Bob’s Journal for 9/17/20

Highlighting Notable Events That Grabbed My Attention This Week

There are clear signs that economic growth slowed during the summer, even before the fiscal stimulus expired at the end of July.

Retail sales and other measures of activity delivered strong numbers once the enhanced unemployment benefits and other fiscal measures were enacted. Growth shot up from its lows in March and April.

Growth kicked higher again after portions of the economy re-opened in spring and early summer. But growth is slowing.

We can see the reduced growth in new unemployment claims. They declined rapidly after their peak in April. More recently, both new unemployment claims and continuing claims stabilized at high levels.

The stabilization started before the stimulus measures expired. With the stimulus now expired and Congress unable to agree on new measures, growth clearly ratcheted down to a lower level. The expiration of the fiscal stimulus is a tightening of policy.

The prognosis for the economy at this point is uncertain. Manufacturing appears to be recovering well. But the services sector recovery stalled. Many service businesses either are not re-opening yet or are operating at reduced capacity. There’s little reason to expect that to change much.

With additional fiscal stimulus on hold and the course of the coronavirus unsure, investors need to use a cautious economic outlook to guide their portfolio decisions.

Indexes are Less Diversified

The major stock market indexes are more concentrated and less diversified.

Very few stocks have been surging ahead of the rest of the market, giving them increasing shares of the stock indexes. The S&P 500 is especially concentrated, more than at any time in the past.

Only five stocks now account for 20% of the S&P 500 and drive its performance and volatility. These stocks are Apple (AAPL), Microsoft (MSFT), Amazon.com (AMZN), Google (GOOGL) and Facebook (FB).

A similar concentration occurred in the tech stock bubble that peaked in early 2000. The good news is today the leading stocks and the index, in general, aren’t as highly valued as in 2000.

Another difference is that in the years leading up to 2000, there was a major divergence between the performance of the leading stocks and the rest of the index. In those days, most stocks were stagnant or declining while the leading stocks pushed the index higher.

After the bubble burst, most stocks rose in value while the leading stocks and the index plummeted.

But this time, most of the stocks in the market were marching higher with the S&P 500 before the pandemic. The average stock wasn’t rising as much as the index and the leading stocks, but most stock prices were climbing.

Since the market’s bottom in March, however, the S&P 500 surged far ahead of the equal-weighted S&P 500, which is a good measure of the performance of the average stock.

Even so, there are substantial differences between now and 2000.

Though the average stock is rising less than the leading stocks, there now is a high correlation between the two groups of stocks. They tend to move up and down together, though by lesser amounts. That is a stark contrast to 2000 and a sign of a healthier market.

Other measures of market breadth also indicate the market today is very different than in 2000. That means if you believe the top five stocks are too risky at this point, there are a number of other stocks that are doing well to consider for your portfolio.

The downside is that if the leading stocks start to decline, they might bring the rest of the market with them.

Investors Still Complacent About Inflation

The Federal Reserve has been clear that it is going to err on the side of letting inflation rise too much before it takes the risk of tightening policy and triggering a recession.

Investors don’t seem to believe that, which continues to provide investment opportunities that should be profitable over several years.

The market provides several measures of investors’ collective forecasts for inflation.

We can watch the performance of Treasury Inflation-Protected Securities (TIPS). If investors were concerned about inflation, TIPS would be more popular.

Also, there’s the yield curve. When investors are concerned about inflation, yields on longer-term bonds are much higher than yields on shorter-term bonds. While longer-term yields today are higher than shorter-term yields, they aren’t substantially higher.

The market also can be used to calculate “break-even inflation.” That’s the difference between the yield on nominal bonds and the yield on comparable TIPS. The computation tells us that today investors expect inflation to be around 1.7% in 10 years.

I believe investors are underestimating the likelihood the Fed will continue its easy monetary policy and push inflation higher. That’s why I’ve been recommending inflation hedges such as gold and TIPS. While they’ve done well this year, I think more gains are likely in the next few years.

Should You Convert Your IRA?

There are a lot of good reasons to consider converting a traditional IRA into a Roth IRA in 2020. I’ve recounted these reasons in Retirement Watch several times this year.

But, as I’ve said, a conversion isn’t the best strategy for everyone. There are a number of factors you need to consider and balance when making a decision.

To help you make the decision, I developed an IRA Conversion Calculator that is now available to my readers.

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The calculator is an Excel spreadsheet and it’s the most flexible and comprehensive conversion tool I’ve seen outside the market for financial professionals.

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The Data

New unemployment claims for the latest week declined by 33,000 to 860,000. But the previous week’s new claims were revised higher.

In addition, 658,737 new claims were filed for Pandemic Unemployment Assistance (PUA). But that is less than the 868,314 new PUA claims filed the previous week.

Continuing claims decreased to 12,638,000 from 13,544,000 the previous week. The continuing PUA claims were 14,467,064, roughly the same as the previous week

Retail sales increased by 0.6% in August. Also, July’s sales were revised lower to 0.9% from 1.2%. Excluding autos, sales increased 0.7% in August.

The growth in retail sales was lower than expected and another sign that the expiration of fiscal stimulus is reducing growth. The sectors with the biggest sales increases were bars and restaurants (4.71%), clothing (2.90%), and furniture (2.11%).

Homebuilders continue to be optimistic. The Housing Market Index from NAHB increased to a new record high of 83 in September, compared to 78 in August. The August level was a record at the time. The index dates to December 1998.

Housing Starts in August decreased 5.1% below July’s level. Over 12 months, starts are up 2.8%. But single-family housing starts in August were 4.1% above July’s level. New permits declined by 0.1% in August from July’s level and were 0.1% below the level 12 months ago.

The Empire State Manufacturing Index popped up to 17.0 in September, compared to 3.7 in August. That’s the third consecutive month of positive numbers.

The Philadelphia Fed Manufacturing Index held fairly steady, coming in at 15.0 for September, compared to 17.2 for August.

Industrial Production continues to slowly climb back toward its pre-pandemic level. Production increased 0.4% in August, which compares to a revised 3.5% rise for July.

The manufacturing component increased 1.0% in August, compared to a revised 3.9% jump in July.

The Consumer Price Index (CPI) increased 0.4% in August, compared to 0.6% in July. Excluding food and energy, the core CPI climbed 0.4% in August, compared to 0.6% in July.

Over 12 months, the CPI increased 1.3% and the core CPI increased 1.7%.

Used vehicle prices were a major factor in the recent increase in the CPI. Their ascent in August was the highest monthly increase in more than 51 years.

The Markets

The S&P 500 lost 0.29% for the week ended with Wednesday’s close. The Dow Jones Industrial Average rose 0.42%. The Russell 2000 increased 1.77%. The All-Country World Index (excluding U.S. stocks) added 1.13%. Emerging market equities gained 1.88%.

Long-term Treasuries rose 0.17% for the week. Investment-grade bonds increased 0.58%. Treasury Inflation-Protected Securities (TIPS) added 0.04%. High-yield bonds declined 0.11%.

In the currency arena, the U.S. dollar fell 0.04%.

Energy-based commodities increased 2.17%. Broader-based commodities rose 0.81%. Gold added 0.54%.

Bob’s News & Updates

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