Home Buying 101: Mistakes to Avoid

After a number of fits and starts over the past 18 months, the housing market is poised to show improvement this spring. The combination of underlying strength in the labor market, affordable mortgage rates and the reduction in FHA borrowing requirements and costs is expected to bring more first time homebuyers into the market. Additionally, many buyers who went through foreclosures, bankruptcies or short sales during the downturn now have repaired their credit enough to qualify to buy a home again. RealtyTrac predicts that about half of the 7.3 million who lost their homes to foreclosure or short sales from 2007 through the end of 2014, will return to the market and buy a house. In this year alone, there could be at least 250,000 of these so-called “Boomerang Buyers”, followed by another million or so in the subsequent seven years.

If you are ready to jump into the market, take care to avoid these common home buying mistakes:

1. Not running the numbers: It’s important to understand how much home you can afford to buy and whether home ownership might preclude you from addressing other important financial issues in your life. Use this great rent vs. buy calculator from the New York Times — renting might still be the better deal in your area. And don’t forget to add in a line item for ongoing upkeep. A good rule of thumb is to include one percent of your purchase price as an annual budget amount for repair and maintenance.

2. Not correcting credit report mistakes: If you have not done so in a while, go to AnnualCreditReport.com and request your free copy. It’s important to correct any errors on the report before you start the mortgage process.

3. Waiting too long to get pre-approved for a mortgage: The mortgage process requires plenty of time (up to 90 days in some cases), patience and follow-through. Start early, compare apples to apples and ask the broker to itemize the total costs that you should expect to pay.

4. Going it alone: As much as everyone complains about realtors, it’s tough to go through the home buying process alone. In some markets, buyers’ brokers are available, but the most important qualities in brokers are: honesty, experience, good connections with other agents; and good referrals from buyers like you. Remember that most agents represent the seller, not the buyer.

5. Getting too attached to a property: As my mother, a realtor, likes to say: “A house is like a man…there’s more than one for you in the world!” Some buyers get so attached to a particular home, that they end up blowing their budget or becoming disheartened if they lose the property. Buck up—there are lots of properties out there!

6. Failing to include a contingency clause in the contract/having too many contingencies. One of the most common contingency clauses is one that is related to securing a mortgage. The clause protects you if the loan falls through or the appraisal price comes in much higher than the purchase price. Should one of these events occur, the seller would refund your down payment. Without the clause, you can lose that money and still be obligated to buy the house. On the other hand, if your offer is loaded up with contingencies, you may spook the seller.

7. Not hiring a real estate attorney: This is a major transaction, so don’t cheap out when it comes to legal fees. Even if your mortgage company provides a lawyer, hire your own to draft all of the necessary documents and to ensure that your interests are being represented at every step of the process.

8. Blowing off the home inspection: Think you’ve found your dream house? Maybe, but unless you have an engineer walk through the premises with you, you might be buying a new roof in a couple of years. Don’t get freaked out if a problem arises during the inspection–remember that it can often be solved with a simple adjustment in price.

9. Assuming foreclosures are great deals: The pace of foreclosure sales is slowing down, but in case you run across what you think is a gem, remember that the property likely has been unoccupied for a while and could need major repairs.

10. Buying a home based on a “The Best/Worst Places to Retire” list: These compilations provide great headlines and may even help guide you, but they can’t possibly take into account the details of your personal situation.

How Much Money do you Need to Retire?

As we conclude National Retirement Planning Week, it’s time to ask the perennial question: How much do you need to retire? The answer depends on a variety of personal factors, starting with how much you need to float your lifestyle today. Because so many people hate the idea of figuring out what they are spending now, they often use an old financial planning calculation to determine their retirement income need: reduce current salary by 20 percent. The rationale behind this strategy is that in retirement, people will no longer be on the hook for payroll taxes, retirement plan contributions or commuting costs.

Of course if you are living on far less than 80 percent of your current pay or some of your big expenses will disappear during retirement (mortgage, school loans), you may want to use a lower monthly need. Then again, according to a report by HealthView Services, the average couple should expect to spend $266,600 throughout retirement on health care. So maybe that 20 percent reduction is not such a bad substitute for your future monthly nut.

