Will The Santa Claus Rally Deliver in 2015?

HartChris Hart, Core Investment Manager

It is that time of year again. The time when Wall Street pundits begin to talk about the potential for the stock market to deliver its year-end present to investors, neatly wrapped in the form of positive gains to finish out the year, and even carry over into January. While seasonality is typically associated with the entire fourth quarter of a given year—as November and December tend to be stronger months for the S&P 500 Index—the “Santa Claus rally” is a more defined subset.

The Santa Claus rally concept was first popularized in 1972 by Yale Hirsch, the publisher of the Stock Trader’s Almanac, when he identified the positive trend between the last five trading days of the year and the first two trading days of the New Year. Over those seven trading days since 1969, the S&P 500 Index posted an average gain of 1.4%. However, investors have had to wait until the last week of the month to see if the actual Santa Claus rally occurs.

Over the years, analysts have speculated many possible explanations for the notion of a Santa Claus rally. One is that investors are simply more optimistic in the holiday season and market bears are on vacation. Others contend that consumers may be investing their holiday bonuses. A more technical explanations could be that year-end, tax-loss selling creates oversold conditions (i.e. buying opportunities) for value investors to buy stocks. Some propose the theory that portfolio managers may try to “window dress” their portfolios in an effort to squeeze out additional performance before year end. Regardless of the various possible explanations, market data supports the idea that since 1950, December has been the best month of the year for the S&P 500 Index.

Strategas: Historically the Best Month of the Year

Source: Strategas

That said, there are no guarantees on Wall Street and the delivery of a Santa Claus rally is no exception. In fact, the lack of a rally could be an important market signal. The Stock Trader’s Almanac warns, “If Santa Claus should fail to call; bears may come to Broad & Wall.” Interestingly, Jeffery Hirsch, son of Yale Hirsch and current editor of the Stock Trader’s Almanac, notes that over the past 21 years, the Santa Claus rally has failed to materialize only four times, and that preceded flat market performance in 1994 & 2005, and down markets in 2000 and 2008.

With so many macro forces at work here in the U.S. and globally, the presence of both headwinds and tailwinds in the current market allows room for debate as to whether or not the Santa Claus rally will occur 2015. The dollar remains strong, manufacturing is slowing, and energy remains under pressure due to low oil prices. However, valuations are not unreasonable, economic growth continues, albeit modestly, and we are seven years into a domestic bull market that continues to move higher amid shorter-term bouts of resistance and volatility. While some naysayers contend that the abnormally strong gains in October may have cannibalized some of December’s potential rally, I believe the Federal Reserve is one of the real wild cards here. If the Fed decides to raise interest rates in mid-December for the first time since 2008, higher levels of uncertainty could temper investor enthusiasm, depending on the Fed’s language regarding the duration and magnitude of any such action.

While I remain a believer in the magic of the holidays and am optimistic that the market can justify a Santa Claus rally in 2015, there are too many mixed signals across the markets to be certain. In the end, I just hope the Santa Rally of 2015 does not prove to be as elusive as that clever little Elf on the Shelf.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a Registered Investment Advisor.

Reaching Beyond Bonds for Income

John CoyneJohn Coyne, Vice Chairman

There are many places besides bonds to generate income. Through broad diversification across and within six major asset classes, we at Brinker Capital seek solutions that will generate good yield, not necessarily high yield, for clients. We believe that you can derive income from a variety of sources so that you are better positioned to meet your investment goals and objectives.

In this audio podcast, John Coyne explains three instances where generating income may be possible:

  • Generating Income in an Absolute Return Environment
  • Generating Income in a Rising Rate Environment
  • Generating After-Tax Income

Click here to launch the audio recording.

Investment Insights Podcast – May 28, 2014

Bill MillerBill Miller, Chief Investment Officer

On this week’s podcast (recorded May 22, 2014), Bill gives a review on the controversial book, Capital in the Twenty-First Century by Thomas Piketty:

What we like: Emphasis on returns to capital (savings); savers will continue to be rewarded.

What we don’t like: Modern-socialistic state belief using high tax rates in order to deal with societal inequalities.

