as well. By Friday, the yield on benchmark 10-year U.S. Treasury note had risen above 2 percent, reaching its highest level in two months. Gold prices firmed during the week.

Fed policymakers will meet twice before Labor Day - in mid-June and late-July. The minutes of those meetings will be released three weeks after each meeting. If markets respond as they did last week, investors may experience a bumpy ride this summer.

Data as of 5/24/13 1-Week Y-T-D 1-Year 3-Year 5-Year 10-Year
Standard & Poor's 500 (Domestic Stocks) -1.1% 15.7% 25.0% 15.4% 3.6% 5.7%
10-year Treasury Note (Yield Only) 2.0 N/A 1.8 3.2 3.8 3.4
Gold (per ounce) 1.6 -18.0 -11.4 5.4 8.9 14.1
DJ-UBS Commodity Index 0.2 -5.1 -0.3 2.1 -9.5 1.1
DJ Equity All REIT TR Index -3.6 14.0 24.8 20.8 7.0 11.9

Notes: S&P 500, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, Barron's,, London Bullion Market Association.

Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

THE TAXMAN COMETH. If your ears are burning, it may be because the people who run state and federal governments have been discussing where to find revenue to fill budget shortfalls. Currently, the solutions they're pursuing focus primarily on U.S.-based companies.

As corporate profits have increased, the tax strategies employed by U.S.-based multinational corporations have come under Internal Revenue Service scrutiny. According to The Economist, America's corporate profits are at an all-time high. Yet, corporate contributions to Uncle Sam's coffers have been far lower than they were in the past. In 1947, corporate profits were about 10 percent of Gross Domestic Product (GDP) and corporate taxes were about 4 percent. Last year, corporate profits were about 12 percent of GDP and corporate taxes less than 2 percent.

The United States government recently called a U.S.-based multinational to task because it had employed "a complex web of offshore entities to pay little or no tax on tens of billions of dollars it had earned outside America." The company responded to the inquiry by pointing out it paid billions of dollars in American taxes during fiscal 2012 and was probably one of the biggest corporate taxpayers in the country.

Internet retailers and catalogue companies also are becoming part of the hunt for tax revenue. Under current law, states cannot compel out-of-state retailers to collect the sales and use taxes owed by residents and businesses. It is up to individuals to declare and pay those taxes. The National Conference of State Legislatures estimates the inability to have Internet businesses collect taxes resulted in about $23 billion in lost tax revenue during 2012. In an effort to help states collect these taxes, Congress created the Marketplace Fairness Act. If it becomes law, states that adopt a simplified tax code will be able to enforce sales and use tax collection by Internet retailers and catalogue companies. The Act was passed by the Senate early in May.

Weekly Focus - Think About It

"Adversity is the diamond dust Heaven polishes its jewels with."

Thomas Carlyle, Scottish philosopher

Best regards,
Sean M. Dowling, CFP, EA
President, The Dowling Group Wealth Management

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  • 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 DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices.
  • The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
  • This newsletter was prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with the named broker/dealer.
  • Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.
  • The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
  • The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
  • Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
  • Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
  • Past performance does not guarantee future results.
  • You cannot invest directly in an index.
  • Consult your financial professional before making any investment decision.

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