Once you have your retirement need in hand, you need to determine how much income you will receive from Social Security and pensions. Any shortfall between your monthly need and your stream of income has to come from your investments.

I continue to emphasize the importance of using a reasonable “withdrawal rate,” which is the percentage that retirees can safely withdraw from their assets annually without depleting their nest eggs. A conservative withdrawal rate is 3 to 3.5 percent on an annual basis. That means every $1 million you save can generate about $30,000 to $35,000 of annual retirement income.

The biggest problem in answering the question of how much do you need to retire, is that it requires a lot of moving parts to operate smoothly over a long period of time. As economist and New York Times columnist Paul Krugman says: “In an idealized world, 25-year-old workers would base their decisions about how much to save on a realistic assessment of what they will need to live comfortably when they’re in their 70s…In the real world, however, many and arguably most working Americans are saving much too little for their retirement. They’re also investing these savings badly.”

How badly are Americans at investing? A recent Bankrate.com study found that just 48 percent of Americans own stocks or stock mutual funds. Of those who don’t participate in the stock market, 53 percent say they simply don’t have the money to invest. Considering that median per capita income, adjusted for inflation, has basically been flat since 2000 and many Americans are still climbing out of a massive hole from the Great Recession, that result is not surprising.

But a whopping 39 percent cite reasons for avoiding stocks that are worrisome: 21 percent don’t know about stocks; 9 percent don’t trust brokers or advisors; 7 percent think stocks are too risky; and 2 percent are afraid of high fees. All of those rationalizations can be resolved without much work, especially in an age of abundant, free information and resources.

In honor of financial literacy month and retirement planning week, here are a few answers to questions that may be keeping people sidelined from the market:

What is a stock/Isn’t owning a stock risky? When you own a share of stock, you are a part owner in a publicly traded company. Stocks as an asset class are risky, which is why when most people invest, they use mutual funds and spread out their risk among different assets, like stocks, bonds, real estate and cash.

What if I don’t trust brokers or advisors and/or want to avoid high fees? To invest without an intermediary in an affordable way, just use no commission index funds. Some of the most inexpensive index funds are offered through Vanguard, Fidelity, T. Rowe Price, TD Ameritrade and Charles Schwab.

Will Earnings Season Halt the Bull Market?

We have reached a critical point for corporate America. After six years of cutting expenses, buying back stock and using cheap financing to boost share prices, it’s time to see which firms will be able to make money the old fashioned way: by selling more of their goods and services. That’s going to be tough due to a trifecta of factors, which include plunging oil prices, a stronger U.S. dollar and rotten winter weather. Those factors mean that estimates for the first quarter are not too rosy. Analysts predict that earnings for S&P 500 companies dropped by nearly 5 percent from a year ago, down from an expectation of more than 4 percent growth at the beginning of the year. If Q1 is as grim as expected, it would be the first year-over-year decline since the third quarter of 2012.

One of the big headwinds has been the 50 percent dive in oil prices since last June, which will likely translate into a more than 60 percent drop in the energy sector’s earnings per share from a year ago. Excluding energy, things don’t look so bleak, with an expected 3.4 percent increase.

It’s not just oil that made Q1 tough: the impact of a stronger U.S. dollar caused headaches for American exporters, whose products have become more expensive in global markets. The 29 percent gain of the greenback against the euro and 18 percent versus the Japanese yen has also hurt overseas profits that are converted back to dollars by U.S. multinational corporations.

And then there’s the weather. In a less damaging repeat of last year, the rough winter in parts of the country (according to the National Climatic Data Center, the Northeast suffered its coldest winter ever this year) kept consumers on the sidelines. As a result, the U.S. economy probably grew by just 1 - 1.5 percent on an annualized basis. That’s a big reduction from early January, when economists’ projected growth at a 3 percent pace.

But like last year, which got off to a rough start, most analysts believe that the rest of 2015 will show improvement. The range is now for a rate of 2.5 to 2.8 percent for all of 2015, slightly ahead of last year’s 2.4 percent rate. Activity should improve as household incomes rise and the effect of lower oil prices helps consumers’ bottom lines.

