Yellen Signals Growing Likelihood of December Rate Hike

US-ECONOMY-FINANCE-CONGRESS-YELLENWASHINGTON — Federal Reserve Chair Janet Yellen told Congress Thursday that economic conditions appear to be improving enough for policymakers to raise interest rates when they meet in two weeks — as long as there are no major shocks that undermine confidence.

Yellen said that even after the first rate hike, the Fed expects future rate increases will be at a gradual pace that will keep borrowing costs low for consumers and businesses.

In testimony before the Joint Economic Committee, Yellen warned that waiting an extended period of time to start raising rates would carry risks.

“Were the FOMC to delay the start … for too long,” she said, “we would likely end up having to tighten policy relatively abruptly to keep the economy from overshooting” the Fed’s goals for unemployment and inflation.

“Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into a recession,” Yellen said.

She also cited concerns by Fed critics that keeping rates exceptionally low for too long “could also encourage excessive risk taking and thus undermine financial stability.”

Fed policymakers meet on Dec. 15-16. The Fed’s key short-term rate has been at a record low near zero for the past seven years.

Many private economists are forecasting the first rate hike by the Federal Open Market Committee, the Fed’s policy panel, will be a modest quarter-point move, followed by four more quarter-point moves over the next year.

“Between today and the next FOMC meeting, we will receive additional data that bear on the economic outlook. These data include a range of indicators regarding the labor market, inflation and economic activity,” Yellen told the JEC. “When my colleagues and I meet, we will assess all of the available data and their implications for the economic outlook in making our decision.”

The Labor Department will release its November employment report on Friday. Analysts believe the data will be key in determining whether the Fed boosts rates this month.

Asked about the upcoming unemployment report, Yellen said the Fed will be watching for “a continued solid trend of job creation” that would indicate the economy has good momentum going forward.

Yellen repeated past comments that she believed two key factors keeping inflation below the Fed’s 2 percent target — the rise in the value of the dollar and falling oil prices — were likely to fade over time.

Strong Signal

Private economists said Yellen’s remarks over the past two days sent a strong signal that the Fed is ready to start raising interest rates at its meeting this month.

Gus Faucher, senior economist at PNC, said he was looking for a rate hike “barring much weaker data over the next couple of weeks.”

The Fed has left its target for the federal funds rate, the interest that banks charge on overnight loans, near zero since December 2008. It has used ultra-low borrowing costs as a way to stimulate economic activity and fight the worst recession since the Great Depression of the 1930s. The Fed has not raised the funds rate since June 2006.

Yellen said that the Fed currently anticipates that even after further improvements in the labor market and inflation, economic conditions are likely to warrant lower rates than normal “for some time.”

She said that a Fed move to start raising rates will be a sign of “how far our economy has come in recovering from the effects of the financial crisis and the Great Recession. In that sense, it is a day that I expect we all are looking forward to.”

Yellen spoke shortly after the European Central Bank announced that it was cutting a key interest rate and extending its stimulus program to enhance efforts to bolster the 19 European countries that use the euro currency. This action disappointed investors, who had been looking for stronger moves.

Market Wrap: S&P 500 Posts Big Drop as ECB Disappoints

Markets Await Fed Chair Yellen's Testimony On Interest RatesNEW YORK — The S&P 500 suffered its biggest drop since late September on Thursday as the European Central Bank disappointed market hopes for greater stimulus.

The ECB move triggered a spike in the euro that caught investors by surprise, forcing them to shift positions that hit most asset classes. Bond prices dropped after the announcement.

At the same time, the CBOE Volatility index, the stock market’s fear gauge, jumped 13.8 percent, closing at its highest since Nov. 17.

The biggest influence was the [ECB President Mario] Draghi talk this morning; it didn’t satisfy the U.S. markets.

The ECB cut its deposit rate deeper into negative territory and extended its asset buys by six months, as expected. But some market participants had hoped for greater stimulus.

All 10 S&P 500 sectors fell in a second day of sharp losses for U.S. stocks. Health care ended down 2.2 percent, leading the day’s decline in the S&P 500, followed by energy, down 2 percent.

“The biggest influence was the [ECB President Mario] Draghi talk this morning; it didn’t satisfy the U.S. markets,” said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia.

Federal Reserve Chair Janet Yellen’s comments suggested the Fed was on track to raise interest rates this month.

Yellen told lawmakers the U.S. central bank was close to lifting its overnight interest rate from near zero. She gave an upbeat view of the economy, saying “growth is likely to be sufficient over the next year or two to result in further improvement in the labor market.” The Fed’s next policy meeting is on Dec. 15-16.

