Wall Street stumbles into September

After a bleak 2008, equities are looking up. But whatever the market, our trademark long-term portfolio can help you build a nest egg for a secure future.
NEW YORK (CNNMoney.com) — Markets tumbled Tuesday afternoon, as investors took a big step back at the start of what is typically a rough month, betting that stocks have risen too far too fast without any underlying support.
“I think we’ve had a nice run and it’s time for a bit of a pullback,” said Tom Schrader, managing director at Stifel Nicolaus. “I wouldn’t be surprised if we moved back to the 880 level (on the S&P 500) before moving back up.”
A drop to the 880 level would constitute a slide of about 12% from the current levels.
Investors nitpicked through the morning’s better-than-expected reports on housing and manufacturing but found little reason to jump back into the fray.
With around 40 minutes left in Tuesday’s session , the Dow Jones industrial average (INDU) had lost 160 points, or 1.7%. The S&P 500 (SPX) index fell 18 points, or 1.8%. The Nasdaq composite (COMP) fell 33 points, or 1.7%.
“I think the ‘whisper number’ for [the manufacturing report] was higher and once people digested that, the market swung in the other direction,” said Schrader.
Schrader said that investors were also reacting to the “calendar influence,” amid a variety of reports about the tendency for September to be a weak month on Wall Street. September is typically the biggest percentage loser of the month for the Dow, S&P 500 and Nasdaq composite, according to the Stock Trader’s Almanac.
“The reports this morning were positive, but investors are basically saying that stocks have had a good run up and now it’s time to take some profits,” chimed in Phil Orlando, chief equity market strategist at Federated Investors.
Stocks have essentially been on the rise since March, as investors have welcomed extraordinary fiscal and monetary stimulus and signs that corporate profits and the economy have stabilized. The major gauges ended last week at the highest levels in 9 to 10 months. Financial shares took a beating Tuesday after enjoying a nice ride through the late summer, fueled largely by speculation and momentum.
But with the S&P up 52% from the March 9 lows, market participants are now looking for concrete evidence that the economy is recovering. The morning’s reports were positive, but perhaps not as positive as the most optimistic forecasts.
Manufacturing: The Institute for Supply Management’s manufacturing index for August showed growth in the sector for the first time since January 2008. The index rose to 52.9 from 48.9 previously. Economists surveyed by Briefing.com thought it would rise to 50.5.
Pending home sales rose for the sixth straight month, jumping 3.2% in July, to the highest point in nearly two years, according to a report from the National Association of Realtors released Tuesday morning. The index rose 3.6% in June. Economists surveyed by Briefing.com thought sales would rise 1.5% in July.
Construction spending fell 0.2% in July versus forecasts for an unchanged reading. Spending rose a revised 0.1% in June.
Financials: Many of the summer’s big bank sector winners led the declines Tuesday.
Dow component Bank of America (BAC, Fortune 500) slipped 5% in active NYSE trading. BofA was the biggest Dow gainer in the June through August period, rising 56%.
Dow component American Express (AXP, Fortune 500) lost 4% Tuesday. Over the last three months, AmEx has gained 36% and was the second-best Dow performer.
Dow component JPMorgan Chase (JPM, Fortune 500) lost 3% after rising 17% this summer.
Among other movers, Citigroup (C, Fortune 500) lost 6% after rising 34% in the summer. Regional bank Fifth Third Bancorp (FITB, Fortune 500) lost 5% after rising 59% this summer.
The KBW Bank (BKX) index fell 4.6% after rising 20% over the summer.
Oil prices and stocks: U.S. light crude oil for October delivery fell $1.91 to settle at $68.05 a barrel on the New York Mercantile Exchange. Oil prices have been slipping since hitting a ten-month high just below $75 a barrel late last month.
The decline in oil prices dragged on heavily-weighted energy stocks including Dow components Chevron (CVX, Fortune 500) and Exxon Mobil (XOM, Fortune 500).
Auto sales: The government’s popular Cash for Clunkers program gave a boost to sales in August, major automakers said. Although a plunge in sales in the last week of the month, following the program’s end, suggests the impact will not be far reaching.
Company news: Online auctioneer eBay (EBAY, Fortune 500) said it will sell a large stake in its Skype Internet phone business to a group of investors for $2.75 billion.
World markets: European markets tumbled, while Asian markets ended higher.
Bonds: Treasury prices rose, lowering the yield on the benchmark 10-year note to 3.37% from 3.40% late Monday. Treasury prices and yields move in opposite directions.
Other markets: COMEX gold for December delivery rose $3.50 to settle at $957 an ounce.
In currency trading, the dollar gained versus the euro and the Japanese yen.
Market breadth was negative. On the New York Stock Exchange, losers beat winners by over four to one on volume of 1.09 billion shares. On the Nasdaq, decliners topped advancers by over three to one on volume of 2.19 billion shares.

4 smart ways to reduce your tax bill

After a bleak 2008, equities are looking up. But whatever the market, our trademark long-term portfolio can help you build a nest egg for a secure future.

NEW YORK (Fortune) — We spoke to several leading financial advisers about the strategies they were recommending their clients adopt to cut their taxes now and in the future.

Harvest your stock market losses

“We have been aggressively harvesting tax losses for our clients over the last year or two, and of course the market environment has assisted us with that,” says Gregg Fisher, president of financial advisory firm Gerstein Fisher.

“Those losses can be used to offset capital gains in the future, and if you think capital gains rates might be higher in the future, those losses become even more valuable,” he says.

And for clients who still like the battered stock they just sold, no problem. IRS rules allow an investor to buy the asset back after 31 days.

Cash in some winners

There’s also a tax strategy for those with gains in their portfolio.

A number of advisers are urging their more affluent clients to sell some of those appreciated assets in order to lock in the gain, and to pay the capital gains tax while it’s only 15%, before it rises to 20% in 2011.

These investors can also buy back the same shares after 31 days if they still want to own the stock.

Invest in municipal bonds

Many advisers are also recommending that clients put a bigger chunk of their cash into tax-free municipal bonds.

Although many states are facing severe financial difficulties because of the recession, “We like munis right now because even during the Great Depression the default rate was less than 4%, and we’re not in a Great Depression,” says Mark Brown, a managing partner at Brown & Tedstrom, a financial planning and advisory firm.

“In a normal recession, less than one-tenth of 1% has been the historical default rate.” He adds that their prices have fallen over the past six months, making them even more attractive.

Divide and conquer

Even as tax rates rise, you’ll probably be paying less on capital gains than on ordinary income.

Sean Cunniff, a research director in TowerGroup’s brokerage and wealth management service, is recommending that investors take advantage of that gap by favoring fixed-income investments (which pay interest that is taxed as ordinary income) in your tax-deferred accounts and putting equity investments with big potential long-term capital gains into taxable accounts.