One other bright note that could also lift the economy in the months to come: after a number of fits and starts over the past 18 months, the housing market is poised to show improvement. The combination of underlying strength in the labor market, affordable mortgage rates and the reduction in FHA borrowing requirements and costs is expected to bring more first time homebuyers into the market. Additionally, many buyers who went through foreclosures, bankruptcies or short sales during the downturn now have repaired their credit enough to qualify to buy a home again. RealtyTrac predicts that about half of the 7.3 million who lost their homes to foreclosure or short sales from 2007 through the end of 2014 will return to the market and buy a house. In this year alone, there could be at least 250,000 of these so-called “Boomerang Buyers”.

MARKETS: There’s been a lot of chatter about whether or not this bull market run is looking tired. Since bottoming six years ago, the S&P 500 is up about 250 percent, including the reinvestment of dividends. With stocks trading at 17 times forward earnings, they are by no means cheap, though that doesn’t mean that a crash is imminent; rather it does argue for investor caution and diligent rebalancing.

• DJIA: 18,057, up 1.7% on week, up 1.3% YTD
• S&P 500: 2102, up 1.7% on week, up 2.1% YTD
• NASDAQ: 4,996 up 2.2% on week, up 5.5% YTD
• Russell 2000: 1231, up 0.7% on week, up 5% YTD
• 10-Year Treasury yield: 1.95% (from 1.84% a week ago)
• May Crude Oil: $51.64, up 5% on week
• June Gold: $1,204.60, up 0.3% on week
• AAA Nat'l avg for gallon of regular Gas: $2.39 (from $2.39 week ago, $3.62 a year ago)

THE WEEK AHEAD:

Mon 4/13:

Tues 4/14:

JPMorgan Chase, Wells Fargo, Johnson & Johnson

8:30 PPI

8:30 Retail Sales

9:00 NFIB Small Business Optimism Index

10:00 Business Inventories

Weds 4/15: TAX DAY

Bank of America, Charles Schwab, U.S. Bancorp, Delta Air Lines, Netflix

8:30 Empire State Manufacturing

9:15 Industrial Production

10:00 Housing Market Index

2:00 Fed Beige Book

Thurs 4/16:

Citigroup, Goldman Sachs, Schlumberger, UnitedHealth

8:30 Housing Starts

10:00 Philly Fed Survey

Fri 4/17:

General Electric, Honeywell

8:30 CPI

10:00 Consumer Sentiment

#214 Are You Retirement Ready?

As we head into National Retirement Planning Week, guest James Nichols joins us to reveal the results of the Voya Financial "Retire Ready Index". The results emphasize that retirement savers need combine knowledge, planning and action to help reach their goals.

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Here are some of the online tools that James mentioned:

• OrangeMoney
• Planning by Age
• How Do you Measure Up

And check out this segment from CBS This Morning, where I discussed retirement planning.

Before James joined us, we fielded a retirement question from John (should he convert his 401 (k) into a Roth?); a beneficiary retirement query from Mike and Gary asked about REITs.

If you are toiling away at your taxes this weekend, here are some Last Minute Tax Filing Resources.

Thanks to everyone who participated and to Mark, the BEST producer in the world. If you have a financial question, there are lots of ways to contact us:

• Call 855-411-JILL and we'll schedule time to get you on the show LIVE 

• Send an email: askjill@jillonmoney.com 

• Tweet us: @jillonmoney and @MTalercio

Last Minute Tax Filing Resources 2015

Most taxpayers have already filed their returns, but every year about a quarter of Americans wait until the last couple of weeks to file. If you are about to spend/ruin your weekend preparing your taxes, here are some resources: IRS E-File: Less than 1% of electronic returns have errors, compared with 20% of paper returns

IRS Free File: Taxpayers who make $60,000 dollars or less can use software to prepare and file their federal taxes

Free Tax Preparation: The Volunteer Income Tax Assistance (VITA) program offers free tax help to people who generally make $53,000 or less, persons with disabilities, the elderly and limited English speaking taxpayers who need assistance in preparing their own tax returns. IRS Publication 3676-B outlines the services provided and check out the What to Bring page to ensure you have all the required documents and information necessary.

Direct deposit: 9 out of 10  refunds are issued within 3 weeks or less, compared with 6 - 8 weeks for paper-filed tax returns

ACA Tax Info: This is the first year you have to account for whether or not you have health insurance.

