January 2014
January 31, 2014 06:00 p.m.
Your Retirement Finance Week in Review
I’m heading home from the large gathering at the Orlando World MoneyShow, which wrapped up today. If you missed the show, parts of it still are available free at the internet eShow version. For details, click here.
A number of investors were shocked the last couple weeks by problems in the emerging economies and how they negatively affected markets elsewhere. They shouldn’t have been. We told Retirement Watch readers from the start of the year that markets entered 2013 pricing in a very smooth continuation of the trends of late 2013. Volatility was extremely low. Markets expected rising U.S. interest rates and average equity market returns.
It doesn’t take much to upset that kind of outlook. Investors also were too focused on how well the U.S. economy was doing and ignored obvious problems in China, Europe, and emerging economies. The only question was which event or events would unsettle markets.
It turned out to be China. It’s been trying to slow growth for a while. When it reported slower (though still strong growth), that knocked down a lot of emerging markets. Several emerging economies also have been trying to deal with the excess debt and cash flow that built up during the great central bank expansion since 2008. Their central banks have been raising interest rates and taking other measures to strengthen their currencies, reduce debt growth, and prevent asset bubbles. Combining those efforts with slower growth in China and the Fed’s reduction of asset buying is a lot to expect the already struggling emerging economy markets to endure.
The good news is that the U.S. economy still is doing reasonably well. The Fed is determined to test whether the recent growth rate is sustainable without significant support, so it continues to reduce its asset buying. The Fed also doesn’t seem concerned about effects on emerging economies. If U.S. growth holds up, the Fed will steadily reduce its asset buying. If growth data tumbles, the Fed will hold policy or increase asset buying.
The Fed is in a tricky position. We’re well into a short-term growth cycle that is within a long-term down cycle. This last occurred in the U.S. in 1936. The Fed at that time focused on the short-term cycle and tightened policy considerably. That caused a new economic downturn and market decline in 1937 that took quite a long time to recover from. Because of zero interest rates and the decreasing effectiveness of quantitative easing, the Fed has to be more careful. If it tightens too much this time, there are far fewer tools available to reverse a new downturn.
I continue to recommend staying with the investments that worked well recently: U.S. stocks, European stocks, and some select mutual funds with unique strategies. But be prepared for a reversal. Have sell signals in place and follow the investments regularly to see if the signals are triggered.
The Data
The market-moving reports this week were fourth quarter GDP and the announcement after the Fed’s meeting.
The first estimate of fourth quarter GDP was a relatively strong 3.2% growth rate, slightly above expectations. That is consistent with the other data issued for the fourth quarter. I suspect that in the next two revisions of fourth quarter GDP the growth rate will be revised upward as the third quarter’s was. Of course, this is backward data. It doesn’t tell you anything about what’s happening now or in the next few months. Yet, it moves markets.
The Fed continues to reduce asset purchases by $10 billion per month. It also upgraded the language on the economy, saying that growth pick up, instead of proceeding at a moderate pace. But the Fed continues to be concerned about low inflation posing an obstacle to economic growth.
The combination of those two reports seemed to disappoint investors. They were hoping for weaker growth to keep the Fed at its latest asset buying level, and some were hoping that the recent problems in the markets would cause the Fed to hold its asset buying steady.
There were several housing reports. Commentators generally viewed them as negative, but they weren’t. The reports all indicated that the strong housing data of the last 18 months or so are going to be less strong. That should be expected, especially in light of the interest rate increases of 2013. But slower growth is more sustainable and doesn’t mean growth is about to turn negative.
New home sales were lower than the month before and below expectations. But sales were lower for non-economic reasons. Builders have a shortage of land on which to build (low inventories), and they tried to hold price increases instead of maximizing unit sales. Also, many areas of the country had weather problems in December. Here’s a key point: Average and median prices of new homes are at new highs, according to the report. See here.
Likewise, the Case-Shiller Home Price Index showed a lower price increase in December and a slightly lower 12-month price increase. But the numbers still are strong (and likely unsustainable), so we should expect lower growth rates. The pending home sales index was the worst housing data of the week (and the month). It fell sharply, indicating the next existing home sales report will be disappointing. But the main reasons for the decline are a lower number of homes available for sale and higher prices. Weather also was considered to be a factor.
Manufacturing generated a mixed bag of reports. The Dallas Fed Manufacturing Survey indicated that manufacturing still is strong in that area of the country, for the ninth consecutive month. The Richmond Fed Index also was positive for that area of the country. But durable goods orders fell when analysts were expecting an increase, and the previous month’s number was revised lower. The decline was broad-based, but it is curious that it is not consistent with other recent manufacturing data.
Consumer sentiment and consumer confidence both increased this month in different surveys. That usually bodes well for retail spending a month or more down the road. It also indicates consumers are comfortable with their employment situations.
The Chicago PMI also was increased, indicating that business overall around Chicago is doing well.
Less impressive and more confusing is the Personal Income and Outlays report. It showed personal income didn’t grow in the last month while spending increased 0.4%. Over 12 months personal income was down 0.8%. Some economists believe the flat income growth was weather-related and will improve once weather returns to normal. Otherwise, spending growth can’t keep growing at this rate. Households apparently have been willing to reduce savings to pay for spending, because stock and home prices have been increasing. With home prices flattening and stock prices below their peaks, households might need higher incomes before they’ll continue to increase spending.
The Markets
It was a roller-coaster week in the markets. But it generally was positive for bonds and negative for stocks and gold. Commodities started the week well but tumbled Thursday and Friday to conclude the week with losses.
