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Bob’s Journal for 1/14/21

Published on: Jan 14 2021

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Some Notable Events That Grabbed My Attention This Week

Are Market Strategists’ New Year Forecasts Accurate?

Each December and January, market strategists at the major Wall Street firms roll out their year-end price targets for the S&P 500.

It always surprises me how much attention is paid to this exercise. The strategists change their outlook throughout the year, so putting much weight on the 12-month forecast at the start of the year isn’t a good idea.

More importantly, the forecasts usually miss the mark by wide margins. The aggregate of all these forecasts each year since 2000 is an average annual return of 9.3% for the S&P 500 from 2000-2020.

The actual average annual percentage change in the S&P 500 since 2000 is 6.0%. That means the strategists’ average being off by about 3.3%, according to Bespoke Investment Group.

But from year to year, the difference between estimated and actual returns can be even more significant. The strategists have been too bearish at the start of the year for 13 of the years since 2000. The year the strategists were most accurate was 2005, when the S&P 500 rose 3.0% and the strategists, on average, forecast a 2.8% return.

But most years, the average forecast of the strategists differed from the actual returns by double-digit percentages. The strategists were far too bullish at the start of the 2000s. They overestimated the returns for 2000, 2001 and 2002 by 13.9, 33.7 and 35.8 percentage points, respectively.

Since then, the strategists have been too bearish most years. Among the few exceptions was 2008. Strategists on average expected an 11.1% return. The actual return was negative 38.5%.

For 2021, the average return of the strategists’ forecasts is 9.35%. The forecasts range from 2.98% from the Bank of America to 19.24% from J.P. Morgan.

Fed Policy Punishes Conservative Savers

Investors who own stocks like the Fed’s zero interest rate policy, but more conservative investors are being hurt by it.

At the start of the year, interest rates hit a new low that wasn’t noted by much of the media. The real yield is the nominal yield on an investment, minus expected inflation.

In the first days of trading in 2021, the real yield on the 10-year U.S. Treasury bond fell to -1.11%. That is the lowest real yield on record for the 10-year U.S. Treasury bond.

Since then, nominal interest rates have increased. The real yield on the 10-year Treasury bond hovered around -1.00%.

Low interest rates, especially negative real yields, mean conservative investors are losing purchasing power after inflation. After income taxes are considered, the penalty for investing in treasury bonds is higher.

That’s why, in our Retirement Watch portfolios over the last couple of years, I eliminated nominal bonds and traditional income investments as the diversifying elements in our portfolios. Instead, we have TIPS (Treasury Inflation-Protected Securities), preferred securities and equities with reliable cash flow.

Despite the negative real yields, the savings rate in the United States remains near its highest level since 1981, and people continue to pour money into conservative savings accounts and bonds.

While a number of analysts worry that the stock market is overvalued and investors are too exuberant, the actions in bonds and other conservative investments indicate many Americans are content to keep at least a portion of their portfolios in safe, low-yielding vehicles despite the negative real, after-tax returns.

Where Are Americans Moving?

The COVID-19 pandemic caused a lot of changes in American life, and one of them seems to be where people choose to live.

The states with the biggest outmigration in 2020 were California, Kansas, Illinois, New York, New Jersey and Connecticut, according to the United Van Lines annual National Migration Study. These states are what the study calls “high outbound” states.

A number of states are in the “high inbound” category for 2020. As you probably expect, most of the southeastern states were in this category, including the Carolinas, Florida, Tennessee, Alabama and Arkansas.

Other high inbound states were Arizona, Oregon, Idaho, Wyoming, Nebraska and Vermont.

The pandemic apparently changed migration patterns. I compared the 2020 results with the 2019 and 2018 studies and found significant differences in all categories of migration.

One thing that’s consistent over all three years is the high outbound category included Kansas, Illinois, New York, New Jersey and Connecticut.

In 2020, Idaho was the state with the highest inbound migration for the second consecutive year. New Jersey has been the state with the highest outbound migration for three consecutive years.

United Van Lines also surveyed its customers about the reasons behind their moves and found significant changes in 2020. About 40% said they moved for a new job or transfer, which is lower than in previous years.

A significantly higher number than in the past, 27%, moved to be closer to family. Of course, beginning in March, a high percentage of customers said the pandemic influenced their moving decisions.

The Data

New unemployment claims increased by 181,000 to 965,000 in the latest week. That’s the highest level since Aug. 22.

Continuing unemployment claims increased by 199,000 to 5.27 million. Among all the unemployment programs, the total number of people receiving benefits fell to 18.4 million from 19.2 million, but this number is two weeks behind the number of new weekly unemployment claims.

Optimism among small business owners continues to decline. The Small Business Optimism Index was 95.9 in December, down from 101.4 in November. Analysts were expecting it to be 102.

This was the lowest level for the index in seven months. It is also less than the index’s average level, 98, since 1978. Of the index’s 10 components, nine declined in December.

Rising gasoline prices increased the Consumer Price Index (CPI) in December.

The CPI climbed 0.4% for the month and is up 1.4% over 12 months.

But excluding food and energy, the CPI rose only 0.1% in December. But that measure of the CPI is up 1.6% in the past 12 months.

Last week’s Employment Situation reports ended seven consecutive months of increases in payrolls. The number of jobs in December declined by 140,000 from November, which was well below expectations.

The hardest-hit industry was hospitality, which suffered about half a million job losses. Bars and restaurants accounted for 372,000 of those losses, as they were affected by the rising number of COVID-19 cases. There were job increases in professional and business services, retail and a few other industries.

The JOLTS (Job Openings and Labor Turnover Survey) found the labor market hadn’t changed much in November. The JOLTS survey is more detailed than the Employment Situation reports but lags them by a month.

The JOLTS report found from October to November that there wasn’t much change in job openings, hiring and separations, though layoffs and discharges increased by 295,000 to a total of 2.0 million.

The Markets

The S&P 500 rose 1.67% for the week ended with Wednesday’s close. The Dow Jones Industrial Average gained 0.79%. The Russell 2000 increased 2.55%. The All-Country World Index (excluding U.S. stocks) added 1.09%. Emerging market equities jumped 3.45%.

Long-term treasuries lost 0.33% for the week. Investment-grade bonds increased 0.47%. Treasury Inflation-Protected Securities (TIPS) declined 0.31%. High-yield bonds gained 0.32%.

On the currency front, the U.S. dollar increased 1.16%.

Energy-based commodities climbed 2.13%, while broader-based commodities rose 0.31%. Gold declined 3.72%.

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 Seriesclick 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.

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