Consider Itemized vs. Standard deduction: 75 percent of tax filers take the standard deduction, which is $6,200 if you’re single and $12,400 if you’re married filing jointly. But you may be able to maximize your deductions by gathering your receipts for things like charitable contributions and other expenses that could give you a bigger tax deduction and lower your tax liability.

Don't Forget Juicy Credits: Credits provide a dollar-for-dollar reduction of your income tax liability, so don't overlook the valuable ones.

IRA Contribution eligibility: A great way to save money on taxes is by contributing to an IRA by April 15, even if you go on extension. The maximum contribution is $5,500 or $6,500 if you are age 50 or older by the end of last year. Even if you are contributing to a work-based retirement plan, you may be able to take a deduction for an IRA contribution. Check the IRS web site to find out.

6-month extension with Form 4868 by April 15: Each year, approximately 7 percent of U.S. taxpayers — around 8 million people, file an extension and for good reason: Without an extension, you could face nasty penalties for late filing and late payment, which can total almost 50 percent of what you owe to your tax bill. Remember that extensions have a major caveat: The IRS gives you extra time to file, but not to pay. You must estimate your tax liability and pay at least 90 percent of what you think you owe to avoid a penalty.

If you can’t pay:

Apply for a 120-day extension: No cost, but interest and any applicable penalties continue to accrue until the liability is paid in full. For more information, call the IRS at 800-829-1040 (inds) or 800-829-4933 (bus)

Apply for extension of time for payment due to undue hardship (Form 1127)

Use an IRS installment plan (Form 9465)

Make an offer in compromise

Use a credit card: An expensive way to go because you’ll pay fees charged by your credit card company, which can be up to 2.35 percent. You’re better off paying by check or electronic funds withdrawal online.

Index Funds (Still) Beat Managed Funds

In honor of Financial Literacy Month, it’s time to return to a core concept of investing: the difference between a managed and an index fund. According to the Investment Company Institute (ICI), from 1990 to 2013, the number of households owning mutual funds more than doubled—from 23.4 million to 56.7 million. Given the explosion, it is amazing how many investors still do not understand the nuts and bolts of funds. Managed mutual funds rely on research, market forecasting, and a tenured portfolio manager and/or management team in order to attempt to outperform their relevant benchmarks. Conversely, index funds track the performance of a particular market benchmark, like the S&P 500, by purchasing each of the securities that comprises the index.

Of course research, expertise and the potential to generate better returns than the index comes at a price: ICI found that average fees on actively managed equity funds were 89 basis points (0.89 percent) in 2013, compared with 12 basis points (0.12 percent) for index equity funds.

Now if the pros that oversee managed mutual funds can consistently beat the index against which they are compared by more than 77 basis points every year, then you might opt to pay up. Unfortunately, very few managed funds outperform their relevant indexes.

S&P Dow Jones Indices provides biannual updates to its study, “Does Past Performance Matter? The Persistence Scorecard,” which found that not many managed funds were able to consistently reach the top quartile of performance over five successive years. In fact, less than 1 percent of funds stay above the fray for five years.

The most recent update to the research found that “as of Dec. 31, 2014, 86.44% of large-cap fund managers underperformed the benchmark over a one-year period. This figure is equally unfavorable when viewed over longer-term investment horizons. Over 5- and 10-year periods, respectively, 88.65% and 82.07% of large-cap managers failed to deliver incremental returns over the benchmark.” Mid-cap, small-cap and international managed funds also lagged their benchmarks, by 66.23%, 72.92% and 68.9% respectively.

The easiest explanation for the underperformance is the fee differential. After all, it’s tough to beat the index when you start the year in the hole by nearly 0.8 percent. But Jeff Somer of the New York Times asked S&P Dow Jones to scrub the data to eliminate the effects of fees. “Even without expenses, they found, nearly all actively managed domestic stock funds trailed the benchmarks over three, five and 10 years. Large-cap funds were the single exception, and only over 10 years.”

The myth of being able to beat the market is even more widespread in the hedge fund industry, which charges about 2 percent annual management fees as well as 20 percent of any upside profits. Last year, hedge fund annual returns were just 2.5 percent for the year, according to eVestment, a data tracker, almost 9 percent less than the S&P 500. Of course, many hedge funds are meant to act differently than the index, but you get the drift.