The Dow Jones industrial average (^DJI)​ fell 252.01 points, or 1.4 percent, to 17,477.67, the Standard & Poor’s 500 index (^GSPC)​ lost 29.89 points, or 1.4 percent, to 2,049.62 and the Nasdaq composite (^IXIC)​ dropped 85.70 points, or 1.7 percent, to 5,037.53.

The S&P 500 posted its biggest daily percentage decline since Sept. 28 and closed at its lowest since Nov. 13.

Some of the selling was related to leveraged funds that were likely forced to close positions as volatility spiked. According to Bank of America (BAC) research, these funds, which were heavily involved in the dramatic selloff in late August, have since returned to the level of leverage they had prior to that downturn.

Slow Week

Volume was elevated in S&P 500 index options expiring on Friday, particularly in put options that suggest people were hedging against the possibility of losses, said Henry Schwartz, president of options analytics firm Trade Alert, in New York.

“After a really slow week it does look like hedgers are taking some action today,” he said.

Data released Thursday showed initial U.S. jobless claims for last week rose but remained at levels consistent with a strengthening labor market. Friday’s employment report is expected to show the U.S. economy added 200,000 jobs in November.

Zafgen (ZFGN) shares were down 5.1 percent at $5.96 after the company said the U.S. Food and Drug Administration was putting on complete hold a late-stage study testing its experimental obesity drug.

Declining issues outnumbered advancing ones on the NYSE by 2,518 to 579, for a 4.35-to-1 ratio on the downside; on the Nasdaq, 2,159 issues fell and 674 advanced for a 3.20-to-1 ratio favoring decliners.

The S&P 500 posted 9 new 52-week highs and 26 new lows; the Nasdaq recorded 53 new highs and 78 new lows.

Service Sector Slows; Labor Market Remains Resilient

Inside The Sole Choice Shoelace Manufacturing Plant Ahead Of Factory OrdersWASHINGTON — U.S. service sector activity slowed in November but remained at levels consistent with a steady pace of economic growth for the fourth quarter, a business survey showed Thursday.

Other data reported a small increase in first-time applications for unemployment benefits last week, but planned job cuts announced by companies in November were the fewest in 14 months.

With the labor market showing resilience, economists say it is almost certain theFederal Reserve will raise interest rates at the Dec. 15-16 meeting for the first time in nearly a decade.

It will take some pretty bad economic numbers for the Fed to pull back from the brink.

“It will take some pretty bad economic numbers for the Fed to pull back from the brink,” said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.

Fed Chair Janet Yellen told lawmakers Thursday that the central bank was close to lifting its key overnight interest rate from near zero. Yellen gave an upbeat view of the economy, saying “growth is likely to be sufficient over the next year or two to result in further improvement in the labor market.”

The Institute for Supply Management said Thursday its index of non-manufacturing activity fell to 55.9 last month from a reading of 59.1 in October. A reading above 50 indicates expansion in the service sector.

The new orders index dropped fell 4.5 points to 57.5 last month. There were also declines in measures of service sector employment, backlogs and export orders. Deliveries are slowing and inventories are still considered high which could constrain order growth in the months ahead.

Twelve service industries, including real estate, retail, transportation and warehousing, finance and insurance and public administration reported growth last month. The six industries reporting contraction included wholesale trade, utilities and agriculture.

The report came after news this week from ISM that the manufacturing sector contracted in November for the first time in three years. Still, economists said the soft service sector survey didn’t signal a slowdown in gross domestic product growth from the third quarter’s 2.1 percent annual rate.

“Even after this drop off, the latest figure was still consistent with real GDP growth of around 2.25 percent,” said Daniel Silver, an economist at J.P. Morgan in New York.

There was little market reaction to the economic data, but the U.S. dollar dropped to a near one-month low against the euro after the European Central Bank unveiled a smaller interest rate cut and bond purchases than investors had anticipated. Stocks and Treasury debt prices were trading lower.

Labor Market Resilience

In second report, the Labor Department said initial claims for state unemployment benefits increased 9,000 to a seasonally adjusted 269,000 in the week ended Nov. 28.

It was the 39th straight week that claims held below 300,000, which is normally associated with a healthy labor market. Claims are near levels last seen in 1973 and there is little room for further declines as the labor market normalizes.

The four-week moving average of claims, considered a better measure of labor market trends as it strips out week-to-week volatility, fell 1,750 to 269,250 last week.

