Bob’s Journal for 1/27/22

A Correction, or Worse?

Last week, all the major stock indexes hit the widely acknowledged marker of a correction — a closing level at least 10% below the recent highs.

The indexes hit record highs last November. As expected, the bubble stocks, high-fliers and others that did best during the bull market were the first to decline and fell the most so far.

The indexes also hit some key bearish technical indicators. The major indexes fell below both their 50-day and 200-day moving averages. Technical analysts say it’s a bearish sign when indexes close below these levels, especially the 200-day moving average.

But the historic data aren’t as clear cut, especially when looking at returns one month or longer after the 200-day moving average is breached.

In fact, in recent decades closing below the 200-day average is a less bearish indicator than in the past. Since 1990, returns three months and six months later are more likely to be positive than negative.

The NASDAQ 100, which is heavily weighted to technology and growth stocks, is down more than the other large company indexes. The index declined more than 1% each trading day last week. It has only declined more than 1% each trading day of a week three times in its history, according to Bespoke Investment Group.

The Russell 2000 declined more than the NASDAQ 100, because this small stock index holds more of the newly public companies that have no earnings or dividends.

Another sign that investors are withdrawing from speculative and risky investments is the decline in Bitcoin and other digital currencies. They fell 40% or more below the highs of last fall.

The question for investors is whether the deep declines will be isolated to the speculative sectors of the markets or will spread to the overall stock market.

The recent record of the indexes delivering positive returns in the months after declining below the 200-day moving average is a cause for some optimism.

Also, utilities, energy and consumer staples are the more conservative sectors of the indexes, and they’ve held up better than the speculative sectors and the broad indexes. But returns for the conservative sectors still are negative so far in 2022.

But the key factor in the market’s future direction is likely to be monetary policy.

The Federal Reserve has focused on supporting stocks since early 2009. But if the recent surge in inflation doesn’t show signs of slowing soon, the Fed will have to shift its focus to containing inflation and reduce the liquidity in the economy.

That could be bad for stocks in general as well as other assets that benefited from the Fed pumping a lot of liquidity into the economy and holding interest rates near zero.

Can Your Portfolio Do Good While Doing Well?

A growing segment of the investment world is focused on more than returns. The investors also focus on doing good.

This form of investing has had several names over the years. It used to be called socially responsible investing. More recent names are sustainable investing, green investing and ESG (for environment, social and governance). ESG and sustainability seem to be the most-used terms now.

One of the arguments in favor of ESG is that investors will earn higher returns while also helping make the planet better. But recent research concludes the results haven’t fulfilled that pledge.

For example, Morningstar issues what it calls sustainability ratings for mutual funds. Investors interested in ESG issues can look at a fund’s rating when deciding which funds to buy. Likewise, mutual fund managers can alter their portfolios to improve their ratings.

A recent article on AdvisorPerspectives.com by Larry Swedroe cited a couple of recent studies that used the sustainability ratings. One study found funds with higher sustainability ratings didn’t have higher returns than other funds.

The other study found that funds desiring higher ratings bought stocks that would give them higher ratings. But that increased valuations for those stocks and gave them lower returns in the future. The study found funds with lower sustainability ratings had higher returns during the period measured.

The Wall Street Journal also published a series of articles recently on ESG investing. The articles argued that returns aren’t any higher for ESG investments, whether they are stocks or bonds.

The series also concluded that a preference for ESG investments doesn’t make a meaningful shift in global capital away from non-ESG investments. One of the arguments in favor of ESG investing is it will starve non-ESG activities of capital and cause them to shrink. But the series argues that other investors buy or invest in those assets and profit from them.

Whether you’re for or against including ESG principles in your investment decisions, read these articles. It’s important to know both the goals and limits of the investment strategy.

Prescription Drug Prices are Falling

Prescription drug prices have been declining in Medicare’s Part D prescription drug benefit, according to a new report from the Congressional Budget Office.

Prices for brand name drugs are high and increased over time. But those drugs are a relatively small share of Medicare Part D prescriptions.

From 2009 to 2018, generic drug prescriptions increased from 75% to 90% of Part D prescriptions. That caused the average net price of prescriptions to decline from $57 to $50.