Optimistic investors want to believe that there’s a wizard behind the curtain, who can help them “beat the market”, but study after study finds that the simplest and most lucrative approach to investing may be the best. In most cases, creating a portfolio of low cost index funds, which are cheaper and more tax-efficient than their managed cousins, is the way to go.

Of course using index funds does not guarantee investment success. As mentioned previously in this column, even when investors use cheaper funds, they still tend to buy when markets are rocking and rolling on the upside and sell when they collapse. To prevent that buy high/sell low cycle, be sure to build a diversified portfolio – by asset class, geography, and sector – which factors in your risk tolerance and time horizon. Then populate the portfolio with index funds; and rebalance the portfolio quarterly. And pay no attention to that man behind the curtain!

A Cold Chill for March Jobs

The job market had a rough go of it in March. Blame the weather, a stronger US dollar or a natural slow down after 12 months of more than 200,000 jobs, but a late winter chill blew through the U.S. economy in the third month of 2015. The Bureau of Labor Statistics said 126,000 new jobs were added last month, half of the consensus estimate for 250,000 and the worst reading since December 2013. Adding to the cool down, the previous two months were revised lower by 69,000, which means that job creation in the first quarter of 2015 averaged 197,000, down sharply from the average of 324,000 in the final quarter of 2014.

The unemployment rate remained at 5.5 percent, because the labor force contracted by 95,000. The broader unemployment rate, which includes people who are working part-time because they can’t secure full time positions and marginally attached workers, remained stubbornly high at 10.9 percent.

The labor force participation rate (the number of Americans in the labor force or actively seeking employment) edged down to a 37-year low of 62.7 percent and is also at the bottom end of its narrow range of 62.7 to 62.9 percent for the past year. Economists say that about half of the three-point slide in participation rate from before the recession is attributable to demographic factors, like the retirement of Baby Boomers. Still, it is disappointing that the 3.1 million jobs created over the past year have not yet encouraged more workers to re-enter the labor force.

And despite the recent announcements of minimum wage increases at McDonald’s, Wal-Mart and Target, average hourly earnings advanced by just 2.1 percent from a year earlier. Wages grew at a better than 3 percent rate annually during the prior economic recovery that ended in 2007. The silver lining is that wages can bounce fairly quickly and there are signs that employers are feeling the pressure to increase pay to attract and retain talent.

All major U.S. stock exchanges are closed for Good Friday, but the immediate market reaction was seen in the electronic trading of the Chicago Mercantile Exchange’s equity index futures, which indicated a more than 160 point Dow sell off after the jobs data was released. In one respect, that was actually comforting. It seems that bad news may finally be seen as bad news for investors, rather than a reason to over think when the Fed might next increase interest rates.

On the rate front, because economic growth likely slowed down in during the first three months of the year (the Atlanta Federal Reserve estimates that Q1 growth was flat) and the Fed has said that it will be data-dependent, many economists and analysts now believe that the first hike will occur in September.

MARKETS:

• DJIA: 17,763, up 0.3% on week, down 0.3% YTD
• S&P 500: 2067, up 0.3% on week, up 0.4% YTD
• NASDAQ: 4887 down 0.1% on week, up 3.2% YTD
• Russell 2000: 1255, on week, up 4.2% YTD
• 10-Year Treasury yield: 1.84% (from 1.9% a week ago)
• May Crude Oil: $49.14, up 0.6% on week
• May Gold: $1200.90, up 0.1% on week
• AAA Nat'l avg for gallon of regular Gas: $2.40 (from $2.43 week ago, $3.57 a year ago)

THE WEEK AHEAD:

Mon 4/6

10:00 ISM Non-Manufacturing

Tues 4/7:

10:00 Job Openings and Labor Turnover Survey (JOLTS)

3:00 Consumer Credit

Weds 4/8:

2:00 FOMC Minutes

Thurs 4/9:

Fri 4/10:

8:30 Import/Export Prices

#213 Annuity Haters

Guest Gary Schatsky, a fee-only financial advisor, Chair Emeritus of NAPFA and Annuity Hater, joins the show to discuss why annuities are rarely advisable (Gary says just 5 percent of the time!) He also weighs in on the concept of fiduciary and explains why he believes that working with a fee-only advisor vastly reduces the potential for conflicts of interest.