In a third report, global outplacement consultancy Challenger, Gray & Christmas said U.S.-based companies announced 30,953 job cuts in November, the smallest amount since September 2014 and down 39 percent from October. There were 1,355 oil-related job cuts, the fewest since June.

Last week’s jobless claims have no bearing on Friday’s Labor Department employment report for November as they fall outside the survey period. According to a Reuters survey of economists, nonfarm payrolls likely increased 200,000 last month after rising 271,000 in October. The unemployment rate is forecast unchanged at a 7½-year low of 5 percent.

“The claims data suggest that the trend in employment growth remains more than strong enough to keep the unemployment rate trending down over time,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, New York.

In a fourth report, the Commerce Department said new orders for manufactured goods increased 1.5 percent after two straight months of declines, on rising demand for transportation equipment and a range of other goods.

Alibaba Unlikely to Be Interested in Yahoo’s Core Business

Day Two Of The Saint Petersburg International Economic Forum 2015Chinese e-commerce giant Alibaba Group Holding is unlikely to be interested in buying Yahoo’s Internet business, The Wall Street Journal reported.

Yahoo’s board, in a three-day meeting that started Wednesday, is weighing a sale of the struggling business, Reuters reported Tuesday, citing a source.

The business isn’t attractive, “given the difficulties successive managers have had in turning it around,” the Journal reported Thursday, citing a person familiar with the matter.

There is almost certainly no buyer who would realistically retain the existing management.

“There is almost certainly no buyer who would realistically retain the existing management,” Pivotal Research Group analyst Brian Wieser said. He also said that U.S.-centric digital advertising had evidently not been Alibaba’s focus.

Yahoo’s board, which includes co-founder David Filo, Walmart Stores (WMT) former Chief Executive Officer H. Lee Scott Jr. and Charles Schwab (SCHW) Chairman Charles R. Schwab, is also expected to discuss the planned spinoff of Yahoo’s 15 percent stake in Alibaba.

Alibaba will be interested in buying back its shares from Yahoo only at a steep discount, the Journal said, citing the person.

Yahoo shareholders could end up paying billions in taxes if the U.S. Internal Revenue Service deems the spinoff taxable. The company had sought a private letter ruling from the IRS to confirm if the transaction would result in a tax obligation, but the IRS denied the request in September.

Activist investor Starboard Value said Yahoo’s board should “immediately abandon” the spinoff and begin a “competitive process to sell its valuable core business at the highest price possible.”

The board is “seriously considering” pausing on the spinoff until there is more clarity on the tax implications, Re/code reported, citing sources.

Yahoo had earlier planned to complete the spinoff by the end of December, but the company said in October the transaction was now expected to close in January.

Alibaba and Yahoo were yet to respond to requests for comment.

Yahoo (YHOO) shares were down 1 percent at $35.25 in late morning trading. Alibaba (BABA) shares were down 1 percent at $84.07.

Why Defensive Stocks Aren’t Safe Anymore

Hand holding american dollars against money backgroundNervous investors should think twice before diving into so-called defensive stocks, especially those securities with high dividends. You might end up putting more risk into your portfolio than you realize.
Stocks that have less volatility than the overall market and pay higher dividends than most other stocks are often seen as a way to reduce risk in a portfolio. Traditionally, these are found in the defensive sectors, including consumer staples, utilities and health care.

Given the state of the world, it’s easy to see why investors would want to get defensive. The war in the Middle East is certainty getting hotter. Cities are under the threat of terrorist attacks, and tensions between Russia and Turkey increased when Turkey shot down a Russian warplane on the Syrian border. Meanwhile, the European economy still looks saggy and the once-fast growing Chinese economy is decelerating. And the Federal Reserve looks set to start raising the cost of borrowing money sooner rather than later.

Sectors are trading at high multiples. The problem is that “the defensives are expensive,” says Ramona Persaud, portfolio manager for Fidelity Global Equity Income fund (FGILX), the Fidelity Dividend Growth fund (FDGFX) and the Fidelity Equity Income fund (FEQIX). Many of the traditional stock sectors that might once have helped reduce risk in a portfolio are trading at relatively high multiples.

She warns that investors could easily lose more money from a declining stock price than they gain from a healthy dividend.

In fact, that may already have happened to some investors. The Utilities Select Sector SPDR exchange-traded fund (XLU), which tracks a basket of utility stocks, has retreated around 10 percent this year, while the broader Standard & Poor’s 500 index (^GSPC) of major stocks is up slightly over the same time. Contrast that loss with the current 3.6 percent dividend yield on the fund. Clearly, those holding the fund since the beginning of the year would have resulted in a net loss, not including the effect of taxes.

