Will it be Debit or Credit?

By Charles Webb

Not all plastic is created equal.  When you reach into your wallet and pullout a card to make a purchase, you probably don’t give much thought as to what the card is beyond VISA or American Express, but you should, and here’s why.  The real distinction among the various cards offered today is if it’s a credit card or debit card. 

There are two primary differences between credit cards and debit cards.  Firstly, credit card charges accumulate in an account with the card issuer and can go no further than that.  Because you owe the balance to the card issuer, you are in an inherently stronger position when it comes to dispute resolutions.  You can wait to make the payment after the dispute is resolved to your satisfaction.  A debit card, on the other hand, places you in the position of having the card issuer refund your money once the dispute is resolved to their satisfaction because the money is withdrawn from your checking account when the charge is made. 

The second difference between the two card types is the consumer protection laws.  The Consumer Financial Protection Bureau says that if your credit card number (not your physical credit card) is stolen, you are not responsible for unauthorized charges under federal law.  If the actual credit card is stolen, you are liable for no more than $50 in unauthorized charges as long as you report it to the card issuer.

With debit cards, the CFPB says that if an unauthorized transaction appears on your statement (but your card or PIN has not been lost or stolen), under federal law you will not be liable for the debit if you report it within 60 days after your account statement is sent to you.  The rules are different if the card or PIN has been lost or stolen: Report the problem within two business days and liability is limited to $50 of unauthorized charges. Past two days and the maximum liability rises to $500.  If any unauthorized charges go unreported for more than 60 days, the CFPB says your money and future charges by the same person could be lost.  Most card issuers have a zero liability policy because they want you using their cards, but ultimately they are not required to by law. 

Most stolen card information has come from retailer data breaches.  This means that you likely won’t even know that fraudulent charges are being made until well after the fact.  If this occurs with a credit card, then there is no harm while the situation gets fixed.  However, if the fraud occurs on a debit card, your checking account can get emptied before you’re notified, potentially affecting all of your other checking activity (i.e. bounced checks, unable to get cash from an ATM, etc.).  Even though your bank will refund the fraudulent charges, you still have to deal with the NSF charges from the companies you wrote checks to.  There’s no guarantee they’ll refund those or that it won’t lead to dings on your credit report.

Hands down, a credit card is the safer form of payment.  As a bonus, many credit card companies also offer free reward points just for using your card.  Banks promote the use of debit cards because it’s a better deal for them.  You should do all of your shopping on a credit card and pay it off every month.

First Quarter 2015 Commentary

April Already?

So far this year, the action in the stock and bond markets has been pretty uneventful.  Most of the major averages sit near where they were at the beginning of the year.  Stocks showed some life in February, advancing roughly 3%, only to see those gains evaporate the next month.  As of March 31st, the S&P 500 was only up 0.5% on the year.  The small and mid-cap sectors of the market performed better, but only slightly.

Our expectation for this year remains unchanged.  In our last commentary, we expressed our belief that 2015 will look a lot like 2014.  While this year, thus far, hasn’t had the same level of volatility as last year, there are several significant economic factors that are building behind the scenes which we believe will be the main drivers of stock performance in 2015. 

The most notable of these factors are global interest rates and their effect on the dollar’s value.  As everyone is aware, interest rates in the U.S. have remained at historic lows since the 2008 financial crisis.  This has been true for all maturities and can be seen by the yield on the 10-year Treasury bond which has declined steadily for almost two and a half years. The yield now sits below 2%.  As paltry as two percent seems, this is actually high by comparison to other developed sovereign debt such as the Eurobond and Japanese debt. 

In Europe, interest rates have been falling sharply, in some cases into negative territory, since the European Central Bank last year introduced measures meant to spur the economy in the Eurozone, including cutting its own deposit rate. The ECB in March also launched a bond-buying program similar to what the Federal Reserve had undertaken, driving down yields on Eurozone debt in hopes of fostering lending.

Another major player in the global bond market is the Bank of Japan.  In fact, last month the BOJ over took China as the largest holder of U.S. Debt.  Japan has also been undergoing their own monetary easing program.  The impact has been just what we’ve seen everywhere else – ultra low interest rates.  Their 10 year bond only yields 0.34%.
So it’s basically the same story around the world.  High credit sovereign debt is extremely expensive and thus their yields are miniscule. The result is U.S. treasuries, by comparison, are the best game in town and international investors are buying them in droves.  The side effect of this demand for U.S. debt is that it has greatly increased the demand for the dollar. The stronger dollar has become a major headwind for U.S. firm’s exports.

This has become the biggest concern for stocks this year.  In particular, it has been a bigger concern for large-cap stocks, as they tend to have a larger proportion of their sales overseas.  So far, there has only be a slight downturn in exports.  Last year, U.S. firms exported a little over 2.3 billion dollars of goods and services.  That number is trending down to be more like 2.2 billion dollars.  It’s still too early to predict what the annual export number is going to look like this year, other than it will be lower.

We view this as the real headwind to stocks this year.  On the flipside, lower energy prices should provide a significant boost to earnings and consumer spending.  Our belief is that this economic benefit will outweigh the negative impact of exports and thus our positive expectation for stocks this year. 

Stock prices are much more influenced by future expectations than actual results.  Because of this, our guess is that there will need to be more clarity in the relationship between the dollar and oil before stocks are able to sustain a rally.  That likely won’t occur until the second half of the year.  Until then, stocks are likely to trade in a narrow range similar to what we’ve seen so far.

The good news is that the major stock indexes’ performance has finally broadened.  Over the last three quarters, the gains have been concentrated in the large cap sector of the market.  This has caused our most diversified equity positions to underperform the Russell 1000 benchmark.  This will happen from time to time, but usually only for one quarter.  This quarter’s results are finally reversing that trend with most of our client equity positions out pacing the Russell 1000 by half to one and a half percent.