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Kenny from NY read my recent post, "Spring Cleaning for your Money" and wanted to know how to reduce the taxable income generated from some of his mutual funds. One easy fix: use index funds in taxable accounts and keep managed funds in retirement accounts.

Meanwhile, Terry from MN is sitting pretty in her early retirement, but is not sure whether she should roll over her old 401 (k) into an IRA; and she also needs allocation tips. Poor Michael was unable to max out his retirement contributions and now is starting a fatter tax bill, while Steve asked about beneficiary IRA accounts and Wayne asked for advice about changing careers - from a pilot to a financial planner.

Thanks to everyone who participated and to Mark, the BEST producer in the world. If you have a financial question, there are lots of ways to contact us:

• Call 855-411-JILL and we'll schedule time to get you on the show LIVE 

• Send an email: askjill@jillonmoney.com 

• Tweet us: @jillonmoney and @MTalercio

Keeping Score on Credit

The use of credit scores and reports dates back nearly 60 years. In 1956, engineer Bill Fair and mathematician Earl Isaac formed the Fair Isaac Corporation (FICO) on the premise that data could be mined and used to inform business decisions. Two years later, the company rolled out its first credit scoring system. FICO honed the score and currently sells it to banks, insurers, retailers and credit card companies. As the company declares on its web site, the use of its data and mathematical algorithms “to predict consumer behavior has transformed entire industries.”

The current FICO score ranges from 300 to 850. Borrowers with scores above 750 are generally considered excellent, while scores below 650 are considered poor. The three most important factors that determine your score are: Payment History (and especially paying bills on time); total debt outstanding, which takes into account how many accounts you have and how close you are to your credit limit; and the number of inquiries made into your credit file. Inquiries are broken into "soft" (for preapproved offers; for insurance or employment purposes; and for when you check your own credit report or score) and “hard” inquiries, like when you are shopping for a mortgage, auto or student loan can. Soft inquiries do not hurt your score, while hard ones count against you.

The use of credit scores was less important in the run up to the financial crisis, when in the year of easy credit, it seemed like anyone with a heartbeat could borrow money. But in the aftermath of the Great Recession, financial institutions would only lend to the best borrowers with the highest scores.

Not only has the FICO score has transformed businesses, it also has assumed a major role in the financial lives of consumers. Credit reports and scores are being used for more than borrowing and lending. Landlords often use credit data to research potential tenants; and in many states, it is perfectly legal for prospective employers to check credit.

The ubiquitous use of credit scores makes their accuracy all the more important. If scores are lower, due to bad data or error-ridden reports, a consumer’s cost of borrowing could be higher than it should be or their living arrangements or job prospects could be negatively impacted. Unfortunately, the Consumer Financial Protection Bureau conducted a 14-month probe, which found that it is notoriously difficult for consumers to correct credit report errors.

As regulators continue to oversee the rating and scoring industries, there could be good news for millions of consumers with shaky credit. FICO is testing a new product, which is calculated using consumers’ payment history with their utility companies. You probably didn’t realize that over 70 cable companies, cell phone companies and utility providers already contribute to a national database called the National Consumer Telecom & Utilities Exchange (NCTUE), on which Equifax already reports.

The new score will also incorporate data from LexisNexis, to determine how often people change addresses -- frequent changes suggesting less stability and greater risk for the lender.

FICO is developing the alternate score to sell to its clients, who are trying to determine how to make loans to – and money from – those consumers who otherwise wouldn’t qualify; and as a result, have been shut out of mainstream borrowing. There is a vast market—according to FICO, 53 million Americans currently have credit scores that are unacceptable to lenders or don’t have scores at all.

While gaining access to credit could help many, chances are, banks will charge riskier borrowers higher interest rates and pile on extra fees. Additionally, young adults will need to be conscientious about paying all of their bills on time, else risk seeing a ding on the new credit score. They also may worry about frequent address changes.

Finally, critics of the new score believe that lending money to shaky borrowers is one of the factors that contributed to the financial crisis and should be avoided at all costs. Or in honor of the start of baseball season, it could be what Yogi Berra once called "Deja-Vu all over again."