Over the years, the Fed’s low interest-rate policies forced yield-seeking investors toward dividend-paying stocks like utilities, bidding up prices and valuations, explains Jeff Carbone, senior partner and founding member of Cornerstone Financial Partners, a wealth management company in Charlotte, North Carolina.

That yield seeking effect is now happening in reverse, with investors selling their holdings in anticipation of what Carbone says is an “imminent increase” in interest rates by the Fed. To reiterate, the pullback in dividend stocks like utilities was happening before the Fed has actually done anything. That anticipation of future event is normal in the stock market.

How do you find dividend stocks now? “Let’s find something with a similar yield that is growing,” says Mike Boyle, head of asset management at advisory Advisors Asset Management in New York. It is better to find stocks that are growing their income and will likely use those increased earnings to boost the dividend. “Focus on areas with strong earnings and income growth, like technology,” he says.
A good example of a company that is growing earnings and has a huge potential to grow its dividends is Apple (AAPL).

Using the combo approach also tilts the scales in the investor’s favor in the current market. You pay a lower multiple of earnings for a company that is growing its dividends. For Persaud, the trick is buying quality companies at a bargain. “Dividend growth is just cheaper.”

That’s why she purchased Israeli generic drug company Teva Pharmaceutical Industries (TEVA), which she purchased at a discount relative to U.S. pharmaceutical giants Bristol Myers Squibb Co. (BMY) or Pfizer (PFE).

Know the warning signs. Whenever you invest with the expectation of receiving dividends, you need to be on the lookout for potential problems.

“Usually when the yield gets unreasonably high, that’s a telltale sign something is wrong,” says Eric Ervin, CEO of ETF provider Reality Shares in San Diego.

For instance, if a stock usually yields 3 percent, but suddenly shows a 6 percent dividend, then that could be a sign that investors expect the dividend to be cut in half. Again, investors discount expected future events.

You should also look to see whether the payout of dividends as a ratio of earnings is sustainable. Companies do need to retain some of their income for capital expenditures and to buy back stock. If the payout is too high for too long, then management may be stretching things too far and it could eventually result in a dividend cut.

The average payout ratio of dividends to earnings is now around 40 percent for the S&P 500, Ervin says. Normally, it’s more like 50 percent, he says.

Market Wrap: Stocks Surge on Strong U.S. Jobs Data

Financial Markets Wall Street
NEW YORK — U.S. stocks rallied Friday, giving the S&P 500 its biggest gain since early September, as employment data suggested the economy was strong enough to sustain a Federal Reserve rate hike this month.

Financials, which benefit from higher borrowing costs, led the rally. The S&P financial index jumped 2.7 percent.

JPMorgan Chase (JPM) rose 3.2 percent to $67.89 after European antitrust regulators dropped charges against the bank on blocking exchanges from derivatives markets.

We’re going to see the market focused on what the U.S. economy is doing, rather than Fed policy.

But the rally, which followed two days of sharp losses, included most sectors and allowed the three major indexes to post slight gains for the week.

“Stocks are going to have to shift to a domestic economic performance focus. We’re going to see the market focused on what the U.S. economy is doing, rather than Fed policy,” said Brad McMillan, chief investment officer at Commonwealth Financial Network in Waltham, Massachusetts.

“I think we see a continued upward trend for the rest of the year.”

Nonfarm payrolls increased 211,000 in November, the Labor Department said, while September and October data were revised to show 35,000 more jobs than previously reported.

Analysts said the report, which also showed the unemployment rate held steady at 5 percent, most likely paves the way for the Fed to raise rates this month for the first time in nearly a decade.

The Dow Jones industrial average (^DJI)​ rose 369.96 points, or 2.1 percent, to 17,847.63, the Standard & Poor’s 500 index (^GSPC)​ gained 42.07 points, or 2.1 percent, to 2,091.69 and the Nasdaq composite (^IXIC)​ added 104.74 points, or 2.1 percent, to 5,142.27.

For the week, the Dow and Nasdaq were up 0.3 percent, while the S&P 500 was up 0.1 percent.

Nine of the 10 major S&P 500 sectors ended up. The energy index slipped 0.5 percent as oil prices fell on news that OPEC was planning to maintain its production near record highs despite depressed prices.

December Rate Hike

The closely watched employment report came a day after Fed Chair Janet Yellenstruck an upbeat note on the economy when she testified before lawmakers, describing how it had largely met the criteria for a rate hike. The Fed’s policy-setting committee will meet on Dec. 15-16.

