August 2015
August 28, 2015 04:15 p.m.
Your Retirement Finance Week in Review
There’s not much about the latest market turmoil that I can add to the email I sent out on Tuesday. I ventured that investors overreacted, that recent events were not another 2008. We likely would have a rally that would last for a few weeks, I said. We seem to have found a bottom for now, and investors are realizing that the U.S. economic data continues to show moderate to modest growth.
The lesson for most investors to learn is don’t buy or sell in a panic. It can be tough to resist selling when everyone else seems to be, but more often than not there’s a sharp rally after a panic.
Another lesson is don’t put in an order to sell without a minimum price, what’s known as a market order. Investors with some stocks and exchange-traded funds who did that Monday were hammered because of a few quirks in how the stock exchanges work.
The exchanges have circuit breakers, which stop trading when there’s a decline exceeding a certain percentage. Many investors know that trading in the whole market will be halted when there’s a drop of more than 7% within a day. What many don’t know is that trading for an individual stock will be suspended for a while when it declines too far in a day.
A number of individual shares had trading halted temporarily on Monday when a number of orders to sell at the start of the day at the market price overwhelmed the market. There weren’t enough buyers willing to take on these stocks, so the prices declined sharply. Major stocks such as JP Morgan Chase, Ford, and Home Depot lost 20% or more in the first few minutes of trading Monday. The Wall Street Journal said “many stocks” had trading halted on Monday, and some were suspended more than once.
This created a problem for the ETFs. The ETF issuers promise to redeem shares of the funds to any seller at the net asset value of the underlying shares. But the ETFs also have an overwhelming number of sell orders on Monday, causing their shares prices to decline. Some of them declined so much that their trading was halted, more than once. For example, the Vanguard Health Care ETF declined more than 32% within the first few minutes of trading Monday and had trading suspended eight times during the day.
Another problem is that when trading in the individual stocks held by the ETFs was suspended, the ETFs weren’t able to accurately value their portfolios. They were obligated to redeemed shares for which they had sell orders, but they didn’t have a good handle on what the net asset value of the funds were. While the Vanguard Consumer Staples ETF also declined more than 32% early Monday, its holdings declined only about 9%.
The phenomenon was short-term and was resolved as the day went on. But some people sold early Monday and received the artificially low prices for their shares.
This is another example of why you shouldn’t buy or sell during a panic, especially when the markets are overwhelmed by trading volume. It’s also why when I have a “sell below” price for an ETF I say to sell only if the fund closes below that price. ETF prices during the course of a day are too volatile to sell because a fund dips below a price at some point during the day.
The Data
The market turmoil obscured a lot of data that was issued this week, and most of it was positive.
The number most people follow is GDP. We had the second estimate of second quarter GDP, and it showed a substantial increase over the first estimate. The first estimate was 2.3%, while the second estimate was 3.7%. This was well ahead of estimates. The improvements were across the board but were particularly strong in personal consumption and residential investment. Even net exports improved. I don’t put a lot of emphasis on GDP, because it is backward-looking. But many investors do, and it showed the economy is performing better than most thought.
Personal income rose 0.4%, the same as last month and in line with expectations. That includes a 0.5% increase in wages and salaries, the highest since last November. Consumer spending rose by 0.3%, showing that it is closely following wage increases. The PCE Price Index, which is the Fed’s preferred measure of inflation, rose only 0.1% for the month and 0.3% for 12 months. Subtract food and energy, and the core PCE Price Index rose 1.2% for 12 months.
Housing had some good numbers this week. The FHFA House Price Index and S&P Case-Shiller Home Price Index both showed that home prices stalled early in the summer. Case-Shiller actually showed a slight decline in overall prices over the latest month. Over 12 months Case-Shiller has a 5% price increase, still well ahead of inflation and economic growth.
New home sales had a nice 5.4% increase after declining last month. The 12-month increase in new home sales now is 26%. The median price did increase 3%, though that is only a 2% increase over 12 months. The supply of new homes on the market is considered low, so that should help both sales and prices.
The pending home sales index also increase 0.5% for the month. This index covers sales of existing homes, not new homes. It’s not a great number but is an improvement over last month’s decline.
Manufacturing continues to struggle. The Richmond Fed Manufacturing Index took a sharp drop to 0 after last month’s big increase to 13. The Richmond Fed’s survey was the best of the regional surveys last month but was weak across the board this month. It looks like manufacturing still has a bumpy road ahead.
