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We came into December with ‘decent’ expectations of a ‘year-end rally’. History was on investor’s side as well. Since 1950, December has been the best performing month, averaging 1.7%.
It seems as if ‘Santa’ did not get the memo. This month has seen oil drop to its lowest level in more than 7 years. Oil has been linked as a ‘proxy’ for global demand. In addition, oil can continue to slide as supply continues to come to the market.
It is our opinion that the Fed may raise rates 4 more times next year (every other meeting) resulting in a Fed Fund rate of approximately 1.25 this time, next year.
After a brief rally after the Federal Reserve announced its historic decision, markets ended another choppy week in the red, battered by plummeting oil prices and rocky investor sentiment. For the week, the S&P 500 lost 0.34%, the Dow dropped 0.79%, and the NASDAQ fell 0.21%.1
If you’re one of the millions of Americans who have better ways of spending time than watching the Federal Reserve, you may be wondering what will happen now that the Fed has voted to raise interest rates last week for the first time since 2006.2
In her remarks, Fed Chair Janet Yellen said that the Fed believes that the recovery has come a long way and that the economy is ready for a “modest increase” in interest rates.3 The chart below will help put the rate increase in perspective:
Source: Federal Reserve Economic Data. Daily Effective Federal Funds Rate
After years of historically low rates, the Fed voted to raise rate targets by just a fraction of a percent. Though we don’t have definitive information about the pace of future rate increases, experts believe that the Fed is likely to raise rates several more times in 2016 and 2017, always assuming the economy remains on track for growth.4 Even if the Fed continues to raise rates regularly, it will take years to get back to historically average rates.
We can expect the coming weeks to be volatile for both stocks and bonds as investors adjust to the new rate environment. Historically, markets have experienced volatility after rate increases and occasionally moved into correction territory (defined as pullbacks of 10% or more). However, stocks and bonds usually experience positive returns in the initial years after the Fed begins tightening policy.5 That being said, the past doesn’t predict the future, and we’ll be closely monitoring markets in the weeks and months to come.
The Fed rate raise is not necessarily a bad thing. The hike underscores the fact that the U.S. economy has made tremendous progress in the last 7 years. However, the raise also comes at a time when millions of Americans are underemployed, inflation is still below targets, and global headwinds are blowing in the face of U.S. firms. Realistically, there was never going to be a perfect time to raise rates, and it’s clear that the Fed is planning to take a gradual approach to future hikes.
Can the economy maintain its pace of growth without the Fed’s foot on the accelerator? We’ll see.
IRS Updates Mileage Rate
The IRS updated the standard mileage rates used to calculate the deductible costs of driving for business, charitable, medical or moving purposes for 2016.
Beginning on January 1, 2016, the standard mileage rates for the use of a vehicle (including cars, vans, pickups or panel trucks) will be:
- $.54/mile for business miles driven.
- $.19/mile for medical or moving purposes.
- $.14/mile driven in service of charitable organizations.
Taxpayers always have the option of calculating the actual cost of using their vehicle instead of using the standard mileage rates. The move comes because of lower gas prices.
For more information about deductions and calculating mileage rates, contact a qualified tax specialist or read IRS Revenue Procedure 2010-51 or Notice 2016-01.
Tip courtesy of IRS.gov