Avon Products (AVP) rose 5.8 percent to $4.22 after a private equity investor group led by Barington Capital proposed a restructuring of the cosmetics maker.

Advancing issues outnumbered declining ones on the NYSE by 1,999 to 1,045, for a 1.91-to-1 ratio on the upside; on the Nasdaq, 1,840 issues rose and 965 fell for a 1.91-to-1 ratio favoring advancers.

The S&P 500 posted 22 new 52-week highs and 20 new lows; the Nasdaq recorded 69 new highs and 101 new lows.

About 7.7 billion shares changed hands on U.S. exchanges, compared with the 6.9 billion daily average for the past 20 trading days, according to Thomson Reuters (TRI) data.

How to Avoid Holiday Season Credit Card Rip-Offs

close up of woman hand holding...“Buy now, pay later” is the modern way of life. Credit cards are a highly profitable business for the companies that issue them, so it’s no surprise that banks continue to inundate consumers with credit card offers, especially during the shopping frenzy of the holiday season. These come-ons are among several financial traps lurking out there today.

Visa (V), MasterCard (MA), Discover Financial Services (DFS) and American Express (AXP): Their cards are common fixtures in hundreds of millions of wallets around the world. According to Federal Reserve data, the average credit card debt per card-holding U.S. household is $16,140. In total, the average American consumer owes $918.5 billion in credit card debt.

You probably get credit card offers in the mail all the time; the volume of unsolicited offers tends to increase the day after Thanksgiving. Here’s some important information that will help you sort through the pitches and separate the good values from the rip-offs.

The Introductory Rate

The introductory rate, or “teaser rate,” expires after a designated period of time. Federal law requires introductory rates to remain in effect at least six months after signup. This rate is below market and typically applies only to balance transfers and cash advances, although they can also apply to purchases. Introductory rates are usually extremely low, ranging from zero to 4 percent for up to 12 months. Be sure to read the fine print for what the percentage rate will be once the initial introductory period ends.

Annual Percentage Rate — Fixed vs. Variable

If you don’t pay your balance in full by the due date, you’ll be charged interest on the remaining balance. How much interest you pay is determined by the annual percentage rate, or APR, on the card.

If you pay the full balance on your credit card every month, you won’t have to pay any interest on your balance ($0), and can ignore APRs.

All credit cards have either a fixed or variable APR, determined largely by the “prime rate,” which is the interest rate commercial banks charge their most creditworthy customers, which are usually corporations. For example, if a bank is offering a credit card at “prime plus 5” and its prime rate is 6 percent, then the bank is essentially offering customers an 11 percent loan (6 percent + 5 percent).

A fixed APR locks in your rate so that it does not fluctuate with changes to the prime rate on which it is pegged. The variable APR, on the other hand, moves in step with the prime rate. If conditions are volatile and interest rates spike, the variable APR that originally enticed you can end up bearing little resemblance to what you actually pay.

While it’s preferable to have a card with a fixed APR, these cards are few and far between. As of this writing, the average fixed APR is at 13.1 percent and the average variable APR rate stood at 15.7 percent.

Cards for Bad Credit

Everyone deserves a second chance. At least that’s the premise behind credit cards for those with bad credit. In most cases, these types of credit cards are “secured,” which means that the person must put money onto the card upfront before he or she can access the credit via the card.

Some companies offer “unsecured” credit cards with low credit limits and high interest rates. These rates can reach up to 20 percent or higher.

The rationale for secured and unsecured cards is that, in today’s society, a credit card confers legitimacy on people and makes life easier. It’s becoming harder and harder to function by simply using cash. Also, if you have bad credit but you rack up a good history with these types of cards, you can repair your damaged credit score.


Some credit cards are tied to charges for hotels, rental cars, air travel, grocery and gas purchases, etc. The premise is that the more products and services you purchase, the more “points” you earn in return for free or discounted rewards.

But beware: Many of these incentive-based cards come with high interest rates and big annual fees. That said, if their interest rates aren’t excessive and there aren’t a lot of hidden restrictions or fees, reward cards can be a good deal, offering free hotel rooms, bonus rental car use, free airline tickets — you name it.

Nonetheless, cast a discerning eye on the agreement. For most frequent flyer credit cards, you’ll see high interest rates and restrictions for the privilege of getting miles in return. It’s not worth it and tantamount to paying for overvalued stocks.