The Kansas City Fed Manufacturing Index has been one of the weakest, since that region is where most of the fracking and related energy activity has been taking place. The region also has a lot of commodity-related activities. That weakness continued in the latest month with the index declining from last month’s negative number and coming in below expectations at -9. The forward-looking numbers, such as new orders, indicated there won’t be a let up in the decline for a while.
Durable Goods Orders were something of a bright spot, rising 2%. After excluding the volatile transportation sector they rose 0.6%. The 12-month number after excluding transportation is a mere negative 2.5%. This is the second month of positive news, and most components of the report were positive.
The non-manufacturing economy continues to do well. The PMI Services Flash mid-month index held steady when expectations were for a small decline. The index continues to indicate expansion in this sector of the economy. The index was not positive in all components, which could indicate growth will slow a bit as the year goes on.
Consumer Confidence as measured by The Conference Board surged to more than wipe out last months’ surprise significant decline. Increased optimism about the employment market led the measure higher. On the negative side, consumers reported that fewer plan to buy new cars or homes.
But Consumer Sentiment as measured by the University of Michigan, in its early mid-month reading, declined slightly from last month’s final reading. It’s a small change and little below expectations, but it is a sharp contrast with Consumer Confidence.
Jobless claims declined a little, keeping that number near historic lows.
The Markets
You know it was a wild week in all the markets. The Dow Jones Industrial Average lost 1,000 points from last Friday’s close in the first few minutes of Monday’s market open. But it never touched that low again and recovered to have its largest two-day point gain ever on Wednesday and Thursday. For the week, emerging market stocks led the way higher with a 3% gain. The All-Country World Index rose about 2%. The Dow Jones Industrial Average, S&P 500, and Russell 2000 U.S. Smaller Companies Index each gained about 1%.
Bonds didn’t do as well. High-yield bonds, as usual, followed stocks and gained about 2.5%. Investment-grade bonds and Treasury Inflation-Protected Securities (TIPS) lost 0.5%. Long-term treasuries lost about 4%.
The dollar gained about 3%.
Energy-based commodities gained about 9%. Broader-based commodities gained 5%. Gold lost about 2.5%.
Some Reading for You
There’s a new report explaining how people can use their home equity to help finance retirement through downsizing, reverse mortgages, and more.
I like this report about the new uses of data in sports.
Here are a couple of simple ways to avoid the usual afternoon sluggishness.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
August 25, 2015 11:25 a.m.
Market Correction Update
Global markets have been through quite a lot the last few days. We’re not short-term investors at Retirement Watch, but it is appropriate to give you an update of our portfolios and some reflections.
The funds in our portfolios have held up well. The changes made in the September issue, posted on the web site on August 12 were especially timely. In the Sector, Balanced, and Income Growth portfolios we sold Price New Asia and reduced Bridgeway Managed Volatility. We added Wasatch-Hoisington U.S. Treasury Bond and Vanguard Utilities Index-Admiral Shares (or other recommended utility stock funds).
In the Retirement Paycheck portfolio we replaced three funds that triggered their sell signals in the previous month.
The only fund that triggered a sell signal in the last week’s turmoil was Tweedy, Browne Global Value. It closed at $24.89 yesterday, and the sell signal was $25.50. We’re selling it from the model portfolio. Frankly, if you haven’t sold it yet, I would continue to hold for reasons I explain below.
Let’s look at how our funds fared. I’m going to give one-week and one-month returns for each fund. As a benchmark, the Vanguard 500 Index fund was down 9.91% for one week and 8.78% for one month.
Tweedy, Browne Global Value is down 6.36% and 6.78%. Nicholas is down 9.28% and 7.85%. Bridgeway Managed Volatility is down 2.85% and 2.58%. DoubleLine Total Return Bond is up 0.64% and 1.00%. DoubleLine Emerging Markets Fixed Income is down 1.57% and 2.25%. The Wasatch-Hoisington U.S. Treasury Bond fund is up 1.81% and 5.24%. Vanguard Utilities Index is down 5.54% and up 1.88%.
In the Retirement Paycheck portfolio, we also own Cohen & Steers Preferred Securities & Income. It was down 1.03% and 1%.
You can see that most of the damage, and in some cases all of the damage was done in the last week.
I pointed out in the September issue that investors have few investment choices with a margin of safety. The correction was building for some time, and bear markets in several asset classes were likely to weigh eventually on U.S. stocks.
