Permanent Value

Week in Review (4/17/14)

Bruce Doole
April 17th, 2014

U.S. Economic Outlook Lifted by Favorable Tailwinds (Part II)

Housing Rebound Firmly in Place

With the job market improving, new household formation is on the rise. Consequently, the demand for housing is greater and, with inventories limited, prices are moving higher. During the past two years, home prices have appreciated at a rate of about 10% a year. Rising home prices help cure a lot of ills in the economy. They help homeowners get out from being “underwater” on their mortgages; they help increase the geographic mobility of the labor force; and they lead to rising wealth among homeowners. In addition, they help improve banks’ balance sheets, allowing them to loosen lending standards and begin making home loans again. All of these factors, in turn, are fueling a recovery in residential construction.

Europe Goes from Bleak to Better

U.S. export growth over the past two years has been moderate to disappointing, largely because of the recession in Europe. With the euro zone emerging from recession in mid-2013, U.S. exports have perked up — especially as the euro has strengthened against the dollar, making U.S. exports more attractive. To be sure, economic growth in the 18-member euro zone remains lackluster at best. But, like the U.S. economy, the trend is positive, and the potential for faster growth is there. Taken at face value, the Institute for Supply Management’s Export Orders Index suggests the potential for a significant acceleration in export growth later in the year. This would provide a tailwind to U.S. economic activity that was largely absent in 2012 and 2013. Moreover, the ongoing recovery in Europe should also provide a boost to China, a significant exporter to Europe, resulting in a brighter outlook for the global economy overall.

Outlook for U.S. Equities

The U.S. equity market has reached record highs in recent months, as measured by the Standard & Poor’s 500 Composite Index, and the price-to-earnings (P/E) ratio has expanded. While the current P/E on the S&P 500 might seem high relative to past periods when bond yields have been between 2.5% and 3%, it is important to note that bond yields right now are artificially low, in part because of the Federal Reserve’s massive bond-buying program. In a more normal environment, bond yields might be between 3.7% and 4.7%. Historically, when bond yields have been in that range, the average valuation of the U.S. equity market has been very close to what it is today. In addition, if the U.S. economy accelerates by 1% in 2014, history suggests this could generate 10% to 12% earnings growth. So if valuations hold up, 2014 could still be a decent year for U.S. equity returns.

This Week’s Economic Data

-FOMC Minutes reveal that most FOMC participants saw a pickup in GDP growth after first quarter bad weather.
-Import and Export Prices are both trending slightly upward. Import prices rose 0.3% excluding fuels, while export prices rose 0.8% for the month.
-Jobless claims fell by 32,000 to 300,000 for the week of April 5, the largest drop in more than 10 years.
-Producer Price Index dipped 0.1% in February, after rising 0.2% in January.

Sources: Capital Group/ Ivy Funds

Week in Review (4/10/14)

Bruce Doole
April 10th, 2014

U.S. Economic Outlook Lifted by Favorable Tailwinds

Economist Darrell Spence discusses his expectations for accelerating growth in the U.S.

Despite recent signs of a slowdown in activity, the U.S. economy remains in expansion mode and growth is likely to accelerate in the months ahead, says Capital Group economist Darrell Spence. Severe weather has clearly had an impact in recent months. However, taking a step back and looking at the big picture, the U.S. economic recovery remains on track, thanks to pent-up housing demand, accommodative monetary policy, improving fiscal conditions at state and local governments, a significant federal budget compromise, and the end of a long-running recession in Europe that had dented U.S. exports.

Disappearing Drags on Economic Growth

Normally, when the U.S. economy is coming out of recession, gross domestic product growth tends to be in the area of 3% to 3.5%, and even as high as 4% at times. That has not been the case so far in the current expansion. Rather, the U.S. has experienced fairly lackluster GDP growth of 2% to 2.5%, largely because of various setbacks, including government fiscal restraint and a European recession that has weighed on global economic growth. As we look into 2014, these drags on the U.S. economy are disappearing and many earlier developments that have been positive for the U.S. remain in place. As a result, 2014 is increasingly looking like the year that U.S. economic growth will finally break into the range of 3% to 3.5%. Faster GDP growth has historically led to stronger earnings growth, which would be good news for the U.S. stock market.

