Bob’s Journal for 3/31/22

The Correction-or-Bear-Market Debate

After stock market indexes decline more than 5%, investors often ask the same two questions.

What’s the difference between a correction and a bear market? Are we headed for a bear market or a correction?

There’s no official or formal definition of either a correction or a bear market. Most market observers say a correction is when the major market indexes drop more than 10%, and a bear market is when the indexes drop more than 20%.

Others have more detailed definitions. Some say only the daily closing values matter. Levels reached during trading hours are ignored.

Some commentators say a brief dip below either the 10% or 20% level doesn’t count. There has to be a sustained decline to qualify as either a correction or bear market. How long the decline must be sustained to qualify is another disputed issue.

I don’t find the discussion to be useful. It is merely labeling.

Here’s a way to look at the situation that can be used to determine whether to adjust your portfolio.

A correction is when the pricing or valuation of the indexes declines. In other words, investors are willing to pay less for each dollar of earnings or assets behind the index. For example, the price-earnings ratio declines with stock prices.

Investors might revalue stocks for a number of reasons: rising interest rates, geopolitical events, rumors and more.

The question for an investor is whether the decline in pricing or valuations is leading to the second, more serious situation. That’s when earnings in general decline or are expected to decline.

A recession or other reduction in economic activity causes a general decline in earnings. A decline in earnings is more long-lasting, causes stock prices to decline more than a valuation change and takes significant policy changes to reverse. That is a bear market.

So far in 2022, we’ve seen only a change in the valuation of stocks. Investors reduced the amount they’re willing to pay for earnings and assets, primarily because the Federal Reserve is slowly tightening monetary policy.

Economic growth still is healthy, so earnings for most companies are increasing.

But we must watch closely. Inflation, higher interest rates, the global supply problems and geopolitical events all could reduce economic activity. That would reduce earnings and would likely lead to a more significant, longer-lasting decline in stock prices.

Advance Care Planning: A Waste of Time and Money?

Estate and financial planners say you need an advance medical directive or similar document in your estate plan.

That’s a waste of time and money, according to a recent paper in JAMA, the Journal of the American Medical Association.

But the points made in the paper don’t support the conclusions. In fact, the paper makes the case for longstanding recommendations from me and others.

The authors said advance medical directives and similar documents don’t result in the care the person really wants, because a person’s views and preferences change over time. The researchers said the documents often are obsolete when they’re needed.

The paper also says the documents might not be available when needed. Medical providers often have to make decisions without seeing the documents.

Another problem, the authors say, is that standardized forms, especially living wills, have statements that can be vague or contradictory.

Finally, the services the patient wants might not be available, or the people with decision-making power might disagree on treatment.

Those all are valid points and have been made by those of us who recommend having the documents in estate plans.

You need to work thoughtfully with your estate planner to develop the advance medical directive or other medical care documents. You also need to review the documents periodically and decide if they need to be revised.

Living wills are the least useful of the documents. Living wills, and some other types of documents, try to set out broad principles of the steps to be taken or not taken in certain situations. The researchers are correct that these documents often are vague or contradictory and don’t cover many situations.

It is best to create an advance medical directive or medical power of attorney that empowers one or more agents to make decisions when you can’t. Be sure these are people who know your preferences.

I’ve stressed in the past that care needs to be taken regarding the selection of agents who will make decisions for you.

The document can be supplemented with a detailed guide on your preferences in certain situations, which most estate planners can prepare.

Of course, be sure your medical providers and the people empowered under the document know about it and have copies. Some states now have online registries of advance medical directives, so they are readily available to medical providers.

Despite the potential shortcomings of the advance medical directive, things are likely to be worse if you don’t have a current document and make it available to your medical providers and agents.

The Missing Social Security Beneficiaries

Many people left the work force during the pandemic, and a significant number of them were Baby Boomers. But they haven’t applied for Social Security benefits yet.

About 2.6 million more Baby Boomers left the work force since the start of the pandemic than would have if pre-pandemic trends had continued, according to research from an economist at the Federal Reserve Bank of St. Louis.

Yet, the pace of applications for Social Security benefits didn’t change much, according to the Center for Retirement Research at Boston College. The latest annual report from the Trustees for Social Security affirms this. It said that one of the reasons the trust fund didn’t lose more value during the pandemic is that retirement benefit applications didn’t surge as unemployment rose.

Some economists believe this means a bunch of the Boomers plan to return to the work force at some point before finally retiring. Some surveys back that up, finding that a number of the pandemic retirees plan to resume working when they believe it is safe. Some of those who resigned have moved on to new jobs or part-time work.