The good news is that most of our investments held up well until the last week and continue to do better than the major market indexes. Quality investments with a margin of safety usually hold up well until the final stages of a correction or bear market. Then, there’s a capitulation phase in which a number of investors decide to sell almost everything. The Wall Street Journal has an article this morning about the floor of trading orders into the discount brokers and mutual fund companies. Web sites and telephone call centers were overwhelmed. Some people couldn’t make the trades they wanted to. The opening 1,000 point drop in the Dow clearly precipitated blind panic selling.
I think the selling in U.S. stocks and also European stocks was overdone. The U.S. economy continues to chug along at its moderate growth rate. Europe continues to slowly improve. China has problems that affect mostly other emerging economies, but these are well-known and have been ongoing for a while.
While the 1,000 point decline to open the day and almost 600-point drop to close the day are large numbers, they aren’t as big as many people believe. Because the Dow is at a much higher level these days, yesterday’s actions didn’t even make the list of top percentage point declines. The Dow never reached the 7% intraday decline that would trigger an automatic halt in trading.
Many investors make mental and behavioral errors. A common one, which is in place now, is to filter facts through recent events instead of taking a long-term perspective. Too many people saw the large declines of last week and China over the weekend and concluded another September 2008 was in play. I think that’s wrong. There’s no equivalent now of the Lehman Brothers bankruptcy, failure of AIG, and other events that froze the markets.
There are problems in the global economy, which I point out in the September issue. I continue to believe that deflation is more of a risk than inflation, and that deflation would be a downward spiral that would be hard for central banks to stop. Central banks have very few tools left after locking in zero interest rates and using quantitative easing. Another major risk is that the Fed could raise interest rates too far, too fast. But those risks aren’t imminent.
Because investors overreacted, I expect we’ll have the usual post-panic rally for at least a few weeks. I’m not ready to say we’ve reached a bottom and it’s time to buy bargains. But our portfolios as outlined in the September issue are prepared for this kind of environment. We’ll lose less than the market averages in declines and earn solid gains in rallies. I recommend maintaining the current positions.
The True Diversification portfolio is behaving as expected. In the September issue I recommended reducing positions in MainStay Marketfield and PIMCO All Asset All Authority and putting those proceeds in William Blair Macro Allocation.
In that portfolio, we’ve seen the following returns in the last week and month, respectively.
MainStay Marketfield reversed recent trends. It is up 1.31% for the week and down 0.84% for the month. PIMCO All Asset All Authority is down 3.50% and 5.82%. FPA Crescent is down 5.22% and 5.24%. Berwyn Income is down 2.40% and 1.89%. Price Capital Appreciation is down 5.92% and 4.09%. Cohen & Steers Realty Shares is down 7.85% and 4.60%. (It was having a nice rally before the panic.) Price High Yield is down 1.85% and 2.96%. PIMCO Real Return is down 0.45% and 1.16%. Oakmark is down 10.02% and 8.63%. William Blair Macro Allocation (which we just added) is down 5.44% and 8.09%.
August 21, 2015 04:10 p.m.
Your Retirement Finance Week in Review
I had the comments on inflation below written before the steep market declines of Thursday and Friday. The events make the comments even more timely, because they indicate the high risk of deflation the global economy faces.
A couple of comments are in order about the market declines of the week. In the stock market, we saw losses this week in the stocks that had done well so far this year despite negative returns for most stocks. Health care, consumer discretionary, and a few other sectors finally swooned. That typically is what happens near the end of a market decline. Those holding the quality assets finally capitulate and sell in a panic. That doesn’t mean the decline is over, but it’s a point to ponder.
As always, consider the longer-term perspective. While the major U.S. indexes are at their lows for the year and sporting negative returns, they still are not too far below their all-time highs that were reached not too long ago. So far, this still is a mild correction in a very strong bull cycle and many analysts believe the decline is long overdue. The same can’t be said of most other markets, especially commodities and emerging markets. But it is the case with U.S. stocks.
Now, on to my comments about inflation.
Inflation confuses a lot of people, especially since the financial crisis.
I remember speaking to a investor group in late 2009 and repeating what I’d written in the newsletter, that I thought inflation would remain low for a considerable time. Several members of the audience challenged this, arguing that the Federal Reserve’s quantitative easing and other programs would trigger high inflation within a year or two.
You know, of course, that inflation’s been low since 2008. This week’s Consumer Price Index and last week’s Producer Price Index showed inflation isn’t a problem. It remains below the Fed’s 2% target, and inflation is below central banks’ targets in most countries despite significant monetary stimulus.
