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Some Year-End Thoughts

As the year comes to an end, we wanted to thank you for your trust in our services. We’ve worked with some of you and your families for more than 20 years now, and it is much appreciated.

Last Wednesday, seven years almost to the day since its last move, the Federal Reserve finally raised the federal fund rate target by ¼ of one percent. This was a move that had been anticipated for quite a while as our commentaries for the past year will attest.

So what now? Current expectations are that the Federal Reserve will keep raising short term rates by a quarter every 3 months or so for the next year. Don’t expect your savings or money market account to earn more interest just yet. Although banks were prompt to raise the prime rate to 3.5% from 3.25% last week, it will mostly mean higher rates on credit card, consumer loans and home equity lines of credit. In other words, you’ll pay more if you owe such debts, but will not earn more on your savings just yet. This increased interest rate spread will benefit banks, especially the big deposit institutions such as Bank of America, Wells Fargo, or JP Morgan Chase.

Besides banks, there is a theory that, with higher interest rates, value stocks might start outperforming growth stocks after lagging for the better part of the past 8 years. The idea is that growth stock valuations tend to incorporate much higher future earnings. With higher rates, the present value of these future earnings will decline faster than for those of value stocks. History seems to support this idea, and there is no question that the recent performance of the S&P 500 index was concentrated in a handful of big growth stocks such as Facebook, Amazon, Netflix, or Google (now Alphabet).

Last March, the New York Times ran an article showing how the leading technology companies by market value have changed in the past 15 years. Only 3 of the top ten remain today: Microsoft, Intel, and Cisco. Two of those are held in our Large Cap Value portfolio.

As far as bonds were concerned, and leaving aside what happened with so-called junk or high-yield bonds, the reaction was fairly muted since it had been anticipated for so long: 10-year bond yields are pretty much where they started the year so investors collected about 2% in 2015.

Our expectations continue to be for much lower than average returns from bonds and stocks in the next 3 to 5 years. Nonetheless, we encourage our clients to stay the course and not try to chase any asset that generates higher short-term returns. Historically, doing so leads to poor long-term results, as historical evidence points to a pattern of cyclicality and reversion to the mean in asset class returns.

Tax Related Activity
As the end of the year nears, we tend to be more proactive in managing our clients’ capital gains tax liability. This can trigger more frequent trading activity. December is typically the time when stock mutual funds distribute to their shareholders the gains that they realized throughout the year. These can be substantial, particularly since they may have accumulated over several years. Frustratingly, the gains distributed are independent of your own cost basis in the fund. They are based on the cost for the securities that the fund sold. So potentially, you could have an unrealized loss in the fund, yet receive a capital gain distribution, adding insult to injury. When it makes sense, we will trade around these scheduled distributions, in order to minimize your tax burden.

Another important clarification: on the “ex-date” of a fund’s distribution, the net asset value per share drops by the approximate amount of the distribution.  In some cases, the distribution may not post to your account until a few days thereafter, creating the impression that there has been an overall drop in investment value.  In reality, this is more a matter of timing, as the decline in the fund’s value is basically offset by the cash value of the capital gain and/or dividend distribution.

Frequently, we intentionally realize losses in certain securities or funds to offset the gains in others. Then, we buy back the same securities after 30 days to avoid the wash-sale rule. If you have any questions about specific trades, don’t hesitate to call us.

IRA Charitable Rollover: Act fast to meet the Year-End Deadline!
As this Forbes article points out, on December 18th, Congress passed and the president signed legislation that makes permanent the ability of an individual retirement account (IRA) owner, aged 70½ and older, to transfer up to $100,000 annually to one or more charities without having to recognize the distribution as income.

Due to the short window in which you can complete an IRA Charitable Rollover for 2015, we thought it important to share this information with you immediately.

Donations now count as part of the IRA owner’s required annual withdrawal. This can help donors avoid taxes on Social Security benefits, higher Medicare premiums, higher tax brackets, and surtaxes such as the 3.8% net investment income tax.

To take advantage of an IRA Charitable Rollover for 2015, you must act by Dec. 31. Distributions should be made directly by your IRA trustee (Charles Schwab, Fidelity, etc.) payable to the charity of your choice. Such transactions usually take a few days, so don’t delay if you want to take advantage of it this year. Please double check with your CPA or tax adviser first.

“It’s time to change our I.R.A.s — individual retirement attitudes”
Although helping our clients plan for charitable donations or a financially secure retirement is at the core of what we do, we acknowledge that there is more to life than money. This article from the New York Times portrays some people who found meaning serving their community once retired. We found it to be an uplifting reading during the holidays.

Whatever 2016 brings, retirement, volatile markets, Bristlecone will continue to work hard in helping you reach your financial goals. We wish you a peaceful and prosperous holiday season.