During that time, the average net price for brand-name prescription drugs increased by 50%. The increase was due to a combination of higher prices for existing drugs and new drugs with higher initial prices than new drugs in previous years.

Many of these new pharmaceuticals were specialty drugs with relatively small potential markets.

The study focused on pharmacy prescriptions. Plus, prescriptions administered in hospitals and doctors’ offices tend to be higher priced than pharmacy prescriptions.

The downward trend might not continue. The latest brand-name drugs are more complicated than previous new drugs. It could be harder for generic manufacturers to duplicate them.

The Data

Economic growth tumbled in the first half of February, according to the PMI Flash Composite Index.

The Services Sector Index declined to 50.9 from 55.0 at the end of December. The Manufacturing Index fell to 55.0 from 57.0 at the end of December. The result is the Composite Index declined to 50.8 from 56.7.

All the indexes are above 50. That indicates growth, but the growth was slower than in December. The Services Index number is an 18-month low, and the Manufacturing Index is at a 15-month low.

Key reasons for the declines are labor shortages, increased worker absences because of the pandemic and supply shortages.

New unemployment claims increased by 55,000 to 286,000 in the latest week. That’s two consecutive weeks in which new claims increased. New claims are at the highest level since October.

Continuing claims increased by 84,000 to 1.64 million.

The Philadelphia Fed Manufacturing Index increased to 23.2 in January from 15.4 in December.

The Richmond Fed Manufacturing Index was 8 in January. That’s down from 16 in December.

Both indexes have been very volatile lately.

Existing home sales declined 4.6% in December from November’s level and were 7.1% lower than in December 2020.

December was the fifth consecutive month in which sales were lower than 12 months earlier.

But existing home sales increased 8.5% in 2021 from 2020’s level.

New home sales in December were 11.9% higher than in November. But December 2021 sales were 14% below December 2020 sales.

Total new home sales in 2021 were 7.3% lower than in 2020.

The S&P Corelogic Case-Shiller Home Price Index increased by 1.2% in November, following a 1.0% increase in October.

Over 12 months, the index is up 18.3%. That’s slightly lower than the 18.5% 12-month increase as of October.

This continues the recent trend of home prices increasing at a historically strong rate but at a lower rate than the previous month.

The 12-month increase in November was the sixth-highest 12-month increase in the 34 years of data for the index. The five highest months were the months immediately preceding November.

The FHFA House Price Index increased by 1.1% in November, the same as October’s increase.

Over 12 months, the index increased 17.5%, also the same as in October.

The Consumer Confidence Index from The Conference Board was at 113.8 in January, down from 115.2 in December. The index had increased for three consecutive months.

The Present Situation Index improved while the Expectations Index declined. Concerns about inflation declined a little after reaching a 13-year high in November.

The Leading Economic Indicators index from The Conference Board increased by 0.8% in December, which follows a 1.1% increase in November.

The Markets

The S&P 500 lost 4.82% for the week ended with Tuesday’s close. The Dow Jones Industrial Average fell 3.00%. The Russell 2000 declined 4.33%. The All-Country World Index (excluding U.S. stocks) retreated 3.04%. Emerging market equities dropped 2.03%.

Long-term treasuries rose 1.51% for the week. Investment-grade bonds increased 0.16%. Treasury Inflation-Protected Securities (TIPS) added 0.59%. High-yield bonds fell 0.67%

In the currency arena, the U.S. dollar rose 0.16%.

Energy-based commodities increased 0.76%. Broader-based commodities rose 1.38%, while gold added 1.83%.

Bob’s News & Updates

My latest book is “Where’s My Money: Secrets to Getting the Most out of Your Social Security.” It tells you clearly what your benefit options are in different situations and how to determine the best choice for you. You can find it on Amazon.com or Regnery.com.

The number of regular viewers for my Retirement Watch Spotlight Series continues to increase. You should sign up because I make in-depth presentations of key retirement finance topics. You can watch these online seminars from the comfort of your home or office at times you choose. To learn more about my new Spotlight Series, click here.

A recent five-star review of my book on Amazon.com said, “A complete retirement guide! One of the best books on this topic!” Click for more details about the revised edition of “The New Rules of Retirement.”

If you’re interested in my books, check my Amazon.com author’s page.

I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.