Many people learned from the post-World War II experience that expanding the money supply leads to higher inflation in time. They forgot that, while that’s true, there are other factors that influence inflation. The prime influence depends on which economic regime or long-term cycle the economy is in. From WW II through 2007, the U.S. was in a cycle of increasing debt, which accelerated economic growth and put an inflationary bias in the economy.
By 2007, debt levels were maximized. U.S. households began reducing debt, primarily through defaults. Lower debt levels, and especially shrinking debt levels, create a deflationary bias in the economy. Extreme amounts of monetary stimulus barely budge inflation in most countries.
In the meantime, there are other forces that influence prices, and these are mostly deflationary.
Globalization and technology worked together to reduce production costs and created downward pressure on prices of goods. Even the prices of some services face deflationary pressures because of technology.
The global commodity cycle right now is in its deflationary period. Oversupply and weak demand caused prices to collapse the last couple of years and are likely to keep a lid on commodity prices for a while.
Wage increases in the U.S. have been low during the economic recovery. Wage inflation increased a bit recently, but it still is below long-term trends.
On the other side of the ledger, there are several factors with an inflationary bias.
Prices of services have increased fairly steadily the last few years, and those increases continue for the most part. Wage increases also have picked up. With unemployment low, there’s potential for wages to accelerate, though there’s no sign of that in the data.
The housing market is recovering and contributing to growth. There was a burst in home prices in 2013, but since then prices have increased at close to average historic levels. Rents have increased faster and put upward pressure on the CPI higher, as we’ve discussed in the past.
So far, the deflationary forces have largely overwhelmed the inflationary forces. In addition, many of the deflationary forces are present around the globe, and that increases the deflationary pressure on the U.S.
The recent economic slowdown in China plus slow growth in Europe and Japan are additional deflationary forces that keep reported inflation low in the U.S. and make deflation a much greater risk over the next year than inflation.
Price pressures can be either secular (long-term) or cyclical (shorter-term). Both sets of forces largely are deflationary with only a small number of factors creating modest inflationary pressure.
The Data
It was another fairly quiet week for data. The economic report with the largest impact was the release of the minutes from the Federal Open Market Committee meeting in July. Most observers believed that at the meeting the members all but agreed to raise rates in September. Instead, the minutes revealed disagreement. Only one voting member was ready to raise rates right away. Others wanted to see more data but believed trends would stay in place and convince them to raise rates soon. But still others said they weren’t close to raising rates. Concerns were raised about China and its effect on the global economy, and events since the July meeting could only have caused additional worry for those members. The minutes seemed to trigger stock market declines in the U.S.
The Consumer Price Index indicated inflation is low at only 0.1% for the month and 0.2% for 12 months. Excluding volatile food and energy puts the 12-month increase 1.8%, still below the Fed’s 2% target. the CPI might overstate inflation, because a large component of it is housing costs measuring using owner’s equivalent rent. Rents have been rising significantly the last few years because fewer people qualify for home mortgages and many don’t want to buy homes because of the price declines after 2007. Without the housing component, the CPI probably would be similar to other inflation measures at around 1% for 12 months.
There were several housing reports that mostly were positive. The only negative report was in housing starts. The starts increased over last month and were above expectations. But new permits issued declined. That could indicate lower starts in the future. But apparently there was a change in New York law that was believed to shift some July starts into June. But permits declined in other parts of the country, so new home sales in coming months could weaken.
Homebuilders don’t seem to notice yet. The Housing Market Index from NAHB ticked up again. The reading of 61 is considered very strong and indicates homebuilders are optimistic.
Existing home sales increased again and were above expectations with a 2% increase. The 12-month increase in sales was 10.3%. Existing home sales were expected to decrease a bit after hitting an eight-year high last month. Single-family home sales are up 11% over 12 months.
Manufacturing had two reports. The Empire State Manufacturing Survey turned deeply into negative territory after a modest increase last month. It was the weakest reading since April 2009. The report is consistent with other recent manufacturing reports, so it might turn out to be an outlier. The PMI Manufacturing Index Flash declined to its lowest level since October 2013, but still is above 50, indicating expansion.
Leading Economic Indicators as reported by The Conference Board declined after months of increases and expectations of a modest increase. The LEI compiles only 10 economic indicators into one index, so swings in one or two factors can influence the overall number. In this case, big changes in new home building permits heaving influenced the index. Most of the factors were flat.
New unemployment claims again rose by a small amount, four thousand. The weekly number and four-week average continue at levels that are very low historically. That indicates the next monthly employment rates should be good ones.
