Market Musings Blog

Today the S&P 500 closed at a five year high. In fact, it’s within shouting distance of an all time high. Another roughly 7% appreciation, and the stock market will once again reach an all time high. (The highest closing price of the S&P was 1565.15 on October 9, 2007; there was an intraday high hit on October 11, 2007 at 1576.09.)

About time, we say. We’ve waited for years for stocks to gain some traction and a new all time high would help immensely. Not that the last few years haven’t been profitable, but viewed point to point from the late 1990s to now, stocks haven’t done much for the buy-and-hold investor.

We think the chances of further progress in 2013 are pleasingly high. The biggest impetus for prices is the intensely negative sentiment that has infected the stock market for years now. The media are full of reports of investors selling out, dropping stocks from portfolios entirely, and swapping to bonds. So far, that’s worked. But this year, chances are it won’t. In fact, government bond investors may have losses. What the stock market really needs is the tables to turn: big gains on stocks versus losses on bonds will convince investors to shift the other way, towards stocks instead. When that happens, we could be in for a multi-year long term bull market.

Meanwhile, there is nothing on the horizon that indicates that fundamentals are worsening for stock investors. In fact, improvement is all around us – in earnings, debt reduction, progress on the “cliff” talks, employment, housing, even manufacturing. Investors should not confuse personal judgments about the direction of politics with the possibilities for investments. You may detest Congress, abhor regulations and tax increases, believe for all you’re worth that the country is headed in the wrong direction, but in the end, the market is judging that circumstances are not worsening. Incremental improvement is everywhere. And that’s what matters.

Just a note to update our post regarding IRA catch up contributions available to those over 50 years of age for 2013:

Updated IRS regs show you may still make a $1000 additional catch up contribution to your traditional or Roth IRA for 2013, which is in addition to your regular $5500 contribution amount. The 2013 catch up contribution for employer sponsored accounts such as 401(k)’s is $5500, which is in addition to the regular $17,500 contribution amount.

Happy saving!

The long term care insurance market has changed a lot in the last few years. Many companies have exited the business (Unum, Guardian Life, Allianz, MetLife, Prudential). A few of the companies remaining (Genworth) are not particularly well-rated, having their own financial problems. Meanwhile, policies in place are experiencing huge premium increases. Genworth announced 50% premium increases for pre-2003 policies and 25% increases for new policies, along with lower benefits.

What’s happened? First, the lapse rate, which describes how many people pay premiums but drop their policies before they collect benefits, has been low. And of course, the cost of long term care has risen steeply. That’s meant high claims versus payments. The second factor has been the miserably low earnings that insurance companies are making by investing the premiums. With interest rates extremely low, companies can’t hope to earn even close to their cost increases for this product.

We say: buyer beware. Traditional long term care insurance is in trouble. As fewer companies provide coverage, the market will keep worsening, with the sickest insureds clinging to their benefits and fewer healthy  people signing up for the ever more expensive and scarce insurance. If you do sign up, you could be so squeezed by premium increases down the road that you drop the insurance just as you become more likely to need it. And that’s if your insurer even keeps offering the coverage.

Hybrid life insurance/long term care products may offer some hope, but again, buyer beware. These products are new, just like long term care insurance was once, so insurers really don’t know what their claims experience will be. And the policies are complicated, with varying bells and whistles.

If you can find a group offering at a reasonable price via an employer, consider it. But check into portability and how much the policy would cost if you if you left your employer.

You may be better off saving the money you would pay in premiums to cover your own care. You can control how much you save; and the money will be there for you, unlike a policy which you may end up canceling before collecting a single benefit. Talk to your advisor if you have any questions.

The outcome of the election in the US was simple, in our view: America decided to keep the status quo. The status quo – a Republican House, Democratic Senate, and Democratic Presidency – was what brought us the debt ceiling fiasco of 2011. We are about to be embroiled in that same scenario again – this time it’s the trifecta of automatic spending cuts, tax increases and a debt ceiling problem. A common refrain in the politico-sphere lately has been that since this is Obama’s last term, a spirit of compromise is in the offing. I don’t know what makes anyone think that. I think the President has all the more reason to stick to his guns, without another election hanging over his head. Thus, we expect a rollicking ride as Republicans and Democrats duke it out over how to avoid the fiscal cliff, offering up every bit as much entertainment as we had in the summer and fall of 2011.

Furthermore, some evidence exists that second terms for Presidents are less beneficial to stock holders than first terms. Second terms are apparently when we finally get treated as adults, served up the medicine that is good for America but which we really don’t want, resulting in a less than optimal economy. Time will tell on that one.

Lest we sound too bearish, remember that these negotiations can’t last forever, and that even if this second term isn’t as good as the first, the first wasn’t terrible for investors. As always, we believe that nearly every market offers some opportunity; it’s just a matter of finding it.

Maximum contribution levels to many retirement accounts rise next year. For instance, the 401k contribution rises to $17,500; the traditional IRA contribution goes to $5500. (“Catch-up” contributions for those over 50 remain the same, but add significantly to the amount you can put away. However, that legislation expires 12/31/12, and must be renewed to be effective in 2013.)

For a brief explanation with a link to the IRS’s pension plan limitations see here.