What we are doing about it: We encourage opening savings accounts for children and grandchildren; fund 401(k)s to the max; watching if some of the societal inequalities as outlined by Piketty are dealt with sooner than later.

Click the play icon below to launch the audio recording or click here.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change.

Ten Reasons Why You Should Not Rely on Year-End Statements for Tax Reporting Purposes

Sue BerginSue Bergin

Many investors are confused by discrepancies between year-end figures and those that appear on 1099 tax reporting documents from fund companies. Typically, these discoveries come to light around midnight when it is most difficult to get someone on the phone that can explain the discrepancies.

If you come upon a discrepancy, resist the temptation to jump to the conclusion that there is a problem. Instead, know that discrepancies sometimes happen, which is why experts advise against using year-end reports for tax reporting purposes.

10 Reasons Year-End Statements Should Not Be Used for Tax Reporting

  1. Fund companies explicitly caution against using the figures provided in year-end reports for tax reporting purposes. There is a reason that it has become industry standard to include such disclaimers. The industry is trying to prevent tax preparers from a commonly made mistake.
  2. The gross proceeds amount on the 1099 will rarely match the proceeds amounts show on a year-end statement’s realized gain/loss statement.
  3. Reclassifications often occur after year-end.
  4. RICs or spillover payments aren’t made until January of the next year, but have to be reported for the prior year. These occur with mutual funds, Real Estate Investment Trusts and Unit Investment Trusts that post distributions with record dates in October, November and/or December of the prior year, but make payment in January of the next year.
  5. Payments described as dividends on monthly statements, but paid on shares selected in the substitute payment lottery process are reported as miscellaneous income on Form 1099-MISC.
  6. Income payments on certain preferred securities must be reported as interest, even though they are often shown as payments and dividends on the monthly statement.
  7. Original issue discount (OID) accruals may be identified and processed after year-end.
  8. Reporting on short-term discount securities (like Treasury Bills).
  9. Shares received as part of an optional stock dividend offering are valued and reported as income on the 1099-DIV.
  10. Corporate reorganizations, recapitalization, mergers and spin-offs creating stock or cash distributions are considered taxable events reportable on Form 1099-B.

Your year-end statements provide valuable information, however for tax reporting purposes, your best bet is to use the information contained on your 1099s.

This information represents our understanding of federal income tax laws and regulations, but does not constitute legal or tax advice. Please consult your tax advisor, attorney or financial professional for personalized assistance.

What to Do With All Those Receipts?

Sue BerginSue Bergin

There are many little annoyances that an advisor must deal with as a cost of doing business. Tracking expenses is a prime example. Out of necessity, advisors have developed systems for tracking expenses that vary in sophistication. Ranking high on the list is the empty-the-pockets-on-the-assistant’s-desk-and-let-her-deal-with-it system and the stack-the-receipts-in-a-pile-for-a-slow-day-project approach.

While these systems are second nature, the beauty of living in the digital era is that annoying tasks have spawned clever digital solutions.

Such is the case with tracking business expenses. For those who have embraced mobile devices, the days of the crinkled and barely legible receipts can be gone forever. Shoeboxed, Lemon Wallet and ABUKAI Expenses are some of the apps available that make managing receipts painless and efficient. You can download these apps on your Apple, Blackberry or Android device(s), and then simply take photos of your receipts. The expenses are digitally categorized and stored, and in many cases, the data can be imported into a spreadsheet or an accounting program like Quickbooks. With Shoeboxed, you can mail in old receipts and they will make digital copies for you. You can even get multiple “seats” on an ABUKAI account, allowing staff members in your office to contribute to the expense report. Other expenses management software programs, like Expensify and Xpenser, also have mobile applications that result in efficiency gains.

shutterstock_111610157Neat Receipts takes a slightly different approach. They offer a mobile scanner and digital filing system that allows you to scan receipts, business cares and documents. The Neat Receipts software system then identifies, extracts and organizes key information. While these applications might help you to make your practice more efficient, they could also help clients who own businesses. Clients often look to their advisor for tips on how to gain more control over their financial world.