The Markets
Risky assets took steep dives the last two days of the week after holding steady the first couple of days of the week. By Thursday’s close, the Dow reached a new 2015 low, and Thursday’s decline was the largest one-day percentage loss for the Dow since February 2014. The S&P 500 also slid into negative territory for the year with Thursday’s close.
At Friday’s close, emerging market stocks were the big losers thanks to a renewed bout of selling and problems in China. The emerging market equities were down about 6.5%. The All-Country World Index lost 5.5%. The S&P 500 and Dow Jones Industrial Average each lost about 5%. The Russell 2000 U.S. Smaller Companies Index lost 4.25%, the winner among stock indexes for the week.
Bonds generally had a good week as investors sought safety. Long-term treasuries rose about 1.4%. Investment-grade bonds rose 0.4% while Treasury Inflation-Protected Securities (TIPS) gained a fraction. High-yield bonds followed stocks, as they usually do, and lost 0.8%.
The dollar followed stocks down, losing 1.8% for the week.
Gold had the best week, gaining almost 4%. Energy-based commodities lost about 4.5% as oil fell below $40 per barrel. Broad-based commodities lost 3%.
Some Reading for You
Here’s a Fed official explaining why he thinks quantitative easing didn’t do much for the economy.
This is a summary of research explaining how to improve an aging brain.
Here’s an interesting story about Paul Newman’s estate and why at least some people think it didn’t turn out the way he expected.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
August 14, 2015 04:10 p.m.
Your Retirement Finance Week in Review
China took over the headlines this week with its surprise devaluation of its currency, the yuan, against the dollar on Monday. The yuan had been pegged to the dollar at a fixed rate, though there also was some free market trade in the yuan that indicated the official exchange rate overvalued the yuan.
Markets don’t like surprises, so the change in the fixed exchange rate caused a sharp shift in almost all markets. Risky assets were sold and safe assets, especially the dollar and treasury bonds, were purchased.
The surprises continued on Tuesday. Initially the Peoples Bank of China had announced that it would support the yuan at the new exchange rate. But on Tuesday the news was different. The yuan was allowed to float within a wide range for a currency (about 2%) before the central bank stepped in with buying and selling to support the currency.
Markets tend to reprice assets quickly after moves such as this. But there are likely to be some long-term effects.
One long-term effect is reduced confidence that China’s authorities know what they are doing and can be relied on to do what they say they will. Another long-term effect is a concern that the country’s economy might be weaker than the markets thought. That probably has been the main response of market traders. They’re now more concerned about potential deflation and slow global growth than they were last week.
One long-term effect that will be clear is more uncertainty and volatility in the markets. China’s move affected all markets. Even U.S. stocks declined sharply in response to Monday’s and Tuesday’s news.
Even before the news I wrote in the September issue of Retirement Watch that there are fewer opportunities for investors these days. I recommended several changes in the portfolios and generally reduced risk. The news from China makes the point more clear.
The Data
The NFIB Small Business Optimism Index improved after a surprisingly big drop in last month. The index hit its highs for the recovery late in2014 and still hasn’t returned to those levels. But it still is at a healthy level that joins many other economic data points indicating moderate growth in the U.S. economy. Details of the report also were positive. The job openings number among small businesses is very high. Also, few businesses indicate that weak demand or poor sales are their biggest problems. In fact, the demand level is now at normal levels.
Productivity increased a bit in the second quarter after declining in the first quarter. Productivity growth has been fairly weak recently, and that’s generated a lot of discussion. Some argue that productivity isn’t being measured right to reflect changes in the economy, especially in technology. Others argue that productivity growth is declining and that will lead to smaller profit margins at many companies. Over 12 months, productivity growth still is weak. Unit labor costs increased modestly in the latest report, because of the increase in productivity. But over 12 months unit labor costs are up 2.1%.
The labor market continues to steadily improve as measured by the JOLTS (Job Openings and Labor Turnover Survey). There were fewer job openings by a modest amount, but hirings increased modestly. The layoff rate also increase by a tenth of a percent. Overall, the report doesn’t indicate much of a change and is consistent with the monthly employment situation reports.
New unemployment claims rose by a small amount, 5,000, following a small 2,000 increase last week. The four-week average is at 266,000. This indicator is near historic lows, regardless of economic environment. The job market is very tight, which is the leading factor in favor of the Federal Reserve raising interest rates soon.
Retail sales were a positive surprise this week. Last month’s negative number was revised upward to no change from the previous month. This month’s retail sales increased 0.6% over last month. Even after excluding autos and gas, sales increased 0.4%. The report indicates stron
