Bob’s Journal for 9/16/21

Investment Lessons from 9/11

Much of the country marked the 20^th anniversary last Saturday of the attacks of September 11, 2001. There are some investment lessons to learn from that period.

At the time I was on the Board of Trustees of the Virginia Retirement System (VRS). The VRS had a firm policy of rebalancing its portfolio automatically at the end of each month.

The portfolio would be rebalanced back to its target allocations whenever the allocations of different asset classes strayed from their targets. You might remember that the New York Stock Exchange and most other trading markets were closed from Sept. 11 through Sept. 16. When the markets finally opened for trading, stocks dropped precipitously for days.

Under the VRS rebalancing policy, the staff would be required at the end of September to sell bonds and other assets to buy a lot of stocks because of the big decline in stock prices.

An emergency meeting of the board was called to discuss whether to suspend the rebalancing policy. At the time, there were quite a few scary forecasts circulating among investors and in the media.

Serious analysts were saying that many insurance companies could be on the brink of bankruptcy because of liabilities for damages related to the terrorist attacks. Additional attacks were anticipated by many.

There were widespread concerns that most people wouldn’t again step foot on an airplane or cruise ship. Shopping malls were mostly devoid of customers for a period of time, and no one was confident that would change. The list of reasons not to buy stocks was extensive.

In the end, VRS decided to execute its rebalancing policy on schedule. The policy was established in calm, unemotional times after a careful study of market history. The study showed that over time rebalancing would increase total returns and reduce risk.

It didn’t make sense to abandon a carefully developed policy because of emotions of the moment and widespread speculation about the future.

Also, market timing decisions rarely are single decisions. They trigger multiple decisions, and you have to make all the right choices to come out ahead.

If the rebalancing policy were suspended, another decision would have to be made about when to reinstate the policy. As hard as it was to decide whether to suspend the policy, it would be even harder to decide when the right time would be to reinstate the policy.

Staying with the rebalancing policy turned out to be the best decision. Investors and consumers soon calmed down and adjusted to the new circumstances.

Rebalancing caused VRS to buy a lot of stocks at depressed prices at the end of September 2001 and generated extra returns for the system as stock prices recovered.

It is important not to get caught up in the emotions and speculations of the moment. Establish long-term investment policies and rules. Stay with them until carefully considered research proves the policies were wrong or circumstances have changed.

That’s one reason I encourage people not to spend much time watching the cable television financial channels. They focus on emotions and the short term, which isn’t the way to increase returns and reduce risk.

Red Light for Some Stocks

Stocks gave investors a green light for a long time. Now, we’re in yellow light or caution territory, and for some stocks bright red lights are flashing.

The S&P 500 hit 54 record high closes in 2021 as of Sept. 10, the most recent being established less than two weeks ago.

In establishing the records, the markets have given some stocks extraordinary valuations, summarized by Andy Kessler in a recent column in The Wall Street Journal.

Joby Aviation plans to start an electric air taxi service in 2024. Though the service still is in development, its current stock price gives the company a higher value than Lufthansa, EasyJet, or JetBlue.

Tesla is worth more than at least six major car manufacturers combined, depending on the stock’s price on the day the calculation is done.

Carvana, which has a unique model for selling used cars, has a higher market value than Volvo, Honda, Ford, or Hyundai. Marriott and Hilton combined are worth less than Airbnb.

Those are just a few examples of today’s extraordinary valuations.

The entire stock market is not in a bubble. But there are stocks and sectors in bubble territory and beyond. These stocks aren’t priced based on their business fundamentals or financial results. People are buying based on emotion, themes and other factors.

We’re participating in the stock market appreciation in our Retirement Watch portfolios. But we’re using mutual funds with long-term records of success.

The managers of these funds carefully analyze the details of the companies they own and sell a stock when the price is too high, regardless of how much they like the company’s long-term outlook.

The Federal Reserve has been supporting stock prices since early 2009. At some point, the Fed will withdraw some of that liquidity, and that will hurt the prices of stocks that depend on the liquidity. It is possible that before then, even the Fed’s liquidity won’t be enough to continue pushing the prices of some stocks higher.

The big issue for investors is whether a crash in the bubble stocks will be isolated or will spread to most of the market. We can’t answer that question with any level of certainty in advance. That’s why you always should have a margin of safety in your investments and avoid bubble investments, even when their momentum seems strong.

Will You Be Required to Buy Long-Term Care Insurance?

If you live in Washington state, you probably have to buy long-term care insurance (LTCI) very soon or pay an additional tax.

The Long-Term Services and Supports Trust Act was enacted in 2019 and takes effect on January 1, 2022.

