Bob’s Journal for 10/10/19
Notable Events That Grabbed My Attention This Week
Here are some things I came across in the last week that are likely to interest you.
You can select stocks better than artificial intelligence can.
I was at the Philadelphia MoneyShow last week and listened to a talk by Tom Sosnoff of tastytrade, an online brokerage firm. Sosnoff discussed the exchange-traded fund (ETF) AI Powered Equity (AIEQ).
The ETF uses artificial intelligence powered by IBM’s Watson to pick stocks. The fund’s website says the system mimics a team of 1,000 research analysts working around the clock.
Yet, since its inception in late 2017, the ETF has significantly lower returns than the major stock indexes. Morningstar compared the fund to the Russell 1000 Growth Index and found it trails the index by 6.68% over the last 12 months.
Sosnoff says there’s a lot of emotion in the markets, and artificial intelligence can’t make better decisions than humans in situations in which emotion is significantly involved. Whatever the reason, you should be aware that so far, IBM’s Watson has lagged well behind the market indexes.
The Wall Street Journal reported last week that seven-year automobile loans now are common. In the first half of 2019, about one-third of auto loans were for six years or longer. It used to be that financial advisors told clients an auto loan never should be more than three years. A few years back, the five-year auto loan became the standard. Now, the loan term is moving toward seven years. Many people don’t keep their cars that long.
I remember telling a friend a few years ago that the auto manufacturers were taking advantage of 0% interest rates, and it would come back to bite them.
The manufacturers steadily increased sticker prices of their vehicles in the years following the financial crisis. The price increases didn’t matter initially, because the manufacturers could use 0% interest rates to offer generous loan and lease terms to customers. Low interest rates kept the monthly loan or lease payment steady over time.
Vehicle prices rose faster than average incomes following the financial crisis. That can’t continue indefinitely.
Auto sales have suffered since the Federal Reserve began tightening the money supply in 2015.
Consumers have started to resist higher vehicle prices in different ways. Some lease instead of buying. Many are keeping vehicles longer than in the past. There also has been an increase in used car sales as many consumers decide to buy used vehicles instead of new ones.
When interest rates rise again or incomes suffer in the next downturn, automobile manufacturers will see sales dwindle if they don’t adjust prices.
The third-quarter earnings reports began this week, and this earnings report season is likely to be a telling one. The most earnings announcements in one day will be on Oct. 24 with 51 reports. The last week in October will be the busiest week of this earnings season.
I’ve been expecting earnings and earnings per share to soften the last few years, and that seems to be happening. Operating earnings for S&P 500 companies have been close to flat for the last 12 months, and some analysts are talking of an earnings recession.
The big issue for stock investors is whether this is a pause in earnings growth, much like 2015 and 2016, or is it a longer-term reduction in earnings.
Analysts continue to reduce their earnings forecasts as we head into this earnings season. Most analysts are concerned about the trade war and lower global growth.
There are longer-term concerns as well. Stock prices and earnings per share benefited greatly from corporate stock buybacks and other financial engineering. Stock buybacks have declined in 2019, and that’s been followed by weakness in stock prices.
Higher wage growth also is likely to hurt profit margins. And productivity hasn’t been strong for a few quarters. That has a negative effect on earnings.
These and other factors create headwinds to earnings growth. This could be a significant earnings season for the markets. If these headwinds result in negative earnings surprises, stocks could be in for another rocky fourth quarter.
The Data
Consumers slowed their borrowing in August after a big jump in July. Consumer credit increased $17.9 billion in August compared to $23.0 billion in July. Credit card use declined $1.9 billion compared to a $9.4 billion the previous month. But student and vehicle loans increased sharply.
Optimism continues to slide among small business owners. The Small Business Optimism Index from the National Federation of Independent Business (NFIB) declined to 101.8 in September from 103.1 in August. No components of the index increased. Business owners say that uncertainty has increased and they are less likely to make major expenditures.
Wholesale inflation turned into deflation in September. The Producer Price Index declined 0.3% compared to a 0.1% increase in August. After excluding food and energy, prices still declined 0.3%. Over 12 months, the headline PPI is up 1.4% and, excluding food and energy, the index is up 2.0%.
The Consumer Price Index (CPI) indicated retail inflation remains low. The CPI was unchanged for September. After excluding food and energy, the CPI rose only 0.1%. Over 12 months, the measures are up 1.7% and 2.4%, respectively.
New unemployment claims declined 10,000 to 210,000. That wipes out most of the modest increases of the last few weeks and keeps the measure near historic lows.
Job openings continue to decline, according to the JOLTS (Job Openings and Labor Turnover Survey) report. Openings declined for the third consecutive month in August, falling 1.7% for the month. Over 12 months, openings are 4.0% lower. The number of job openings is at its lowest level since February 2010.
Likewise, hiring declined 3.3% in August and is down 0.8% over 12 months. In general, the JOLTS report indicates the labor market is becoming a little softer.
Last week’s Employment Situation also showed a little weakness. Keep in mind that employment data lags behind the rest of the economy.
The number of jobs created was 136,000, which was a little below estimates and trends of recent months. The unemployment rate declined to 3.5%.
Yet average hourly earnings were unchanged for September after rising 0.4% in August. Earnings now are up only 2.9% over 12 months, compared to 3.2% last month. As I’ve pointed out before, it is unusual for earnings growth to be this low after such an extended economic recovery and with the unemployment rate so low.
The Markets
The S&P 500 rose 1.11% for the week ended with Wednesday’s close. The Dow Jones Industrial Average increased 1.04%. The Russell 2000 fell 0.08%. The All-Country World Index (excluding U.S. stocks) added 1.00%. Emerging market equities improved 0.94%.
Long-term treasuries rose 0.52% for the week. Investment-grade bonds increased 0.25%. Treasury Inflation-Protected Securities (TIPS) added 0.05%. High-yield bonds improved 0.22%.
In the currency arena, the dollar increased 0.15%.
Energy-based commodities rose 0.95%. Broader-based commodities climbed 0.55%, while gold gained 0.56%.
Bob’s News & Updates
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.”
I’m a regular contributor to the Forbes.com blog. You can view my contributor page here.
Do your heirs know how to handle an inherited IRA? If not, they’ll join the long list of heirs who made simple mistakes that triggered additional taxes and penalties. To avoid this result, be sure your heirs have a copy of Bob Carlson’s Guide to Inheriting IRAs.