Evaluating the Key Areas

Now that you’ve been tutored on the basics, here are the most important areas to scrutinize when weighing the pros and cons of a credit card offer:

What’s the interest rate? Compare fixed and variable APRs. If you think interest rates will remain stable, you might want to opt for the lower variable rate. Remember, that’s a risky option. If interest rates go up, you lose.

Thanks to the new credit card laws, the companies that issue cards can’t raise rates on existing balances during the first year unless a prior promotional rate expired, the index on a variable index rate increased, or you were 60 days late in paying your bill. If your rate rises because of a late payment, the bank is required to restore it to its lower rate once you’ve made six consecutive monthly payments, on time of course.

Is there an introductory rate? If so, what is it and how long does it last? If the introductory rate is more than 13.1 percent (the average fixed APR) and doesn’t last at least six months, forget it.

Is there an annual fee? A credit card annual fee is a yearly fee — typically ranging from $15 to $300 — charged by the credit card company for the privilege of letting you have the card. Don’t agree to pay much more than about $50. If you can, opt for a card with no annual fee.

What’s the late fee? If you make a late payment, what will you get charged? A typical credit card late fee is about $35.

What’s the over-the-limit fee? Look for cards that don’t impose a charge of this kind. Some cards will notify you if you’ve gone over your limit without hitting your pocketbook with a penalty.

Are there any hidden fees? Some cards charge balance transfer and account termination fees. Avoid these cards. You can find cards that don’t incur such fees.

Also beware of fishy interest calculations. There are many ways a card issuer can calculate interest owed. One of the shadiest tricks is to use a late payment as a reason to jettison the interest-free period for new purchase transactions and then calculate the interest as far back as the original purchase date.

Another dodgy maneuver is to charge daily interest on the full purchase amount even if partially repaid on deadline. Read the fine print on your credit card statement. If the contract allows the card company to get away with either of these schemes, cancel your card and look for one that only charges interest from the date the new statement was produced.

6 Things to Consider Before Paying Off a Mortgage Early

Mortgage calculator. House, noney and document. 3dLiving debt-free sounds great, and depending on where you are in life it may actually be attainable. But even if you can pay off your mortgage early, should you?

Although it may be tempting, first consider the opportunity cost of paying off your mortgage early at the expense of other goals or investment options, as well as the impact to your tax situation.

Opportunity cost. By paying off your mortgage early, you’ll save on the additional interest expense that would have been incurred in your regular payments. This savings can be significant, and will increase with the prepayment amount. However, by directing excess cash towards paying down a mortgage, those funds are no longer available for investment. The lower your interest rate, the less you stand to benefit through early retirement of debt.

How can you decide whether it is best to invest excess cash or pay off your mortgage early? Consider the following example:

Suppose the stated interest rate on your mortgage is 4 percent and you are in the 28 percent federal income tax bracket. Your after-tax mortgage rate is roughly 2.9 percent, perhaps lower if you can also deduct the mortgage interest on your state income tax return. For many investors, investment portfolios are constructed using a risk tolerance that carries a much higher annualized expected investment return than 2.9 percent.

For some, the “guaranteed” 2.9 percent savings is more attractive than a higher expected market return, subject to greater volatility and risk. For those with a much higher after-tax mortgage rate, paying off a mortgage early likely becomes a more attractive option.

Here are some other considerations:

Taxes. For many, the ability to deduct mortgage interest is a key component to their tax strategy. Consider whether you will still be able to itemize deductions without mortgage interest.

Investing. Realistically consider whether you’ll invest the cash that would have been directed towards paying down your mortgage or spend it. Consider direct deposits into your brokerage account or increasing your monthly 401(k) contribution in an effort to “set it and forget it.”

Other needs. Aside from the ability to invest excess cash, are there any other more pressing goals on the horizon? Look at your whole financial situation including student loans, credit card debt and whether you have adequate emergency reserves.

Life stage. The decision to pay down a mortgage will vary depending on yourlife stage, risk tolerance and time horizon. If you’re nearing retirement you may have a more conservative asset allocation, and investing the excess cash in the market may mean taking on unnecessary risk. Being debt-free may also become more important later in life.

Time horizon. If you are planning to stay in your home for the long term, it makes more sense to consider overpaying your mortgage than if you don’t anticipate ever paying off the note.

As you weigh the options, set realistic expectations and ensure the proper plan is in place to achieve your objectives. Discuss the decision with your financial adviser and tax professional before committing to a strategy. As with all financial goals, it pays to be flexible. If you’re still unsure which direction is best or whether you have adequate reserves, think about opening a dedicated savings account for your excess cash flows and revisit the decision in three to six months. By separating the funds, you will be less likely to spend it on daily expenses while you consider the options.

