Bob’s Journal for 3/24/22

Market Recovery vs. Dead Cat Bounce

The S&P 500 rose 6.15% in the week ending last Friday, March 18.

Did that surge indicate the end of the market decline since last November’s peak? Or was it the proverbial dead cat bounce?

For some perspective, I looked at the last two extended bear markets, one from 2001-2002 and the other from 2008-2009.

In each bear market, the S&P 500 lost more than 50% from peak to trough. But in each bear market, there were periods of significant market increases. These surges usually were 7% or higher and lasted from a few weeks to several months.

In the 2001-2002 bear market, I counted at least three of these counter rallies, with returns exceeding 7%, 8% and 18%. In the 2008-2009 bear market, I identified four rallies of 8%, 7%, 13% and 7%.

If you look at the stock index charts from those periods, you’ll see that the S&P 500 was grinding steadily lower in a stairstep pattern, with the downward trends interrupted by those rallies.

But in each bear market after the last of the rallies, the index tumbled sharply. Indeed, a high percentage of the total losses from the bear markets were experienced in the last few months.

The lesson is that it’s tough to interpret the meaning of a strong market rally by looking only at market action. It is better to consider other factors before making a decision.

Currently, the Federal Reserve no longer is supporting the markets and seems determined to reduce market liquidity and let markets fall. There also are complications such as global labor and supply shortages and a major global conflict. These aren’t the conditions that usually accompany a new bull market.

Some Key Gaps in Many Retirement Plans

Many pre-retirees might be making their plans with bad data and low confidence, according to a recent survey of retirees and pre-retirees by MetLife.

About 62% of pre-retirees said their anticipated retirement age is based on whether they believe they’ll have saved enough to fund their retirements. But answers to other questions indicate they haven’t explored the issues fully.

The median retirement nest egg is expected to be $450,000, but individual savings vary widely. About 11% say they’ll have less than $100,000 saved while 14% say they’ll have more than $1 million.

Many of the survey respondents don’t seem to have a good handle on life expectancy. About 16% say they anticipate their savings won’t last a decade, and on average, the pre-retirees expect their nest eggs to last 19 years.

Yet, the life expectancy for most new retirees exceeds 19 years, and a high percentage will live much more than 19 years in retirement.

Perhaps that’s why 30% of pre-retirees think they’ll have to delay their retirements past their planned retirement ages.

More than 50% of pre-retirees are very or somewhat concerned that they underestimated both the amount of money they’ll need and their life expectancy while overestimating how long their savings will last.

It is no surprise that one-third or fewer of the pre-retirees haven’t reviewed information such as estimates of how long their savings might last, how distributions will be taxed, how to coordinate different sources of income and other key questions.

When most retirees had pensions and Social Security, retirement planning didn’t have to be detailed. But in today’s environment, a strong review of retirement finances is essential both before and during retirement to ensure a successful retirement.

Inflation to Linger Through the End of 2023

High inflation is likely to be sustained through the end of 2023. That’s the analysis of economist Martin Sullivan for Tax Analysts.

Sullivan, who’s no conservative, puts the blame on the fiscal stimulus enacted in the American Rescue Plan Act of 2021. He describes the stimulus as “policy overkill.”

After crunching the numbers, Sullivan said the stimulus measured enacted in 2020 and accompanying easy monetary policy were essential to offset the effects of the pandemic. But Sullivan believes those measures had been successful by the end of 2020.

The American economy was at full capacity at the beginning of 2021. The additional stimulus enacted early in 2021 increased demand for goods and services at a time when the economy couldn’t increase production.

The result was the classic inflation definition of too many dollars chasing too few goods.

Admitting that his analysis involves many assumptions, Sullivan said that the excess savings from the stimulus and their inflationary pressures are likely to work through the system around the end of 2023.

If supplies can be increased faster or if other factors reduce consumer demand, inflation might start to ebb sooner. But if some version of the Build Back Better bill is enacted, inflationary pressures likely would be extended.

The Data

Housing starts increased by 6.8% in February from January’s level, which was revised higher from the initial estimate. Starts in February were 22.3% higher than 12 months earlier.

Single-family home starts increased 5.7% in February from January’s level and were 13.7% higher than 12 months earlier.

The number of single-family homes under construction was at the highest level since December 2006. Unlike in 2006, most of the single-family homes currently under construction already have been sold.

Existing home sales decreased 7.2% in February from January’s level and were 2.4% lower than 12 months earlier. A major cause of the decline was a lower inventory of homes available for sale. The inventory in February was 15.5% lower than 12 months earlier.

New home sales declined 2.0% in February from January’s level. February’s sales were 6.2% lower than sales 12 months earlier.

The median sale price of a new home in February was $400,600, and the average sale price was $511,000.

The Philadelphia Fed Manufacturing Index increased to 27.4 in March from 16.0 in February. New orders and shipments increased significantly, and employment had a solid increase.

Prices paid and prices received both increased by significant amounts.

The Richmond Fed Manufacturing Index also jumped sharply in March, rising to 13 from 1 in February. All major components of the index increased.

Prices paid remained higher than average but now have trended lower for three consecutive months. But prices received inched higher.

Industrial Production increased by 0.5% in February from January’s level. Manufacturing production increased 1.2% for the month, and production of business equipment was 1.9% higher in February than in January.

Total production was 7.5% higher than 12 months earlier.

New unemployment claims declined by about 15,000 to 214,000 in the latest week. That’s the lowest level of any week in 2022, and only two weeks last November and December were lower.

Continuing claims decreased by 70,000 to 1.4 million, the lowest level since 1970.

The Leading Economic Indicators index from The Conference Board increased by 0.3% in February after declining in January.

The Markets

The S&P 500 rose 5.82% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 3.78%. The Russell 2000 increased 5.99%. The All-Country World Index (excluding U.S. stocks) added 6.74%. Emerging market equities surged 9.30%.

Long-term treasuries lost 2.17% for the week. Investment-grade bonds increased 0.39%. Treasury Inflation-Protected Securities (TIPS) declined 0.88%. High-yield bonds gained 1.77%.

In the currency arena, the U.S. dollar declined 0.49%.

Energy-based commodities increased 10.21%. Broader-based commodities rose 6.61%. Gold gained 0.25%.

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.

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