The Fed’s Shift in Policy, Plus RMDs
Thursday, December 19, 2013
Charles Rotblut, CFA
AAII Journal Editor

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Sentiment Survey

This week’s AAII Sentiment Survey results:
  Bullish: 47.5%, up 6.2 points
  Neutral: 27.5%, down 6.3 points
  Bearish: 25.1%, up 0.1 points

Long-term averages:
  Bullish: 39.0%
  Neutral: 30.5%
  Bearish: 30.5%

Take the AAII Sentiment Survey »

Special Note: The weekly Investor Update email will not be sent out next week. The AAII offices will close early on Tuesday and will be closed on Wednesday.

The Federal Open Market Committee (FOMC) voted to shift its monetary policy yesterday. Monthly purchases of agency mortgage-backed securities and longer-term Treasury securities will each be reduced by $5 billion, to $35 billion and $40 billion, respectively. This tapering is significant in that it represents the beginning of the end of quantitative easing, but it is subtle in terms of the likely short-term impact on the economy.

The shift comes as the committee members’ view of the economy has become more optimistic relative to earlier in the year. Though Boston president Eric Rosengren thought the shift was premature and dissented, the consensus among committee members was that now is the time to start weaning the economy off of cheap money. Whether the timing and the magnitude of the shift is correct is something to be debated in the years to come. Even our ability to look back at this decision years from now won’t give us the right answer, because all variables going forward would change if a different decision had been made yesterday.

Yesterday’s announcement ends the speculation about when tapering will begin. Though less uncertainty is generally a positive for the stock market, I don’t view the immediate reduction in purchases as being large enough to have any significant short-term impact on either the stock or the bond market. Even with likely further reductions at future meetings, the Fed’s cumulative bond purchases could still exceed $400 billion in 2014.

More importantly, the announcement is not a reason to alter your portfolio allocations. Economists and market strategists have been wrong about what the Federal Reserve will or won’t do for several years and there is little reason to expect their forecasts to be accurate going forward. This fact alone should be reason enough not to alter your portfolio right now.

The challenge always facing central bankers is that economic and monetary policy cannot be subjected to controlled studies the way pharmaceuticals are. When a change is made to monetary policy, we will never know what might have occurred if a different decision had been made. We can theorize about what might have happened, but that’s it. The best an investor can do is to accept the uncertainty and stay diversified. Over the long term, stocks are the best inflation hedge, while bonds can give you income and—when held to maturity—preservation of wealth.

A Few Important Notes about RMDs

If you are age 70-1/2 or older by December 31, 2013, you must take your required minimum distribution (RMD) from tax-deferred retirement accounts such as traditional IRAs, SEP IRAs and 401(k) plans no later than New Year’s Eve. If you turned age 70-1/2 this year, you have the option to delay your first RMD until April 1, 2014, but you must take your second RMD no later than December 31, 2014.

There is a tax issue you should be aware of. Though RMDs are taxable events, you can avoid paying taxes on up to $100,000 of withdrawals by making a qualified charitable distribution in 2013. (Withdrawals above this amount are taxable. See the IRS website for specific details.) The provision allowing the donations in lieu of taking the RMD is set to expire at this end of this year. Unless Congress acts, you won’t be able to make qualified charitable donations to charity from your IRA in 2014.

Regardless of whether or not you make a charitable contribution, follow this useful suggestion from Retirement Weekly: Keep a paper trail of all of your RMD distributions. Either make a copy of the check sent to you or, if you have the money electronically transferred, keep a copy of the statements showing the distribution. Also keep a copy of any notice your brokerage firm sends you about the RMD for this year. This paper trail will be extremely helpful if you are audited or if you determine in the future that you did not withdraw enough money this year to satisfy the RMD requirement.

More on

The Week Ahead

The U.S. equity markets will close at 1 p.m. ET on Tuesday. All U.S. financial markets will be closed on Wednesday, Christmas Day.

No S&P 500 member companies are scheduled to report earnings.

On the economic calendar, November personal income and spending and the University of Michigan’s final December consumer confidence survey will be released on Monday. Tuesday will feature November durable goods orders and November new home sales. Weekly initial jobless claims will be released on Thursday morning as usual.

AAII Sentiment Survey

Optimism rebounded to an eight-week high in the latest AAII Sentiment Survey, as pessimism remained below average for the 10th consecutive week.

Bullish sentiment, expectations that stock prices will rise over the next six months, jumped 6.2 percentage points to 47.5%. This is the ninth time in the past 11 weeks and the 11th in the last 15 weeks that optimism is above 40%. The historical average is 39.0%.

Neutral sentiment, expectations that stock prices will stay essentially unchanged, dropped 6.3 percentage points to 27.5%. The historical average is 30.5%.

Bearish sentiment, expectations that stock prices will fall over the next six months, increased 0.1 percentage points to 25.1%. This is the 10th consecutive week and the 12th out of the past 14 weeks with a bearish sentiment reading below the historical average of 30.5%.

The current streak of consecutive weeks with a below-average level of pessimism is the longest since the first quarter of 2012. Bearish sentiment was below 30.5% for 14 consecutive weeks from January 5, 2012 through April 5, 2012. Though pessimism is below average, concerns about the pace of economic growth, elevated stock valuations and the lack of a long-term fiscal solution have not gone away. Nonetheless, many individual investors continue to be encouraged by the new record highs established by the large-cap indexes along with earnings growth and economic growth. All three sentiment measures are within their typical historical ranges.

Yesterday’s Federal Open Market Committee statement was released at the end of the survey period and likely only had a minimal impact on the results. This week’s results do, however, include reaction to the announcement of the bipartisan budget agreement.

This week’s special question asked AAII members how the compromise on the federal budget impacted their first-quarter outlook for stocks. Responses were essentially evenly split between those who said the compromise hasn’t impacted their outlook and those who said it makes them more optimistic about how the market will perform. Several respondents said they were encouraged by the reduced level of political uncertainty. A smaller number of respondents said, before yesterday’s Federal Reserve announcement, that any change to monetary stimulus would have a bigger impact on their short-term outlook.

» Take the AAII Sentiment Survey