Ignoring Washington’s Noise

Ignoring Washington’s Noise

If you look past the political noise in Washington and take a careful look at the dynamics of the economy, you’ll find some good news: It’s faring better than most had anticipated. A rapidly improving housing industry, pent-up capital spending needs, resurgent growth from Asia, and calm across European economies have produced a powerful fuel for financial markets to carry on through 2013.

Business investment is also expected to snap back after a sluggish performance in 2012. Several factors contributed to this downturn, such as the European crisis and uncertainty around the fiscal cliff, causing corporations to cut back spending even more than what was actually needed. As the smoke around these issues begins to clear, companies may once again look to capital investments.

Although economic growth remains subpar, the NASDAQ is hitting highs not seen in more than a decade and low interest rates are providing ample financial liquidity. But a healthier financial environment could also accelerate a rotation out of bonds and into riskier assets such as equities and real estate. Investors need to be mindful of the growing risk in the U.S. Treasury bond.

Additionally, the fiscal cliff deal set in place new tax provisions that require a thorough reassessment of investors’ financial strategy. More than just the commonly-talked about higher income tax rate for wealthier individuals, the new tax law also extends more than 50 provisions retroactively for 2012 and ahead through the end of 2013. These include a host of personal credits, such as the child tax credit, the earned income credit, and qualified tuition deductions. Business extenders include bonus depreciation, work opportunity tax credits, research credits, and others.

So while the year ahead holds a lot of promise, it also holds a lot of change. Investors should consult with a financial advisor to determine a long-term financial strategy that helps enable the pursuit of their unique goals.

David Menashe is a senior vice president  and wealth management advisor, and Bruce Morley is a vice president and wealth management advisor, for Merrill Lynch, Pierce, Fenner & Smith Incorporated, a registered broker-dealer, member SIPC, and a wholly owned subsidiary of Bank of America Corporation. (858.381.8113)

Photo by Andy Templeton