Memorial Day Holiday:

As a reminder, the stock and bond markets will be closed on next Monday, May 27th, in observance of Memorial Day.  Our offices will be closed as well.  Many will take the opportunity to enjoy extra time with family and friends. Please take a moment to remember those who serve and those who have paid the ultimate price defending the freedoms we cherish. Since WWI, nearly 625,000 Americans have given their lives in battle (Navy Dept Library, Wikipedia).

 The Markets:

Once again, stocks finished the week in positive territory, with the major market indices extending their winning streak to four. Like the prior week, the Dow Jones Industrials and the S&P 500 Index ended at record highs (St. Louis Fed data, MarketWatch).

We remain even more cautious at this time within our portfolio allocations for all risk levels, as stock prices, in our opinion, continue to overextend themselves.  We still expect a correction of some sort at any time, and feel we could easily see the major stock indices decline 5-10%.  Patience is often difficult but can prove rewarding in the long term.

The bi-partisan Congressional Budget Office announced last week that its forecast for the fiscal year (FY) 2013  federal deficit will drop from a projection made three months ago of $845 billion to $642 billion (FY 2013 ends on September 30). FY 2012’s federal deficit totaled $1.09 trillion.  If the current forecast holds, this will be the first year in five that the deficit won’t top $1 trillion, putting it at the lowest since FY 2008, when red ink amounted to $458 billion (Office of Management & Budget).

Why is the deficit falling much faster than nearly anyone had anticipated? It’s simple math.

First, spending restraint – federal spending is forecast to decline for the second year in a row. In fact, government spending of $3.46 trillion this year would be $63 billion less than FY 2009 – see chart above (OMB). And it’s not just discretionary spending. Entitlements – Medicare, Medicaid, and Social Security outlays – are coming in below earlier estimates (CBO).

Second, the economic recovery is slowly but consistently turning the unemployed into working taxpayers. That translates into a faster-than-forecast pace for tax receipts. Yes, there’s more to do on the employment front, but a net increase of 6.2 million working Americans since nonfarm payrolls bottomed in early 2010 (BLS) has been a plus.

Third, the end of the payroll tax holiday, i.e., the two-percentage point hike in the payroll tax, coupled with the deal on the fiscal cliff that raised taxes on the wealthiest Americans, is also playing a role.

Finally, an unexpected $95 billion this year in payments from Fannie Mae and Freddie Mac, which is not projected to repeat in FY 2014, is also sopping up some of the red ink (CBO).

This leads us to the next question, which gets a bit speculative. Will progress continue at the current pace?

Well, much depends on what happens to the economy as growth puts people back to work. The rate of interest the government pays on the debt outstanding will also play a role. And then there is the difficulty in forecasting future Medicare, Medicaid and Social Security costs.

Those who believe in a more activist approach to government would argue for more government spending as a way to get folks back to work. Those who want to see a more limited government would advocate tax cuts as the preferred method to funnel money back into the economy and jumpstart employment.

Looking ahead, Fed Chief Ben Bernanke’s testimony before a Congressional Committee this week will be among the top events. Any clarification on when the Fed might reduce its bond purchases or how it may unwind its fast-growing balance sheet would be welcome.

We wish you all a safe and happy Memorial Day weekend ahead, and truly appreciate the privilege to serve each and every one of you.  We look forward to working with you in the years to come!

God Bless,

Your TEAM at F.I.G. Financial Advisory Services, Inc.

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1 The Dow Jones Industrials Average is an unmanaged index of 30 major companies which cannot be invested into directly.  Past performance does not guarantee future results.

3 The S&P 500 Index is an unmanaged index of 500 larger companies which cannot be invested into directly.  Past performance does not guarantee future results.