With tax deadlines rapidly approaching, the inefficiencies of traditional approaches are top of mind. Take this opportunity to suggest this small way to remove one of the little annoyances in their lives. You may find that they are quite receptive and appreciative of your efforts.

Finally…A Fiscal Cliff Deal

Magnotta@AmyLMagnotta, CFA, Brinker Capital

It went down to the wire, but the House passed the Biden-McConnell compromise late last night. Investors are cheering today, happy to have avoided the worst case scenario. While this deal reduces the scheduled fiscal drag for 2013 and eliminates a tax-rate cliff in the future, it contains no structural reforms needed to address the country’s longer-term fiscal health. In addition, it sets us up for more fiscal policy uncertainty in the first quarter.

The previously scheduled fiscal drag, estimated at 3.5% of GDP, has now been reduced to around 1.5% of GDP. A majority of the fiscal drag ($120 billion) comes from the expiration of the 2% payroll tax cut that impacts all workers, with the remainder from the tax increases on the wealthy. However, in an economy growing at a 2.6% rate, this impact of this smaller fiscal drag is not negligible.

The tax side seems to be settled for now, reducing a sharp fiscal cliff in future years. Income tax rates have been permanently extended, with tax rates increasing only on those with incomes above $400,000 ($450,000 for families). Taxes on dividends and capital gains have been increased only for taxpayers in the highest bracket, and even still rates were increased from 15% to 20% (23.8% including the tax on investment income included in the Affordable Care Act). The AMT was also patched permanently.

However, they continue to kick the can down the road on the spending side. The sequester, or the mandatory spending cuts put in place after a deal on the debt ceiling failed to materialize in 2011, has been delayed for two months. No other meaningful spending cuts were put into place. As a result, the deal adds to the deficit.

1.2.13_Magnotta_FiscalCliff_Resolution_Chart1

Source: FactSet, BEA

This deal sets up more fiscal policy uncertainty and likely more drama in the first quarter as the sequester needs to be addressed and the debt ceiling increased. The President has vowed not to negotiate over the debt ceiling. The Treasury reported that we reached the statutory debt limit on Monday, but they can continue with extraordinary measures to keep under the limit until the end of February.

With the way the fiscal cliff deal played out over the last few weeks, Washington has done little to inspire confidence that a grand bargain to address our unsustainable fiscal path can be implemented. It is clear that we need to address both the spending and revenue sides of the equation. There has been bipartisan support in the past for a tax and entitlement reform package, like the Bowles-Simpson proposal offered by the President’s own debt commission. This type of plan would increase revenues by lowering tax rates and broadening the base, and reform entitlements, setting us on a path to getting our deficits under control and bring down our debt to GDP ratio.

Without improvement in our deficit and a plan to stabilize our debt to GDP ratio, we risk another downgrade of our sovereign debt. So far, Washington has alleviated some of the near-term headwinds to economic growth, but has done very little to address our longer term problems. We can continue to hope for a less toxic political environment, but in reality, fiscal policy uncertainty will continue in 2013 and will lead to periods of increased market volatility.

1.2.13_Magnotta_FiscalCliff_Resolution_Chart2

Source: FactSet, CBO

Ten Reasons Why You Should Not Rely on Year-End Statements for Tax Reporting Purposes

Sue BerginSue Bergin

Many investors are confused by discrepancies between year-end figures and those that appear on 1099 tax reporting documents from fund companies. Typically, these discoveries come to light around midnight when it is most difficult to get someone on the phone that can explain the discrepancies.

If you come upon a discrepancy, resist the temptation to jump to the conclusion that there is a problem. Instead, know that discrepancies sometimes happen, which is why experts advise against using year-end reports for tax reporting purposes.

