Stay on Track: Navigating the Fiscal Cliff
With the 2012 elections behind us, investors now await the outcome of the so-called “fiscal cliff,” the colloquial short-name given to the series of budget cuts and tax hikes due to become effective January 1, 2013, as a result of the Budget Control Act of 2011 – unless new legistlation is enacted.
To help you stay informed as these developments unfold, we offer two perspectives on the topic: one from Dreyfus’ Chief Economist Richard Hoey, and the other from Tom Higgins, Ph.D, Global Macro Strategist of Standish, Dreyfus’ cornerstone fixed income affiliate. In addition, our two investment viewpoints below help prepare for the fiscal cliff uncertainty. As always, Dreyfus remains committed to helping you navigate today’s market challenges and pursue future opportunities.
While both political parties appear willing to resolve this very serious matter, many experts agree that taxes are likely to increase for millions of investors. That is why municipals may provide considerable investment benefits for fixed-income investors given the possible outcomes of the fiscal cliff situation. And whether you are concerned about the prospects of higher taxes, or simply looking to diversify your bond portfolio, Dreyfus’ full lineup of high-quality tax-exempt mutual funds may be able to meet your needs.
For investors subject to the federal Alternative Minimum Tax (AMT), Dreyfus can help tame your AMT concerns with three muni bond funds that seek to provide income exempt from both federal income tax and the AMT.
Municipals Offer Desirable After-Tax Investment Potential –
Even at Current Tax-Rate Levels
The graph below shows the hypothetical taxable equivalent yields an investor would have to receive to equal that of a municipal bond yield. If tax rates do increase next year, the potential benefits of municipals would be even greater than those shown below.
Source: Dreyfus. Based on federal income tax rates only. For illustrative purposes only. The share price, yield and investment return of actual investment will vary and there can be no guarantee that any investment will achieve any particular yield or return. Does not take into consideration capital gains, fees or expenses, or state, local or federal alternative minimum taxes.
An overview on why municipals are poised to continue to provide strong total return and yield potential and help meet many investment objectives.
While the fiscal cliff has undoubtedly affected the confidence of many equity investors, we believe it is not the time to panic. Severe short-term volatility, while unsettling, tends to moderate over time, especially for investors with long-term outlooks of over 5 -10 years. In fact, such periods may provide a favorable reinvestment opportunity.
If you look back over the last 10 years, equity investors who stayed the course through recent market turmoil generally were rewarded as the stock market regained most of its earlier loses. Those who “went to the sideline,” however, tended not to fare as well since they would have locked in earlier loses. Of course, there is no guarantee these past performance trends would occur in the future.
Investors Who Stayed the Course During Recent Market Challenges Fared Better than Those Who Sold Out of Equities at the Bottom
Source: Morningstar. Past performance is no guarantee of future results. These illustrations are based on the historical returns of the S&P 500 Index, a widely accepted, unmanaged index of U.S. stock market performance. They assume an initial hypothetical investment of $10,000 was made beginning 1/1/2000.
Investors cannot invest in any index. Actual returns will vary and results will be different with different assumptions.
Investors should consider the investment objectives, risks, charges, and expenses of a fund carefully before investing. Download a prospectus that contains this and other information about a fund, and read it carefully before investing.
The comments provided serve as a general market overview and should not be considered investment advice or predictive of any future market performance. These views are current as of November 2012 and are subject to change rapidly as economic and market conditions dictate.
Past performance does not guarantee future results.
Bond funds are subject generally to interest rate, credit, liquidity, call, sector, and market risks, to varying degrees. Generally, all other factors being equal, bond prices are inversely related to interest-rate changes and rate increases can cause price declines.
Income for national municipal funds may be subject to state and local taxes. Income may be subject to state and local taxes for out-of-state residents. Some income for non-AMT-Free funds may be subject to the federal alternative minimum tax for certain investors. Capital gains, if any, are taxable.
Equity funds are subject generally to market, market sector, market liquidity, issuer and investment style risks, among other factors, to varying degrees.