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Bob’s Journal for 12/5

Last update on: Jun 15 2020

Value stocks finally might be ending their long period of lag.

Historically, value stocks generate higher long-term returns than growth stocks. But the two types of stocks take turns having better performance over shorter periods.

In recent years, however, value stocks have lagged well beyond growth stocks for such a sustained period that analysts were openly arguing that the value stock premium was dead. Growth stocks have had a significant and sustained outperformance since the beginning of 2007. The S&P 500 Value Stock index is up just over 60% since then while the S&P 500 Growth Stock index returned about 200%.

But we’re seeing signs that value stocks finally might be starting to outperform other equities. So far in 2019, value stock indexes have had similar or better total returns than growth stock indexes. This is true whether we look at stocks belonging to large, mid-size or small companies. Among small companies, value stocks are substantially outperforming growth stocks in 2019.

It is too soon to tell if this trend will be able to sustain itself for a while. I suspect it will. I think the Federal Reserve’s aggressive expansion policies after the financial crisis helped growth stocks more than value stocks.

Also, many of the technology companies that propelled the growth stock indexes higher are facing stronger competition, more government regulation and threats to their profit margins. If you’ve been a buy-it-and-forget-it growth stock investor, you might want to take a close look at your portfolio.

Similarly, small company stocks have lagged large company stocks for years though small company stocks historically have had higher long-term returns. Small company returns still lag large company returns in 2019, but the gap is smaller and small company stocks are showing some momentum.

Good-Bye to Brent Crude Oil

I remember when the discovery of oil in the North Sea was announced and was a big deal.

This week’s news reported in The Wall Street Journal is that the North Sea oil wells are dry and will be plugged in 2020 by Royal Dutch Shell. Or at least, the wells in the East Shetland Basin will be plugged.

North Sea oil was the first big discovery of oil outside the Middle East in some time. Also, drilling for oil under the sea was a relatively new undertaking. In this case, the North Sea was a particularly rough place to do business, and the drills had to go more than four miles beneath the seabed.

Finally, the North Sea oil field was used to develop the global price benchmark for crude oil known as Brent. The brent is a species of goose that is also referred to as the brant. Shell, at the time, named its oil fields after seabirds. The oil from the field has been used as the global price benchmark for about 40 years.

Since oil production from the field has been declining, the benchmark now uses a blend of North Sea crude oils to set the price. The benchmark will continue to be called Brent after the field stops production, and the Brent name probably will continue to be used after all North Sea production ceases.

The Caterpillar Indicator

Some of the better indicators of the economy weren’t intended to be used that way.

For example, a reasonable indicator of global economic growth is sales growth at Caterpillar (CAT), a company that produces heavy equipment which is used by builders and developers. CAT is well-established and diversified around the world. Though it is a U.S.-based company, it sales reveal a lot about growth around the world.

CAT’s sales growth boomed beginning in mid-2010, following sharp declines in the financial crisis. Sales growth slowed and then turned negative from early 2013 through mid-2017. That negative period coincided with poor growth everywhere except the United States. That was the period of the European financial crisis, an oil price bust and a recession in most emerging economies.

Since then, 12-month sales growth at the company has been positive.

But the growth rate has declined steadily since mid-2018. Most recently, sales grew only 3% over 12 months.

The company breaks sales down by region, and sales are declining in all regions.

The weakest region is Asia, where recent sales were 9% less than they were 12 months ago. Latin America also had a steep decline in growth, though growth still is positive.

CAT’s sales confirm other indicators that global growth has been weak, especially in Asia. I anticipate that CAT’s sales growth rate will increase, because I see signs that growth is bottoming in most of the world. If I’m wrong, CAT’s shareholder reports will be one of the first places you’ll see it.

The Data

There was more bad news from manufacturing.

The ISM Manufacturing Index fell to 48.1 from 48.3. The index also remains below 50.0, which indicates the sector is contracting. The good news is the level is better than the 47.8 recent low recorded in September. The index was at 58.8 only 12 months ago.

The PMI Manufacturing Index was better. It increased to 52.6 for November from 51.3. The two indexes diverged a lot in the past year. The PMI Index uses a survey with a larger sample size than the ISM index, but the ISM Index draws more attention.

We see a similar conflict in the two indexes for the service sector of the economy.

The PMI Services Index increased to 51.6 in November from 50.6. But the ISM Non-Manufacturing Index declined to 53.9 from 54.7. Both indexes indicate that the service sector is growing at a modest rate, but the ISM index shows the growth rate is declining.

The employment market wasn’t as strong in November as it has been, according to the ADP Employment Report. ADP said 67,000 private sector jobs were created in November. That compares with 140,000 jobs in October (which was revised higher from an initial report of 125,000 jobs). Expectations were for about 156,000 new jobs.

But new unemployment claims declined 10,000 in the latest week, following a decline of 15,000 last week. That brings the total new claims to 203,000, very close to the record lows.

The Markets

The S&P 500 lost 1.27% for the week ended with Tuesday’s close. The Dow Jones Industrial Average fell 1.72%. The Russell 2000 declined 1.26%. The All-Country World Index (excluding U.S. stocks) gave up 0.85%. Emerging market equities tumbled 1.37%.

Long-term treasuries lost 0.48% for the week. Investment-grade bonds were unchanged. Treasury Inflation-Protected Securities (TIPS) added 0.18%. High-yield bonds fell 0.12%.

In the currency arena, the U.S. dollar lost 0.74%.

Energy-based commodities fell 0.19%. Broader-based commodities declined 0.73%, while gold rose 1.29%.

Bob’s News & Updates

Join Me for the Orlando MoneyShow, February 6-8, 2020, at the Omni Orlando Resort at ChampionsGate. I will be speaking Thursday, Feb. 6, 11:30 a.m. about Important Changes in IRAs and Other Retirement Planning Strategies You Must Know. On Feb. 7, I will talk at 11:30 a.m. about 10 Questions You Must Answer Before and During Retirement. Other investment experts who will be speaking include Hilary Kramer, Bryan Perry and Mark Skousen. Register by clicking here or call 1-800-970-4355 and mention my priority code of 049320.

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.”

I’m a senior 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.

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