Bob’s Journal for 8/19/21

How Stock Sectors Fared in the ETF Revolution

Exchange-traded funds (ETFs) of the S&P 500 sectors began trading on December 22, 1998. We can look at the returns to see how the different sectors have done.

Unlike published stock indexes, these are real returns available to investors after expenses and in real-time trading. It is interesting to see how the long-term data compare with what people believe happened in the markets during that time.

The S&P 500 sector ETF with the highest total return since they began trading in 1998 was consumer discretionary with an 828% return (10.34% annualized), according to a study by Bespoke Investment Group.

In a likely surprise to many people, the technology sector was right in the middle of the nine sectors, outperforming four sectors and underperforming four, with a total return of 524.4% (8.42% annualized).

One reason people underestimate the return for consumer discretionary is that S&P puts Amazon in the consumer discretionary sector, not the technology sector.

Financials brought up the rear since 1998 with a 214.3% total return (5.19% annualized).

The results are different when only the last 10 years are examined.

Technology is far and away the leader for the last 10 years, with a 22.36% annualized return. Consumer discretionary is second with a 19.25% annualized return.

Financials improved quite a bit following the financial crisis. They came in fourth with a 15.79% annualized return.

Health care has been the most consistent sector. Since 1998, it is the sector with the second-highest return, 9.22% annualized. In the last 10 years, it is the third-highest returning sector with a 17.58% annualized return.

Energy’s been consistently near the bottom. It has the second-worst returns since 1998 at 5.80% annualized. In the last 10 years, it barely has a positive return, 0.44% annualized, and is the worst-performing sector.

Dividends have a significant impact on total returns, especially for the energy, financial and utilities sectors. For the S&P 500 ETF, dividends increase the annualized total return by two percentage points.

When looking at the major broad stock market indexes, the results are different from what I think most people would expect.

Since 1998, the S&P 500 has had the highest return by far, 1,616.3% (10.5% annualized). The NASDAQ 100 trails with a 731.3% (9.9% annualized) total return. Notice how a small difference in annualized returns  (0.6%) compounds to a much higher total return over the years.

But in the last 10 years, the NASDAQ 100 has a 668.9% (22.6% annualized) total return. That’s well above the 385.5% (16.4% annualized) total return of the S&P 500.

Notice that the annualized returns for the last 10 years are much higher than the returns since 1998, indicating that stocks had poor returns for the period from 2000 to 2010.

For comparison, the long-term treasury bond ETF returned 6.7% annualized since 1998 and 5.9% over the last 10 years.

The Pandemic and Long-Term Care Insurance

The COVID-19 pandemic had a significant impact on long-term care insurance (LTCI), though some of the effects won’t be known for a while yet.

Ironically, the pandemic might have saved the LTCI industry some money. About one-third of deaths due to COVID-19 were in nursing homes. Those deaths probably came earlier than they would have, saving the insurers some money.

The pandemic also increased interest in LTCI. Insurers and agents report renewed inquiries about and purchases of LTCI.

Insurers and agents also learned to stress that LTCI is not “nursing home insurance.” In fact, the majority of claims paid by insurers are for home care.

After reports of the increased deaths and forced isolation of long-term care residents, many people now emphasize that they want to receive any care they need in their homes for as long as possible. Though LTCI has paid for home care for many years, many potential purchasers didn’t realize that.

Most LTCI policies pay for almost any type of LTC. The standard provision triggers benefits when the insured is diagnosed as having a cognitive impairment or needing assistance with at least two of the six activities of daily living. It doesn’t matter where the care is received.

A negative effect is that it is more difficult to qualify for LTCI. Insurers reportedly are declining more applications.

In-person medical exams are required for some applicants. Age restrictions are tighter, and more pre-existing conditions disqualify applicants. Some insurers won’t insure an applicant or will postpone the beginning date of a policy when the applicant resides in an area with a high incidence of COVID-19 or has traveled to certain countries.

Those interested in LTCI continue to move away from traditional LTCI and toward the hybrid policies. The hybrids are annuities or life insurance contracts with LTC benefits.

