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March 19, 2007

The Markets

"Failing to prepare is preparing to fail." - John Wooden

Markets continue their wide March swings, and anyone who was complaining about a lack of volatility has certainly been satisfied.

Prices rallied last Friday and Monday, with a strong pullback on Tuesday that continued in early Wednesday trading. That decline had most indexes falling to new 2007 lows before bargain hunters swooped in to cause a modestly higher close. The gains continued on Thursday, in much slower trading, but most indexes are still below where they were a week ago.

The Federal Open Market Committee meets this week on 3/20 & 3/21. According to Bloomberg, many would like to see the Federal Reserve lower interest rates, which could help ease the pressure on borrowers who chose adjustable rate mortgages (ARMs). Many homeowners with ARMs have seen their monthly mortgage payments go higher in recent months—in many cases the payments have gone higher than they could afford, which has caused some folks to default. Lower rates could reduce the number of defaults in the marketplace and help lenders out of a tight spot.

So what's holding the Fed back from lowering rates? You guessed it: inflation. The Consumer Price Index, a common measure of price inflation, rose by 0.4% in February, according to the Labor Department. That was higher than Wall Street had expected, and left many people believing there was little chance the Fed would lower rates any time soon. As a result, market performance was lackluster last week. For readers who would like to know if a rate cut will put the stock market back on track here's an article worth reading:   Must Stocks Rise Following a Cut in the Fed Funds Rate?

Stagflation, a portmanteau of the words stagnation and inflation, is a term in macroeconomics used to describe a period of high price inflation combined with slow output growth, high unemployment, or recession. "Stag" refers to a sluggish economy, while "flation" signifies rapidly rising consumer prices.

Subprime, describes a specific lending market sector. Typically, subprime customers are those who do not qualify for prime market rates because of a blemished or limited credit history. Subprime customers are therefore charged a higher interest rate, to compensate for the increased risk that they will default. The general lending philosophy can be described as "priced to risk," where the interest rate the borrower pays increases as their risk level to the lender increases. In the United States, subprime borrowers are generally defined as individuals with limited income or a FICO credit score below 620 (on a scale between 300 and 850).

WHERE WILL YOU GET INCOME ONCE YOU STOP receiving a paycheck? Knowing that your bank account will be replenished each time your earnings are deposited is mighty reassuring. Once you retire, that won't happen anymore. Along with freedom from work, you get the responsibility of generating your own income. It's one of the reasons that retirement seems daunting to some. In fact, more and more retirees are reluctant to completely give up their paychecks, so they continue to work part-time during retirement.

Whether you decide to continue working part-time or choose full retirement, you will probably have a variety of sources of income. These may include Social Security, traditional or Roth IRAs, qualified retirement plan accounts, and personal savings accumulated outside of qualified retirement plans. Before you start withdrawing assets from any of these accounts, you'll want to develop a plan (Don't worry. We can help.). As you do, consider the following questions:

• How much will each source of income provide each year? If you are retiring before your full Social Security retirement age, you may need to provide yourself with income from other sources for a few years until Social Security begins. Many experts suggest that you withdraw no more than 4% of your savings each year during retirement.
• How and when will you receive income from various sources? Your income sources may offer specific distribution options, or they may not. In some cases, you may need to apply to receive distributions and choose a payment option when you do.
• Which sources provide taxable income and which offer tax-free withdrawals? Some income sources, like Roth IRAs, may provide tax-free income; others may provide taxable income. The tax status of your distributions may affect your net income, as well as your tax bracket.

Make sure you are proactive and have a plan for coordinating your payments that will allow you to meet your financial needs during retirement. You may want to take one lump sum withdrawal each year from your retirement accounts, or you may prefer to take small amounts periodically to supplement benefits like Social Security. We will be happy to work with you to help determine your options and develop a plan that works for you.

Happy Birthday to the S&P 500! On March 5, the Standard & Poor's 500 Index turned 50. Now that the index has gained some experience and perspective—along with the rest of the baby boomers—it's time to look back and see how far it has come (and how far investors may have come with it).

• Today there is $1.2 trillion directly invested in the index.
• Only 86 of the original 500 constituents remain in the index today.
• The best performing of those stocks over the past 50 years was Altria (previously Philip Morris) [MO]. A $1 investment in Altria on March 5, 1957, would have grown to a value of around $8,400.
• The average annual total return for the index was 10.83%, with roughly 1/3rd of that return coming from reinvested dividends.

The first 50 years have been good to the S&P 500. Here's hoping the next 50 will provide equal or better performance.

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One of the following three objects is the next element in the row.

The Question: Which one is the next element? Click here for the answer.

Best Regards,

* 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 Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks.
* The Nasdaq Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.