3 Consumer Stocks to Covet in 2016

Inside A J.C. Penney Co. Store Ahead Of Earnings FiguresDescribing 2015’s stock market returns is like offering up reactions to toast with butter. [Meh. Yawn.]

While 2015 had some cringeworthy moments — like when China’s market took a dive this summer — for the most part, stocks are ending the year close to where they began, showing only a 1.5 percent boost in the Standard & Poor’s 500 index (^GSPC). It’s a far cry from the 63 percent return we saw through the three prior years.

Consumer discretionary companies, however, offered a bright spot. As a whole, the sector rose 12 percent; consumers have more money to spare, thanks to lower gas prices and unemployment, combined with higher wages. It’s a good time if you’re a company selling cars, homes or apparel.

But has the moment passed? With the Federal Reserve expecting to raise interest rates in December, tighter lending could persist. Although gas prices remain low, could oil soon become pricey again? And with seven-year long bull market rolling along, is it time for a correction? These are all primary concerns going into 2016.

To navigate this, we talked to portfolio and money managers to help find bright spots within consumer companies that could show signs of life, even if these issues become a problem.

American Eagle Outfitters (AEO). The Fed rate increase will certainly impact consumer companies. Historically, when rates move up, consumer discretionary and consumer staple companies perform the worst in the 12 months after the boost. But this isn’t your normal rate rise — unlike past increases, the Fed isn’t “really trying to tighten monetary policy, but normalize it,” says Brad Sorensen, an analyst at Charles Schwab (SCHW).

Since rates are already at historic levels, the increase isn’t to halt inflation, which remains low. Instead, it’s to move the rates back to a normal level. While typical rate raises hurt consumer companies, this time around they may be spared. But that doesn’t mean you should look to consumer-focused companies in droves. “We’re advising clients not to get too aggressive,” Sorensen says.

Instead, it’s time to get picky. One company that Jeannie Wyatt, CEO of South Texas Money Management, likes is American Eagle Outfitters. The stock fell 50 percent from 2012 to 2014 as teenagers shunned high-priced brands and American Eagle failed to control its inventory.

But in 2014, embattled CEO Robert Hanson left and American Eagle closed 100 stores that performed poorly. It has done a better job of making sure it’s not overstocked with clothes, creating a 17 percent return this year. Wyatt gives AEO stock a price target of $24, and the stock also pays a generous 3.1 percent dividend.

Group 1 Automotive (GPI). While gas prices sit near $2, there’s fear that they could rise in the next year, pinching consumer pockets.

Don’t expect them to change dramatically, though. Oil inventory levels remain high, which means there’s an overabundance of supply. This has continued even as consumers pump more gasoline. Outside of a major Middle East conflict or military intervention, Sorensen doesn’t see gasoline rising above $3 in 2016.

But there’s “not a lot of correlation between gas prices and consumer stocks,” he says. That’s because of other factors at play, like higher health care costs, which limit directly using funds saved from gas for mall purchases.

It does, however, push people to buy more gas-guzzling vehicles that offer many auto companies higher margins. One company that Eric Marshall, a portfolio manager at Hodges Mutual Funds, likes is the dealership Group 1 Automotive.

The average age of cars on the road is 11.5 years, a new high. When the economy struggled, people held off on purchasing new vehicles. And as improvements took hold, the last to feel the benefits were middle-class Americans. That has started to change, as wages increase and employment levels remain high. “We’re still in the early innings of the replacement,” Marshall says. “As long as employment is doing well, we think auto replacement consumptions will continue.”

Group 1 is cheap — GPI stock is trading at 11 times 2016 earnings. That’s below most of the industry, which trades 13 to 15 times 2016 earnings. Marshall has a price target at $110 for GPI stock.

J.C. Penney Co. (JCP) The biggest drag on a number of companies heading into 2016 may just be their outsized performances over the past few years. But that doesn’t mean the market won’t grow. You just can’t expect the large growth rates seen from 2012 to 2014. Sorensen expects growth next year of “mid-to-upper single digits.”

Finding companies that have much room to improve will be important since the ceilings for many stocks have already been reached. That can also mean taking a bet on companies that have struggled for years. Marshall sees that opportunity in J.C. Penney.

In many ways, Penney’s became a laughing stock of the retail world over the previous five years. Trying to adapt to weakening sales due to online shopping, it tried everything from marketing to higher end consumers, cutting back promotions and altering stores. They all dramatically failed. But now the company has gotten back to its roots with strong promotional plans, keeping its inventory at proper levels and cutting expenses.