Government Finances Looking Brighter

Fiscal restraint at all levels of government has undoubtedly had a negative impact on the U.S. economy, but it appears to be moderating. Employment growth at state and local governments has turned positive for the first time in five years. This should be followed by an increase in capital projects at the state and local level, which is where more than 90% of government construction activity occurs. The federal government’s drag on the economy is also declining. The federal deficit has improved markedly over the past few years, the result of a combination of budget cuts and tax increases that have bolstered government coffers, as well as overall improvements in economic activity. As a result of this improvement, the recently approved two-year federal budget agreement calls for less fiscal restraint than previously imposed. As long as the deficit continues to improve, particularly as a percentage of GDP, the incentive for policymakers to undertake further fiscal restraint in coming years should be greatly reduced.

This Week’s Economic Data:

-PMI Manufacturing Index final for March was 55.5 – lower than February’s 57.1, but still very solid led by new orders at 58.1.

-ISM Manufacturing Index rebounded from a soft February, but remained below expectations at 53.7. The Econoday consensus estimate was 54.0.

-International trade deficit increased to $42.3 billion in February from $39.3 billion in January. Expectations were for a $38.8 billion deficit. Exports declined 1.1% while imports rose 0.4%.

-Jobless claims moved up 16,000 in the March 29 week to 326,000 or 6,000 over consensus.

-Employment situation seems optimistic as nonfarm payroll jobs rose 192,000 in March. The unemployment rate held steady at 6.7%.

Sources: Capital Group/ Ivy Funds

Week in Review (4/7/14)

Bruce Doole
April 7th, 2014

Charitable Donations: The Basics of Giving

While it may be better to give than to receive, with proper planning it’s possible to do both at the same time. Consider the strategies below to help you make the greatest impact with your charitable donations while receiving some tax savings for yourself, too.

Ground rules for giving

The tax aspects of charitable giving can be complex, so it’s a good idea to consult a tax professional about your personal giving strategy. That said, here are a few ground rules:

Get an independent appraisal for gifts of property in excess of $5,000 ($10,000 for closely held stock). You won’t need an appraisal for exchange-traded stocks, bonds or mutual funds.

Subtract the value of any benefits you received for your charitable contribution (e.g., books, tapes, meals, entertainment and so on) before you deduct it.

Tax treatments by type of gift

Generally speaking, the tax advantages of a charitable contribution depend on three factors: the recipient (only donations to qualified charities are deductible), how you structure the gift and its form. Different types of charitable donations—cash, stock or personal property—offer different tax advantages and drawbacks.


Cash donations are simple and usually fully deductible. As previously mentioned, you will need a receipt from the charity or a bank record (such as a canceled check or statement) to substantiate your cash gift, no matter how small.

-Tangible personal property

You can donate almost any item, including old clothing, household goods, or vehicles. Keep in mind that gifts of used clothing and household items must be in “good used condition or better.”


You can deduct transportation costs and other expenses related to volunteering. However, keep in mind, the value of volunteer time isn’t deductible.

-Limitation on itemized deductions

Starting in the 2013 tax year, the so-called Pease limitation on itemized deductions (named for the Congressman who first introduced it) is back in effect. Most itemized deductions, including charitable deductions, are reduced by 3% of AGI over $250,000 for single filers and $300,000 for married couples filing jointly (up to a maximum total of 80% of itemized deductions).

It’s important to keep in mind that the Pease limitation is driven by your income, not the amount of your itemized deductions. Therefore, it should not be a disincentive for increased charitable giving.

-More sophisticated giving options

If you want to make a longer-term commitment to giving, charitable remainder trusts (CRTs), pooled income funds, private foundations, and donor-advised funds all offer different benefits in terms of flexibility, taxes, administrative costs, and account minimums.

This Week’s Economic Data

-PMI Manufacturing growth so far in March is solid, based on Markit’s PMI flash which is at 55.5, down from unusually high readings of 57.1 for February.
-New home sales in February couldn’t match the strong pace of January, coming in at an annual rate of 440,000 versus a revised 455,000 in January.
-Consumer confidence is higher than expected this month, at 82.3 versus a revised 78.3 in February.
-Real GDP growth for the fourth quarter was revised up slightly to an annualized 2.6% (compared to third quarter’s 4.1%). Expectations were for 2.7%.
-Initial jobless claims fell to 311,000 for the week of March 22. The 4-week average is down a very sharp 9,500 to 317,750, the lowest level in six months.

Source: Charles Schwab/ Ivy Funds