Others believe those in or approaching their 60s think differently about Social Security than previous retirees. Today’s retirees understand that it’s better for them in the long run to delay claiming Social Security benefits instead of claiming lower benefits earlier.

Also, the surge in investments and home prices since 2020 increased the wealth of a lot of households. That makes it feasible for people to stop working while they delay claiming Social Security benefits.

Some speculate that many people want to apply for their benefits in person and talk the options over with Social Security representatives. That hasn’t been possible during the pandemic, because Social Security offices were closed for an extended time.

All we know for sure is that the surge in unemployment during the recession was not accompanied by a surge in claims for Social Security benefits. That’s a change from past behavior.

The Data

The number of private sector jobs increased by 455,000 in March, according to the ADP Employment Report. And February’s number of new jobs was revised higher to 486,000.

The leisure and hospitality sector added the most jobs, 161,000.

In the first quarter of 2022, private sector jobs increased by 1.45 million.

New unemployment claims declined by 28,000 to 187,000 in the latest week. That’s less than the low reached last December and is the lowest level since September 1969, more than 52 years ago.

Continuing claims declined to 1.35 million from 1.42 million. That’s the lowest level since January 1970.

For a little perspective, the U.S. labor force today is about half the size it was in 1969 and 1970.

Durable goods orders declined 2.2% in February from January’s level. That’s the first decline in five months. But orders were 16.7% higher in February than they were a year earlier.

Orders for core capital goods, considered a good indicator of business investment, declined by 0.3% in February. But core capital goods orders were at an all-time high in January.

The economic growth rate increased in the first half of March, according to the PMI Composite Flash index. The composite was 58.5, compared to 57.5 at the end of February.

The manufacturing component increased to 58.5 from 57.5 at the end of February. The services component also increased, rising to 58.9 from 56.5.

The Kansas City Fed Manufacturing Index reported a record high growth rate in March. The index rose to 37 from 29 in February and 24 in January.

But the Dallas Fed Manufacturing Survey showed a slower growth rate. The Production Index derived from the survey declined in March to 13.2 from 14.5 in February. The General Activity Index declined to 8.7 from 14.0.

The Consumer Sentiment Index, established by the University of Michigan, declined in late March to set a new decade low. The index was 59.4, down from 59.7 earlier in March.

The future expectations component of the index remained at the lowest level since 2011.

About one-third of respondents expect their overall financial position to worsen in the next year, the highest level ever in the index, which has been compiled since the 1940s.

But the Consumer Confidence Index from The Conference Board rose to 107.2 in March from 105.7 in February. The index had declined in January and February.

The Present Situation component of the index increased while the Expectations component decreased. Expectations for inflation over the next 12 months are at an all-time high.

Pending home sales declined 4.1% in February from January’s level. February was the fourth consecutive month of sales declines.

Sales were 5.4% lower than 12 months earlier.

Home prices continued to surge in January, according to the S&P Corelogic Case-Shiller Home Price Index. The index increased 1.4% in January, following a 1.1% increase in December.

Over 12 months, the index is up 19.1%. The 12-month increase is the fourth highest in the index’s 35-year history.

The strongest 12-month increases in price were in Phoenix, 32.6%, Tampa, 30.8%, and Miami, 28.1%.

The FHFA House Price Index reported similar results. The index rose 1.6% in January, following a 1.2% increase in December.

Over 12 months, the index increased 18.2%.

The labor market didn’t change much in February, according to the latest JOLTS (Job Openings and Labor Turnover Survey) report.

There were 11.3 million job openings, which was about the same as in January. The number of people hired increased a little in February while the number of people separating from employers was stable.

The third estimate of fourth quarter GDP didn’t change much from previous estimates. The economy grew at an annualized rate of 6.9%, down slightly from 7.0% in the second estimate.

Personal consumptions expenditures declined to 2.5% in the third estimate from 3.1% in the second estimate.

The Markets

The S&P 500 rose 2.66% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 1.39%. The Russell 2000 increased 2.23%. The All-Country World Index (excluding U.S. stocks) added 1.27%. Emerging market equities are 1.10% higher.

Long-term treasuries rose 1.60% for the week. Investment-grade bonds increased 0.93%. Treasury Inflation-Protected Securities (TIPS) lost 0.53%. High-yield bonds gained 1.02%.

On the currency front, the U.S. dollar dipped 0.04%.

Energy-based commodities decreased 2.54%. Broader-based commodities fell 1.47%. Gold declined 0.11%.

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 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.”

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.