Stage 3 Investor Angst: Rate Rage

We have now entered the third stage of the psychological condition known as “Investor Angst”. As a reminder, stage one began nearly two years ago, with the "Taper Tantrum". On May 22, 2013, the Federal Reserve announced that it would begin tapering its bond and mortgage backed securities program. The news freaked out investors and they sold just about everything that was considered risky. The second stage was "Patience Panic", which began this year, as investors perseverated over whether or not the Fed would remove the word “patient” from its monetary policy statement. When the news finally emerged that the central bankers were no longer "patient" as to when they would consider hiking rates, reality sank in and investors entered stage three of the affliction, "Rate Rage".

The more rational among us might think, “Wait, isn’t it a good thing that the Fed is finally going to normalize its policy? Doesn’t that mean that the economy is officially out of the woods and we can put the financial crisis, the Great Recession and the stinky recovery behind us? And after all, who cares whether the Fed starts increasing interest rates at the June or the September meeting—does ninety days really matter to my long term game plan?”

All of those are great questions, but they matter little to institutional investors, who have been enjoying this period of ZIRP (Zero Interest Rate Policy) and are riding high on the big gains in their portfolios. The “pros” are among the most likely to suffer from Rate Rage, because once interest rates start to rise, the period of easy money is over and they must return to the mundane world where old school financial analysis is necessary to score big investment returns.

That’s why as you were gearing up for a big weekend of NCAA basketball, the “Rate Ragers” were focused on a speech that Fed Chair Janet Yellen delivered on Friday. Here’s what you need to know about the 18-page (more than 4,000 words) treatise that she delivered: the central bank will raise short term interest rates later this year; and once it does actually happen, the pace of increases will be gradual and will depend on economic conditions. In other words, Yellen told us what we already knew.

For those suffering from Rate Rage, perhaps the only solace is to remember that the rationale behind rising rates is that things are getting better. And because the process is likely to be a slow one, the U.S. economy should still be able to expand to its historic, post World War II pace of 3 to 3.5 percent. That doesn’t mean that stock prices will shoot up, but frankly, after a six-year bull market, what did you expect?

As companies’ increase wages (a good thing!), their profits will be curtailed. I’m guessing that most workers would gladly trade a bump in pay for an extra couple of percentage points of gains in their retirement accounts this year. To put into perspective how much ground needs to be covered in wages, the analysts at Capital Economics note that labor’s share of corporate profits after tax has fallen to 57.7 percent, down dramatically from the peak of 66.3 percent in Q1 2001. While the drop partly reflects “the structural forces of globalization and technological progress…it has also been a cyclical response to the deepest recession in recent memory.”

To determine when those much-needed and anticipated pay raises are coming, the focus will be on the government’s monthly employment report, which is due on Friday. It’s expected that the economy added 250,000 new jobs and the unemployment rate remained at 5.5 percent.

MARKETS:

• DJIA: 17,712, down 2.3% on week, down 0.6% YTD
• S&P 500: 2061, down 2.2% on week, up 0.1% YTD
• NASDAQ: 4891 down 2.7% on week, up 3.3% YTD
• Russell 2000: 1232, down 2% on week, up 3% YTD
• 10-Year Treasury yield: 1.96%
• May Crude Oil: $48.87, up 5% on week
• May Gold: $1200.70, up 1.3% on week
• AAA Nat'l avg for gallon of regular Gas: $2.43 (from $2.42 week ago, $3.54 a year ago)

THE WEEK AHEAD:

Mon 3/30

8:30 Personal Income and Spending

10:00 Pending Home Sales

10:30 Dallas Fed Survey

Tues 3/31:

9:00 Case- Schiller Home Price Indexes

9:45 Chicago PMI

10:00 Consumer Confidence

Weds 4/1:

Motor Vehicle Sales

8:15 ADP Private Jobs Report

9:45 PMI Manufacturing

10:00 ISM Manufacturing

10:00 Construction Spending

Thurs 4/2:

8:30 International Trade

10:00 Factory Orders

Fri 4/3: Good Friday: Markets Closed, Banks Open

8:30 March Employment Report