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Bob’s Journal for 11/5/20

Published on: Nov 05 2020

What Are the Basics About Retirement Planning?

What are the basics of retirement planning, and do you know them?

Most older Americans describe themselves as at least “moderately knowledgeable” about retirement income planning, according to a study recently released by the American College of Financial Services.

Yet, when the same people were asked about basic retirement finance issues, most answered incorrectly.

Survey participants were asked to complete a 38-question online quiz. You can see the quiz here.

As past studies found, more than half of the respondents underestimated the life expectancy of a 65-year-old man. Life expectancy is a key issue in retirement planning, since an underestimate makes it more likely the person will run out of money in retirement.

Large percentages of participants made similar mistakes on questions about long-term care, Social Security, investments and more. When participants had a written retirement plan or retirement income plan, they reported feeling more prepared to deal with last March’s bear market. That’s consistent with other studies that found retirees with written retirement plans reported more satisfaction and comfort in retirement.

Even so, fewer than half of those with written plans reported being prepared for the bear market. Only one in three had written plans.

How Much Government Support Does the Recovery Need?

Government stimulus payments are one factor that prevented the recession from being much worse than it has been, especially during the key months of March, April and May, when large portions of the economy were shut down.

The transfer payments, including enhanced unemployment compensation, reduced the decline in Personal Income. One key measurement to watch is Personal Income less Transfer Payments.

Transfer payments ballooned in April and May and have declined since. The rate of decline accelerated after most of the stimulus measures expired on July 31.

Despite the decline in transfer payments, Personal Income has held up well. Personal Incomeless Transfer Payments increased by 0.7% in September from August’s level and was only 2.2% below the previous peak in February 2020.

It is not clear how well Personal Income will do in the coming months, especially if economic activity declines because of increased COVID-19 infections. But so far, Personal Income has held up better than expected after the stimulus measures expired.

Can Value Stock Investing Survive?

Value stocks have lagged market indexes and growth stocks far longer than during any time in the past.

Through stock market history, value stocks and growth stocks have alternated periods of dominance. During some periods, value stocks had higher returns than growth stocks, and vice versa. Over the long term, value stocks have higher returns, especially when adjusted for risk and volatility.

But value stocks haven’t had a turn at the top for a long time. This year is the most painful in a long time for value investors. In 2020, value stocks are likely to have their lowest returns relative to growth stocks since 1975.

Three highly regarded value investors recently appeared at a webinar for their clients to make the case for value investing going forward.

They agreed that it is hard to explain why value has underperformed growth for so long. Probable reasons include interest rates near zero and the increase in the flow of money to index investing. They also said the rise of the digital economy was a factor, since companies that benefit from the trend are growth oriented.

The panelists also gave reasons they believe value investing is likely to return to prominence. Mario Gabelli said he favors investing in innovation and new trends, but investors shouldn’t pay too much to do so. Value stocks provide a lower-risk way to invest in innovation and trends.

The panelists also pointed out that the valuation gap between value and growth stocks is abnormally large.

Josef Lakonishok pointed out that growth stocks usually trade at valuations 20% higher than the index’s valuations. But today, growth stocks are 50% more expensive than the index.

To justify those valuations, the growth stocks will have to maintain the rapid growth rates they’ve had the last few years.

Also, the 10 largest capitalization companies in the S&P 500 usually trade at the same price-to-earnings (P/E) multiple as the rest of the market. Now, they’re trading at a 60% premium.

The panelists believed growth stocks are at extreme valuations to the indexes and to value stocks, and that must reverse at some time. None, however, could say when investors will favor value again or what might trigger the change. But they all are confident that at some point value stocks will become market leaders again.

The Data

New unemployment claims declined by 7,000 to 751,000 after last week’s number was revised higher to 758,000. This is the third consecutive week below 800,000, though new claims still are well above the pre-pandemic record high of 695,000 in October 1982.

Continuing claims were 7.3 million, down by 538,000. But there was an increase of 277,564 in Pandemic Emergency Unemployment Assistance claims, bringing new claims for that program to 3.96 million.

The total number of people receiving all forms of unemployment assistance was 21.5 million, a decline of 1.15 million.

Manufacturing continues to improve. The PMI Manufacturing Index increased to 53.4 in October from 53.1 in September.

The ISM Manufacturing Index in October rose substantially to 59.3 from 55.4 in September.

Factory Orders increased by 1.1% in September, compared to 0.7% in August.

The service sector also is growing. The PMI Services Index climbed to 56.9 in October, the highest level since April 2015. It was at 54.6 in September.

The ISM Non-Manufacturing Survey was 56.6 in October, which is down from 57.8 in September. That indicates the sector still was growing in October but at a slower rate than in September.

Pending home sales declined 2.2% in September. That compares to an 8.8% increase in August and expectations for a 3.5% increase in September. Despite the disappointment, pending home sales have jumped 20.5% over 12 months.

Personal Income increased 0.9% in September, which is a rebound from the 2.5% decline in August and was better than expectations.

Personal Consumption gained even more, rising 1.4% in September following a 1.0% boost in August.

The Fed’s preferred measure of inflation, the PCE Price Index, increased 0.2% in September whether looking at the broad index or the core that excludes food and energy. Over 12 months, the price indexes advanced 1.4% and 1.5%, respectively.

Consumer Sentiment, as measured by the University of Michigan, held fairly steady. In October the index was 81.8, compared to 81.2 in September.

The Chicago Purchasing Manager’s index indicated the economy still is growing. The index was down a bit in October to 61.1 from 62.4 in September.

The ADP Employment report was well below expectations. The report estimated that 365,000 private sector jobs were created in October. Economists were expecting about 600,000 new jobs. Most of the new jobs were in the service sector, and the hard-hit hospitality sector was the leader.

ADP had reported 753,000 new jobs in September. The October number is the lowest since July.

The Markets

The S&P 500 rose 5.17% for the week ended with Wednesday’s close. The Dow Jones Industrial Average gained 4.91%. The Russell 2000 increased 4.64%. The All-Country World Index (excluding U.S. stocks) added 4.77%. Emerging market equities grew 4.78%.

Long-term treasuries rose 0.34% for the week. Investment-grade bonds increased 1.20%. Treasury Inflation-Protected Securities (TIPS) lost 0.19%. High-yield bonds gained 2.56%.

In the currency arena, the U.S. dollar declined 0.08%.

Energy-based commodities increased 2.37%. Broader-based commodities rose 1.00%. Gold gained 1.62%.

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 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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