Change Proposed for Social Security COLA

Social Security beneficiaries probably will receive the highest benefit increase in years when the 2022 COLA is announced later this year. (See the Aug. 5 issue of Bob’s Journal.)

But some say the increase isn’t high enough and the Social Security COLAs have been too low for years.

The Social Security COLA is determined by the 12-month increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers, also known as CPI-W, as of the end of the third quarter. This is the main Consumer Price Index (CPI), a measure that’s widely reported in the media.

But it computes inflation on the hypothetical monthly shopping basket of goods and services for a family with children. In other words, it doesn’t represent the mix of goods and services purchased by most retirees. For example, the CPI-W overweights education expenses and underweights medical expenses compared to what a retiree spends.

There are a number of CPI measures issued by the Department of Labor.

Some analysts believe the Social Security COLA should be based on the CPI-E, also known as the CPI for the elderly. From 1982-2011, the CPI-E increased 3.1% annually while CPI-W increased 2.9% annually.

The COLA is set by law, so it would take Congress to make a change. Representative John Garamendi (D-CA) introduced a bill that would make the change. But it isn’t scheduled yet for action in Congress.

The Data

Retail sales declined 1.1% in July. That follows a 0.7% increase in June. A lot of the decline was in vehicle sales. Excluding vehicle sales, retail sales declined only 0.4%.

There were sharp increases in gasoline sales and in sales at eating and drinking establishments.

This report from the Department of Commerce focuses on sales at stores, restaurants and online. It probably isn’t capturing a recent shift in consumer spending from goods to services, such as travel, entertainment and recreation.

The Empire State Manufacturing Index reversed the big move it made in July.

The index for August was 18.3. That’s down from the 43.0 reported in July but above the 17.4 that was reported in June.

Industrial Production increased 0.9% in July, which follows a 0.2% increase in June. Manufacturing output increased a hefty 1.4% in July, following a 0.3% decline in June.

A lot of the increase was due to an 11.3% jump in vehicle production after some supply disruptions ended.

Optimism is fading among home builders. The Housing Market Index from NAHB declined to 75 in August from 80 in July. This is the lowest level since July 2020.

Two of the three components of the index (current sales conditions and traffic) declined while the third (sales expectations for the next six months) was unchanged.

The builders face rising costs for materials and skilled labor. Lumber prices are down sharply from their peak, but costs are rising and availability is reduced for other building materials.

Builders say these factors are raising prices and reducing demand.

Housing starts and permits data are consistent with the decline in home builder confidence. Starts declined 7% in July from June’s level. Starts increased only 2.5% over 12 months.

Single-family home starts declined 4.5% in July and are up 12.0% over 12 months.

Housing permits increased 2.6% in July and 6.0% over 12 months. Single-family home permits decreased 1.7% in July.

New unemployment claims declined for the third consecutive week by 12,000 to 375,000 in the latest week.

Continuing claims declined to 2.866 million, the lowest level since mid-March 2020.

The total number of people receiving some form of unemployment assistance declined by about 900,000 to 12.1 million.

The Producer Price Index (PPI) climbed 1.0% in July, following another 1.0% increase in June. Over 12 months, the PPI has increased 7.8%.

Excluding food and energy, the PPI also rose 1.0% in July and is up 6.2% over 12 months.

Consumer Sentiment in mid-August, as measured by the University of Michigan, declined to its lowest level in the pandemic period. From its end-of-July reading of 81.2, the Consumer Sentiment Index declined to 70.2.

It also is the lowest reading since 2011 and the seventh-largest decline in the history of the index.

The Markets

The S&P 500 rose 0.31% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 0.31%. The Russell 2000 lost 2.79%. The All-Country World Index (excluding U.S. stocks) declined 1.29%, while emerging market equities fell 3.56%.

Long-term treasuries gained 1.56% for the week. Investment-grade bonds increased 0.85%. Treasury Inflation-Protected Securities (TIPS) added 0.17%. High-yield bonds gained 0.36%.

On the currency front, the U.S. dollar rose 0.12%.

Energy-based commodities fell 1.20%. Broader-based commodities lost 1.07%. However, gold rose 3.19%.

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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