While Walmart Stores (WMT), Kohl’s (KSS) and Macy’s (M) all see stagnating or falling same-store sales, it’s Penney’s that has better than 6 percent growth. And JCP stock is positioned to go up. “It’s been so bad for so long, it now has opportunity to gain back market share,” Marshall says.

The stock is priced at $8, which is the value that Marshall places on the company’s real estate alone. A fair price for JCP stock, he says, would be $16, which offers growth in a market where there’s little to find. “You’re buying the real estate, but getting the retailer for free.”

3 Risks of Investing in Annuities

USA, New Jersey, Jersey City, Close up of woman's hand putting money into jarInvesting can be scary, especially in the short term. When you retire, it’s hard to watch the value of your lifetime of savings fluctuate as financial markets bounce up and down. Fear is a powerful sales tool.

Immediate annuities are an insurance product that prevents you from losing money and offers the benefit of guaranteed payments. However, there is a catch with those guarantees. Many annuities aren’t guaranteed to keep up with inflation, so the purchasing power of those guaranteed payments could decline over time. Tying up a significant portion of your money in an annuity also takes away some of your financial options and flexibility, because you can’t always get the money back out easily. And some annuities are outright expensive.

Here are some of the issues you could face if you invest your retirement savings in an immediate annuity.

Inflation risk. Inflation has been artificially low for years due to manipulation by central banks and the slow growth patterns of the economy. As a result, many people have forgotten how inflation can reduce the buying power of fixed income payments and guaranteed rates of return.

Inflation is a normal occurrence as the cost of goods and services increase over time. Back in the late 1970s and early 1980s, inflation hit double digits.

A diversified investment portfolio has the ability to grow and provide a return above inflation. However, if you purchase an annuity in today’s low interest rate environment, you could find yourself in a situation where your “guaranteed” rate of return isn’t keeping pace with the rising costs of goods.

It wasn’t too long ago that the average rate of return on savings accounts insured by the Federal Deposit Insurance Corp. exceeded 4 percent at your local bank. With the Federal Reserve planning to increase interest rates, the risk of inflation should be factored in to any annuity purchase.

Loss of flexibility. Putting a portion of your savings into an annuity means that it won’t be available for current expenses or emergencies. Here’s how you limit your options when you purchase a guaranteed rate of return from an insurance company:

  1. Penalties. If you change your mind or incur an emergency expense and want to pull your money out of an annuity, you’re probably going to facesurrender charges. You could find yourself in the unfortunate situation of being subjected to surrender charges that exceed 10 percent. The insurance company is able to provide you with a guaranteed return due to the restrictive nature of the investment that makes it expensive if you want to withdraw your money early.
  2. No legacy options. Fixed annuities provide guaranteed payments during your lifetime. But when you pass away the payments typically cease, and your initial investment is retained by the insurance company. In some cases you can buy additional insurance riders that act as life insurance and repay the principal if you die unexpectedly. However, this additional protection has an extra cost that can add to the annual fees and ultimately lower the return or guaranteed payment, which is why you likely purchased the annuity to begin with.
  3. Limitations. Some annuities are designed to mimic the behavior of the stock market. Equity-indexed annuities supposedly make money like the stock market without the risk of losing principle. However, your participation in the returns of equity markets is capped or restricted. It varies by policy, but the limits typically kick in around 8 percent. That may sound generous, but consider how much money you would have been shorted in 2013 when the S&P 500 returned 32 percent. Make sure you read all disclosures and fine print before investing in an equity-indexed annuity.

High fees and commissions. Insurance products have multiple layers of fees. These can include mortality expenses, administrative costs and sales commissions. The fees can be steep. The Securities and Exchange Commission estimates that the average mortality expense is around 1.25 percent, and sales commissions are typically 5 to 6 percent.

Annuities are complicated insurance products with strict limitations on the guaranteed income. Given the current low interest rates and potential for increasing inflation, annuities certainly won’t be a good fit for everyone. Make sure the broker, agent or adviser you are working with truly understands your situation, needs and all of the investments available to you — not just the products that are the most lucrative for them.

Some tell-tale signs that you may need to seek a second opinion are:

  • A persistent recommendation of one product without clearly articulating (in easy to understand language) why it’s the best fit for you.
  • A limited knowledge of the entire realm of possible solutions, such as fixed versus variable products and immediate versus deferred annuities.
  • Recommendations that don’t make sense or that you can’t easily understand.
  • Offering insurance solutions for non-insurance problems, such as saving for college, paying off debt or emergency reserves.