The law created the WA Cares Fund. The fund will pay qualified long-term care (LTC) benefits up to $36,500 to each eligible person beginning January 2025. The amount will change with inflation over time. The benefits can pay for a range of long-term care services.

To be eligible for benefits, a person must have worked in Washington and contributed to the fund for at least 10 years at any point in life without a break of as long as five or more years within those 10 years.

The person also must have worked in Washington and contributed to the fund three of the last six years before applying for benefits. The person must have worked at least 500 hours per year during those years.

The WA Cares Fund is not supported by taxpayers or employers. It is funded entirely by employees. Beginning January 2022, each worker in Washington must pay up to $0.58 per $100 of earnings. Employers are required to withhold this amount and pay it to the fund.

Self-employed people can opt to join the program.

Any employee over the age of 18 can apply for an exemption from the tax. To qualify, the person must have purchased private LTCI before November 1, 2021. An application for a waiver must be submitted and, if it is approved, the applicant will receive a waiver letter.

Once received, the exemption is permanent. The individual can’t re-enroll in the program or qualify for benefits.

The Office of the Insurance Commissioner determines which LTC coverage qualifies for an exemption. Some types of LTC insurance, such as acceleration of benefits under life insurance policies, don’t qualify for exemptions.

Critics have several complaints about the law.

People who will retire soon will have to pay into the fund but won’t receive benefits because they plan to retire before paying into the fund for at least 10 years.

Also, benefits won’t be paid to people who paid into the fund but retire outside Washington. Likewise, employees who work for Washington-based employers but live outside Washington must pay into the fund but won’t be eligible for benefits.

Details are on the WA Cares web site. Other states are watching how the fund works to determine if they will create similar funds.

The Data

Consumer Credit in July increased at an annual rate of 4.7%. Consumers seemed to have spent more, because revolving credit borrowing (mainly credit cards) increased at an annual rate of 6.7%.

Nonrevolving credit (mainly student and vehicle loans) increased at 4.1% annual rate.

New unemployment claims reached a new pandemic low of 310,000 in the latest week. That’s 35,000 lower than the previous week.

Continuing claims also declined to 2.78 million, which was the sixth straight week of new pandemic lows.

About 11.9 million people are receiving some form of unemployment benefit, down about 255,000 from the previous week.

This was the last reporting period for unemployment claims before the expiration of the enhanced pandemic unemployment benefits.

The Consumer Price Index (CPI) declined a little in August. The CPI increased 0.3%, which is down from the 0.5% increase in July.

Over 12 months, the CPI increased 5.3%, a slight decrease from the 12-month increase of 5.4% recorded at the end of July.

Excluding food and energy (the core CPI), the index increased 0.1% in August and 4.0% over 12 months. That compares with the 0.3% and 4.3%, respectively, reported for July.

The Producer Price Index increased 0.7% in August, which is lower than the 1.0% increase reported for July.

Over 12 months the PPI increased 8.3% in August, which follows the 7.8% increase reported at the end of July.

Excluding food and energy, the PPI was up 0.6% in August, down from 1.0% reported in July, and 6.7% over 12 months, which is higher than the 6.2% increase reported for the end of July.

Optimism among small business owners increased a little in August, according to the NFIB Small Business Optimism Index. The index increased to 100.1 from 99.7 in July.

The number of business owners expecting conditions to improve over the next six months declined to a net negative of 28%. That’s the lowest reading since January 2013.

Half of business owners said they have job openings they can’t fill. That’s an increase of one percentage point from July’s level and sets a 48-year record high for the second consecutive month.

The business owners also report problems managing their supply chains. All but 13% say supply problems are having a negative impact on their businesses.

Manufacturing surged in New York recently. The Empire State Manufacturing Index for September rose to 34.3 from 18.3 in August.

That brings the index closer to its all-time high of 43 reached in June.

The price paid and prices received components of the index were at or near record highs.

Industrial Production increased 0.4% in August, following a 0.8% increase in July. But the manufacturing component increased only 0.2% in August, declining from a 1.6% rise in July.

The Markets

The S&P 500 lost 1.61% for the week ended with Tuesday’s close. The Dow Jones Industrial Average declined 1.41%. The Russell 2000 decreased 2.80%. The All-Country World Index (excluding U.S. stocks) fell 1.39%. Emerging market equities are 2.32% lower.

Long-term treasuries rose 2.84% for the week. Investment-grade bonds increased 1.24%. Treasury Inflation-Protected Securities (TIPS) added 0.71%. High-yield bonds gained 0.26%.

In the currency arena, the U.S. dollar gained 0.08%.

Energy-based commodities increased 2.08%. Broader-based commodities rose 2.79%. Gold added 0.70%.

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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