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December Commentary: A Happy or Not So Happy New Year?

Well, we are here. The last three days of 2014. I am sure you, like me, have some wonderful memories of the past year, and some that you will be glad to bid farewell to as the calendar turns. From an economic perspective, 2014 has been as up and down as everything else this year. So as we seal the book on the current year and look forward to 2015, here are some of the measurables that will help determine how much we all enjoy the next 12 months.

To 18,000 and Beyond! In a month that saw the biggest single day drop in the New York Stock Exchange since 2011, the Dow Jones rebounded for a Merry Christmas, hitting an all-time high of 18,024.17 on December 23rd, and creeping up a few more points in the days that followed. What does this mean? It means that after fears of the markets having a flat year, that barring a major sell-off over the last three days of the year, the market will finish in positive territory for the sixth straight year. While this result is certainly welcome news for investors, experts have increased concern about what it will mean for 2015. Interest rates ticking up, a still-depressed housing market and slowed global growth all have the potential to keep the markets at more of a trot than full sprint in the coming year. This does not mean it is time to exit the market, as job growth and other domestic factors point continued growth in the US economy, which could point to another positive year in 2015. It simply means that we use caution and understand that globally there are factors that may impact results.

Gas Prices...How Low Can They Go? This morning I filled up my car for $2.15 per gallon, and almost shed a tear that I could fill up for around $35. We haven't seen those prices in what feels like a generation (really since 2009). With a national average of approximately $2.60/gallon, US consumers will save an estimated $70 billion over the next 12 months. At previous prices, the average American was spending about $2,600 a year on gasoline, so the 20% price decline would result in $520 more to save or spend. And it gets better. Even though gas prices (and, therefore, the cost of driving) have plummeted, the Internal Revenue Service is raising the standard mileage rates that people can deduct on their tax return for business travel, from 56 cents in 2014 to 57.5 cents per business mile driven next year. Hallelujah!

Only the investment markets seem to think that cycling an extra $70 billion into the U.S. economy is a bad thing. Large cap stocks, represented by the S&P 500 index, saw their prices fall by 3.5%—their biggest drop since May 2012 as a result. Why? The only possible explanation is that rapid Wall Street traders believe that lower oil prices will harm the economies of America's trading partners, and therefore impact the U.S. economy indirectly. However, it appears that the biggest losers are countries like Venezuela, Iran and Russia, who are not only minor trading partners but major political enemies of U.S. interests. With the recent rise in the markets, it does appear that the markets have finally come to their senses and realized that cheaper oil should be regarded as a plus for our economic—and political—interests.

There's No Place Like (a) Home. While the economy has continued its slow, but steady recovery from the Great Recession, one sector that has put a drag on the economy is the housing market. Existing home sales have never recovered their 2007 levels, despite several government stimulus efforts. Newly-constructed single family home sales have been hovering near levels that represented the bottom of previous recessions. And in the latest statistics, groundbreakings on new homes actually fell by 2.8% in October compared with September.

Depressed home sales—both new and used—have a negative effect on many sectors of the economy, from the materials to make the houses, appliance sales—plus, of course, the income of many thousands of construction workers, appraisers and realtors. During healthy times, home construction and sales make up 9% of all economic activity, compared with just under 6% today. Simply put, it is amazing that our economy has been able to experience the growth that it has during a time when such an important sector of our marketplace has been dragging so significantly.

Sounds like a dreary picture, huh? Well, never fear—there is reason for optimism. In recent weeks, Fannie Mae and Freddie Mac, the two government-backed mortgage companies that provide loan guarantees to lending institutions, have adjusted some of their guidelines to make it easier for home buyers. Over the past five years, lenders have been requiring home buyers to have near-perfect credit, and even then to pay 20% down on their home purchase. Now, going forward, Freddie and Fannie will start backing loans where the borrower puts down just 3%—a huge relief for first-time homebuyers.

Look for this simple shift in policy, along with others, to accomplish more stimulus to the housing market—and to the U.S. economy—than any of the emergency measures passed in the wake of the economic downturn. And, sometime in the first quarter of next year, you might see articles talking about an unexpected housing recovery and windfall GDP growth that has economists scratching their heads.

On behalf of everyone here at Teplitz Financial Group, we wish you a healthy and happy new year, filled with friends, family and financial success!


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