10 Reasons Year-End Statements Should Not Be Used for Tax Reporting

  1. Fund companies explicitly caution against using the figures provided in year-end reports for tax reporting purposes. There is a reason that it has become industry standard to include such disclaimers. The industry is trying to prevent tax preparers from a commonly made mistake.
  2. The gross proceeds amount on the 1099 will rarely match the proceeds amounts show on a year-end statement’s realized gain/loss statement.
  3. Reclassifications often occur after year-end.
  4. RICs or spillover payments aren’t made until January of the next year, but have to be reported for the prior year. These occur with mutual funds, Real Estate Investment Trusts and Unit Investment Trusts that post distributions with record dates in October, November and/or December of the prior year, but make payment in January of the next year.
  5. Payments described as dividends on monthly statements, but paid on shares selected in the substitute payment lottery process are reported as miscellaneous income on Form 1099-MISC.
  6. Income payments on certain preferred securities must be reported as interest, even though they are often shown as payments and dividends on the monthly statement.
  7. Original issue discount (OID) accruals may be identified and processed after year-end.
  8. Reporting on short-term discount securities (like Treasury Bills).
  9. Shares received as part of an optional stock dividend offering are valued and reported as income on the 1099-DIV.
  10. Corporate reorganizations, recapitalization, mergers and spin-offs creating stock or cash distributions are considered taxable events reportable on Form 1099-B.

Your year-end statements provide valuable information, however for tax reporting purposes, your best bet is to use the information contained on your 1099s.

This information represents our understanding of federal income tax laws and regulations, but does not constitute legal or tax advice. Please consult your tax advisor, attorney or financial professional for personalized assistance.

A Conscious Delay: The Argument for Filing Tax Returns After March 15

Sue BerginSue Bergin

While few people would admit to being eager to file their tax returns, it is one of those chores that can weigh heavily on a person’s mind. Many Americans like to get their returns filed as quickly as possible so that they can check it off their list of things to do, and go on with their lives.

As recently reported on MainStreet.com, the two-week period leading up to the April 15th deadline is when the majority of Americans file their tax returns. The second most active two-week filing frenzy occurs between February 1 and February 14, with 20% of Americans choosing to file shortly after they receive all of their 1099’s.

Filing early may increase your chances of receiving a quick refund if you are so entitled. It may also lead to more work for you in the long run.

The IRS mandates that federal tax forms such as the Form 1099 series be postmarked by February 15, unless an extension is granted. While the likelihood of receiving amended forms is described on the front page of the Form 1099, many filers overlook it and are surprised and/or annoyed when their mailbox is stuffed with amendments.

The key to remember is that the fact that there is an amendment to the form 1099 does not mean that there was necessarily an error in calculation or reporting.

While every effort is made to provide clients with accurate 1099 forms, timing is sometimes an issue.

The brokerage and clearing firms that issue 1099’s are dependent upon mutual fund, Regulated Investment Companies (RIC), Real Estate Investment Trusts (REITs), and Unit Investment Trusts (UIT’s) issuers to provide accurate and final information early in January. These fund companies tend to analyze their portfolios throughout January into February and beyond, and may discover data that requires the 1099’s to be amended. Although rare, issuers have been known to revise dividend information one or two years after the payment date.

In addition, many companies take financial actions that the IRS may ask them to reclassify. This is common for REITs, UITs, mutual funds, RICs, and foreign-based securities. A reclassification does not indicate whether a security has merit; it means the IRS may classify something differently than the filing company.

The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JTRRA) has caused a delay in income reallocation information from many, resulting in a spike in amended tax forms. Since there is currently no centralized source for this information, the brokerage industry continues to struggle with determining whether foreign securities meet the complex JGTRRA rules in order to pay qualified dividends. Therefore, receipt of late and revised information will again this year result in multiple changes to tax forms.

The bottom line is this: Wait until mid to late March to file your tax returns. This helps ensure that you have received all the amended 1099 forms that will be issued on your accounts.

This information represents our understanding of federal income tax laws and regulations, but does not constitute legal or tax advice. Please consult your tax advisor, attorney or financial professional for personalized assistance.

Insights: Fixed Income Scenario Analysis with Tom Wilson and Andy Rosenberger of Brinker Capital

Tom Wilson, Senior Investment Manager and Andy Rosenberger, Senior Investment Manager, discuss fixed income investments and the potential impact that interest rates would have on these investments.