Bob’s Journal for 6/4/20

Some Notable Events That Grabbed My Attention This Week

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The Disappointing Bull Market

A long bull market followed the financial crisis of 2009, but even that surge wasn’t enough to cause the market indexes to deliver strong returns over the last two decades, according to Bespoke Investment Group.

As of the end of May, the S&P 500 had a very good return during the last 12 months. The index was up 12.8% compared to an average one-year return of 11.7%.

But over the last two years, the index returned 8.2% annually, compared to an average two-year return of 10.5%, according to Bespoke. (In this discussion, returns of a period greater than one-year are annualized.) For the last five years, the index’s return is 9.9%, which is close to the historic average five-year return of 10.3% but still below it.

The return since the end of the financial crisis has been a strong one. The index returned 13.2% during the last 10 years, which is well above the long-term average of 10.4% for 10 years.

But the index still is recovering from the bursting of the technology-stock bubble following the 1990s. Over 20 years, the S&P 500 has an average annual return of only 5.9%, compared to a long-term average of 11% annually.

The data are important to those in or near retirement. They show that while the stock indexes have strong returns over the very long term, over shorter periods the returns are very uneven. Since the end of the 1990s, a buy-and-hold investor would have done about as well in government bonds as in the S&P 500, and would have endured a lot less volatility.

The key period for retirement investors is the 10-year period that begins five years before retirement and ends five years after retirement. Often, retirement plans depend on earning at least average returns during that period. But there is a lot of variability in returns over 10 years or less.

I recommend that most people have enough guaranteed lifetime retirement income from Social Security and annuities to pay their fixed, required expenses. That way, your standard of living doesn’t depend on the vagaries of the stock market. Also, your spending plan should have flexibility, so spending can be adjusted in response to investment returns.

How Soon Will the Social Security Trust Fund Run Dry?

Social Security’s trust fund will run out of money sooner than currently estimated.

I’ve been saying that since the Annual Report of the Trustees of Social Security came out in late April. The report used data through the end of 2019 and didn’t incorporate the effects of the current economic downturn.

Others have agreed and made estimates of when the trust fund would run dry.

I previously reported on the estimate from the Center for Research at Boston College, which forecast that the current economic slump would cause the trust fund to be depleted two years earlier than the trustees estimated. I said the estimate was too optimistic, because I believed the report underestimated the steepness of the downturn.

In the last week, the Penn Wharton Business Model staff issued a new study that makes several estimates of Social Security’s future.

Even if the economy makes a sharp V-shaped recovery, the Penn Wharton Model says the trust fund will run out of money two years earlier than the trustees estimate.

A V-shaped recovery seems unlikely at this point. So, the study also estimated the results following a more gradual U-shaped recovery. Such a recovery would cause the trust fund to be depleted another two years earlier, or in 2032. I think even a U-shaped recovery is optimistic, barring a scientific breakthrough.

As I’ve said before, retirees and near-retirees shouldn’t panic at reports the trust fund will run out of money. It is not a good idea to accelerate the date you claim Social Security benefits because the trust fund will run out of money.

Payroll taxes will continue to roll into the program each year. They are estimated to be sufficient to pay 75% to 80% of promised benefits for at least 75 years.

Also, it’s likely that those already retired or within five to 10 years of retirement will have their benefits protected by Congress, except perhaps for high income Social Security recipients. Most of the burden of the Social Security shortfall will fall on those who are 10 years or more away from claiming their benefits. They need to incorporate higher taxes and lower benefits in their retirement plans.

The Data

The employment data leading to tomorrow’s Employment Situation reports indicate the new numbers will be bad. The ADP Employment Report said private sector jobs in May declined by 2.76 million, compared to a 20.236 million decline in April.

New unemployment claims in the latest week increased by only 1.877 million. That marks the ninth consecutive week in which the new claims were lower than in the previous week. It also is the first time new claims were below two million since March 14.

Yet, the number of new claims was higher than analysts expected. Also, continuing claims totaled 21.5 million, which is higher than last week and indicates not many people who lost jobs during the pandemic are returning to work. Continuing claims peaked at 24.9 million on May 9.

Personal Income increased 10.5% in April after declining 2% in March. The increase was the result of government stimulus payments to households and businesses that otherwise saw their incomes decline.

Despite the increase in income, personal spending fell by a record 13.6% in April, following a 7.5% decline in March. Surveys indicate that a high percentage of households used their stimulus payments to increase savings or pay debt instead of to buy goods and services.

Factory Orders in April declined 13.0%. That compares with a 10.3% decline in March. The Census Bureau announced that because many businesses were closed or operating at limited capacity, it made estimates of the data. April marked the third month in the last four in which orders declined.

The major economic surveys for May were released over the last week. They showed the economy is at depression levels but the rate of decline slowed.

The index from the Kansas City Fed Manufacturing Survey was negative 19 in May, compared to negative 30 in April.

The PMI Manufacturing Index was reported at 39.8 for May, compared to 36.1% in April.

The ISM Manufacturing Index rose to 43.1 in May from 41.5 in April.

The PMI Services Index took a big jump to 37.5 in May from 26.7 in April.

The ISM Non-Manufacturing Index increased to 45.4 in May from 41.8 in April.

The Chicago PMI declined to 32.3 in May, compared to 35.4 in April. This is one of the few indexes that was worse in May than in April.

For all of the PMI and ISM indexes, a level below 50 indicates the sector is contracting. If the reading is below 50 but is better than the previous month’s reading, that indicates the sector is contracting but at a slower rate than during the previous month.

Consumer Sentiment, as measured by the University of Michigan, held fairly steady in May. The index dipped to 72.3, compared to 73.7 in April.

Prices declined in April. The PCE Price Index was down 0.5% for the month and is up only 0.5% for the last 12 months. The core index, excluding food and energy, declined 0.4% for April and is up 1% over 12 months.

The Markets

The S&P 500 rose 2.85% for the week ended with Wednesday’s close. The Dow Jones Industrial Average gained 2.89%. The Russell 2000 increased 1.20%. The All-Country World Index, excluding U.S. stocks, added 6.46%. Emerging market equities jumped 8.27%.

Long-term treasuries lost 2.01% for the week. Investment- Securities (TIPS) fell 0.07%. High-yield bonds gained 2.74%.

In the currency arena, the U.S. dollar lost 1.94%.

Energy-based commodities increased 4.81%. Broader-based commodities rose 1.96%, while gold declined 0.98%.

Bob’s News & Updates

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