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4th Quarter December 2013

Happy New Year!

Celebrate but be cautious. 2013 was a banner year and what an interesting year it was! Despite all the normal reasons for caution, the markets soared to new highs by the end of the year. The Dow Jones Industrial Average closed at 16,576.66.

While it was a significant year, it is not a first. The S & P 500 has increased between 25% and 30% five of the years since 1927, and there have been eleven years in which it grew between 15% and 20%, which is the most common frequency. Also, according to Jeff Kleintop of LPL Financial, the five years following the 25% to 30% gain years, the average return was 12%. Interesting statistic.

I would describe our current outlook for the U.S. markets as cautious. Historically, markets can run one direction or the other longer than anyone can accurately predict. Long term we believe you should own risk assets, but offset the volatility with proper diversification to help minimize the impact of market pullbacks when they occur.

Historically, 10% pullbacks happen about once a year. We have not had one since October 2011. More severe pullbacks of 15% happen every two years, but have not happened since October 2011. A bear market, which is a 20% or more decline, happens about every three and a half years, historically. This has not happened since March of 2009.

Predicting the markets is impossible and last year was no exception. The fiscal cliff, sequester, government shutdown, and "taper talk" should have tempered market returns, but it did not. Actually, economies do not necessarily predict markets. One of the poorest performing stock markets last year was China, down 3.88% (Shanghai index) for 2013, but the economy had a much stronger growth rate than the U.S. and is predicted to grow next year at approximately 7.6%.

International stocks did not do as well as U.S. stocks last year (see table below), but foreign stocks have more frequently outperformed U.S. stocks in the last 50 years (MSCI World). We do believe strongly that diversification is prudent, including international companies, since we never know when those shifts will happen, especially now since our markets generally appear more expensive as measured by price earnings multiples.

The Fed has indicated that they will now begin a slow tapering process by reducing their balance sheet. The new Fed chair, Ms. Yellen, will lead the process starting in January. The ten-year treasury is currently at 3%; a year ago it was at 1.79%. We have opined all year that we believe interest rates will continue to rise over time as the economy continues its slow recovery. One strategy to help reduce volatility in your bond portfolios is to have shorter maturities. Another is to shift from interest rate sensitive holdings to credit rate sensitive holdings.

Financial Market Update* Year-to-date change as of December 31, 2013
S&P 500 Index 32.39%
Dow Jones Industrial Average 29.65%
NASDAQ Composite 40.12%
Russell 2000 38.82%
MSCI EAFE US$ (International) 23.29%
Barclay US Aggregate Bond -2.02%
*Indexes are for illustrative purposes only. One cannot invest directly in any index. Assumes dividends are reinvested.
Source: Morningstar

A New Tax Year

Taxpayers in the higher brackets will be faced with additional tax bills for 2013 as they prepare their 1040s this April. For taxpayers earning more than $200,000 for single and $250,000 for joint, exemptions are lost and you may be subject to an additional 3.8% tax called the "Medicare Surtax". That is just one of the increases that will happen going forward. There is also an additional payroll Medicare tax of an additional 0.9% for higher income earners.

Strategies for minimizing and reducing the additional taxes would include tax loss selling where the opportunity exists, using tax deferrals in 401(k)s and other retirement accounts, and possibly insurance contracts. We will review strategies with you as we review your overall tax situation. You should also review strategies with your CPA.

The IRS will not even begin processing returns until January 31st because of the government shutdown. Some of those deadlines could be extended. Raymond James will also keep you posted on extended 1099 information and corrections as they occur.

January is a good time to review documents, update plans, and review goals, We look forward to working together in 2014 and are very grateful for your friendship and association.

Best wishes for a happy and healthy 2014,


Dow Jones Industrial Avg.: An unmanaged index of 30 widely held U.S. Stocks. NASDAQ Composite: An unmanaged index of securities traded on the NASDAQ system. Russell 2000: An unmanaged index of small cap securities which generally involve greater risks. MSCI EAFE: An unmanaged index that is generally considered representative of the international stock market. Please note that international investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Past performance may not be indicative of future results. Expressions of opinions are as of this date and are subject to change without notice. Any opinions are those of Sherri Stephens and not necessarily those of RJFS or Raymond James. Stephens Wealth Management Group is independent of RJFS. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Be sure to contact a qualified professional regarding your particular situation before making any investment or withdrawal decision. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise.

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