Happy Fourth of July!

Summer is finally here and the markets have been sizzling since March. The great rebound of the market is exactly why the thought process to �stay invested� actually works. The rebound can come so quickly, the market can rise 10% in one week. It is nice to see some recovery in the portfolios that held growth funds during the downturn. This was the best quarter of performance in four and � years! S&P 500 is up 11% and NASDAQ has gained 22%, year to date.

�Patience is a necessary ingredient of genius." �Benjamin Disraeli

Will this turn out to be the next bull market? Will this be a false bull run and only another brief rally? I do not know. We have crossed over several technical indicators that are triggering many investors to re-enter the market. Worth noting is many portfolio managers are beginning to invest the cash hoards they have accumulated. They cannot afford to be left behind their peers in performance. This is all based upon a (hopeful) positive earnings season to be released over the next few weeks. The economy still has worries, no doubt, but some indicators are starting to look positive.

I personally believe that mild inflation is more likely than deflation. Most of the economists and fixed-income managers I listen to are sharing this view. People are seeing low and declining interest rates and are interpreting slowing of inflation as deflation. No one expects inflation to become rampant, and most see a period of low inflation and low economic growth ahead. Of course, I hear and read opinions that range from depression to deflation to inflation to robust growth.

The Federal Reserve recently lowered interest rates � percent on June 25th. Yields on money market funds will be extremely low and some of the funds may have expenses greater than the rate of return being generated. If you are considering a new mortgage or a refinance, please do it now. Rates at some banks and credit unions can be lowered with a phone call and a flat fee of $250. Some banks want to rewrite the loan as a new loan and charge fees. Rates and fees are very competitive at this time. Car loans are being written for zero percent financing for five years.

"Sharing makes you bigger than you are. The more you pour out, the more life will be able to pour in." Jim Rohn



Here is a brief summary of some of the new tax law changes:

Lower Capital Gains: Capital gains taxes have come down from the 20% maximum to 15%. This will apply to capital gains paid out by mutual funds. However, because it applies to capital gains received on or after May 6, it will not include gains that were paid out in March. Now, more than ever, capital gains are more valuable than the income you receive from short-term gains. Why? Under the old tax laws, the gap between the highest income tax bracket of 38.6% and the capital gains rate of 20% was 18.6%. Now the gap has grown to 20%, the difference between the 15% capital gains rate and the 35% highest income tax rate.

Lower Dividend Taxes: Dividends paid from stocks, and by mutual funds, will now be taxed at the 15% rate rather than one�s individual tax rate. This includes virtually all dividends paid out by equity funds. It does not include dividends paid by REITs. The reason is REITs are not taxed on their income if they distribute substantially all of it to shareholders. The lower dividend tax was aimed at reducing, or eliminating the �double taxation� on dividends, first at the corporate level and then at the shareholder level. Dividends are now on a par with capital gains as a store of after-tax value, making stocks a bit more competitive with bonds than they�ve been in the past.

Lower Income Taxes: While the �income� distributions from bond funds won�t be taxed at the 15% dividend rate, our tax hit will come down because of the lower income tax rates that will be applied across the board. That said, high-yield stocks have become more competitive with bonds because their dividends will be taxed at 15% while bond interest will be taxed at rates as high as 35%. I am assuming that the mutual fund companies now have to report, and break out both the dividend income and the interest income that funds distribute each quarter, and year, given that interest income will be taxed at individuals� income-tax rates while dividend income will be taxed at the new 15% rate. This dissection of �income� will also be necessary for accurate reporting on the tax efficiency of funds, which fund companies are now required to make in their reports to shareholders. Look for more lines of information in your upcoming tax forms and more work for your CPA.

Please call or make an appointment if you wish a personal assessment of the tax law changes and how they relate to your portfolio. Each taxable portfolio is undergoing analysis and possible changes for dividend yield and lower taxable income.


Sandra C. Field, CSA, MBA, CFP