The worst-performing index for the week was the Dow 30, down 1.5%. The All-Country World Index was next-worst with a loss just over 1%, and the Russell 2000 U.S. Smaller Companies Index was right behind with a 1% loss. The S&P 500 was on track to be the best-performer for the week but tumbled late Friday to close with about a 0.6% loss. Emerging markets staged a strong recovery Friday to close the week with a loss of about 0.4%.
The dollar had a strong week, closing with about a 1% gain.
Long-term treasuries bonds also did well and gained about 1%. Investment-grade bonds were close behind with a 0.8% gain. Treasury Inflation-Protected Securities (TIPS) also had a good week with a 0.5% gain. High-yield bonds stayed in positive territory, though just barely with a 0.1% gain.
Gold was the weakest of the commodities. It took a big fall early Thursday and didn’t recover, closing with a 1.2% loss. Broad-based commodities lost about 0.6% while energy-based commodities lost about 0.3%.
Some Reading for You
Here’s a good review of why emerging markets are having such problems now.
This article takes a good view of the latest new home sales report.
Here’s why we should expect low inflation and economic growth for a while.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
January 24, 2014 11:00 a.m.
Your Retirement Finance Week in Review
There’s still a few more days to join us at the Orlando World MoneyShow January 29-February 1, 2014, at the Gaylord Palms Resort & Convention Center. Conference attendance is free. To register, set your web browser to http://www.WorldMoneyShow.com and use source code 034009, or call 800-970-4355.
I recently learned that my presentation will be part of the free web version of the conference, the Orlando eMoneyShow. If you can’t make it to Orlando, you can view my presentation and others free. For details, click here.
I’m traveling later today, so I’m uploading this report around mid-day instead of waiting for the markets to close.
There’s some new research that should interest those in or near retirement. A key concern for many in that group is how to allocate their investment portfolios. Should they have a fairly high allocation to stocks so that they’ll have enough growth for a retirement of 20 or 30 years? Or should they be conservative, reducing the probability of losing substantial value in a bear market?
The latest research discovered that a different strategy increases long-term wealth and the probability of a portfolio surviving retirement. The strategy is to start with a fairly low stock allocation at or before retirement begins. Then, gradually increase the stock allocation each year. As retirement goes on, the allocation to stocks steadily increases.
The strategy is logical. The most dangerous time is the period from about five years before retirement to five years into retirement. A sharp portfolio decline during that period puts the entire retirement plan at risk. But once a person is a few years into retirement, the probable retirement period is shorter and the damage from a stock decline is less. Also, the higher stock allocation over time increases the potential the portfolio will increase and allow spending to increase with inflation.
The research is new and needs more study, but I think it’s a move in the right direction for many people.
The Data
There wasn’t a lot of data issued by the U.S. government this week, but other data moved the markets. Earnings reports and data from China were the main concerns of investors.
Earnings reports that disappointed investors were key influences. The Dow Jones Industrial Average, with only 30 stocks, lost value Tuesday and Wednesday (U.S. markets were closed Monday) on disappointing earnings from Johnson & Johnson and IBM. The S&P 500 and other indexes fared better because they are broader-based.
China released its PMI data, and it indicated economic growth would slow. Chinese officials have been trying to reduce growth to reduce some bubbles and control debt growth. But China’s growth has been an engine of global growth for a number of years, especially for commodity-based emerging economies. The latest indications of lower growth in China were a reason for investors to sell stocks and lock in some of the profits from 2013.
Especially hard hit by the news were stocks and currencies of emerging economies. They are down more sharply than U.S. counterparts. That keeps something of a floor under U.S. stocks and is helping U.S. bonds after their bearish 2013.
The news helps funds such as MainStay Marketfield that have been selling short emerging market investments. It hurts funds such as PIMCO All Asset All Authority that increased emerging economy exposures during 2013 because the previous declines in those assets made them appear to be bargains.
The small amount of U.S. data from the week indicated growth might be slowing a bit in January. The Chicago Fed National Activity Index and the PMI Manufacturing Index Flash both indicated growth but at lower levels than in the previous periods.
Two housing reports also indicated lower growth in that sector. The Federal Housing Finance Agency House Price Index showed only a modest increase in home prices. Existing home sales rose slightly above last month’s number (after it was revised down). Also, the supply of homes available for sale declined 4.6%, which probably indicates sales will decline next month.
But this leveling of existing home sales should be expected. Existing home sales dominated the housing market after the financial crisis, because that was where bargain hunters could snatch up foreclosures and distress sales. The availability of such sales is greatly reduced. New home sales are making up a greater share of the market, so next week’s existing home sales report will be interesting.
The Conference Board’s Index of Leading Economic Indicators rose slightly and in line with expectations. This continues a string of higher readings in the index, though it is less than recent increases.
There wasn’t enough data this week to draw new conclusions about the economy. Previous data indicated that growth increased in late 2013 and is likely to continue at the higher rate in early 2014. The economy and earnings aren’t the same thing, however, and the early stages of the earnings season for the last quarter of 2013 aren’t meeting investor expectations. As we discussed last week, investors might be willing to pay less for each dollar of earnings if they are less optimistic about the future. That would mean a lower multiple or valuation for stock indexes and lower prices.
The Markets
Markets were calm until the release of China’s PMI data on Thursday morning. As described above, that precipitated changes in market trends. The 2013 losers, bonds and gold, gained while stocks declined. Emerging economy assets were hurt the most.
This is an example of why investors need balanced portfolios. Market trends can change quickly, and investors with balanced portfolios are doing better so far than those with stock-heavy portfolios.
Around mid-day Friday, stock indexes were down more than 1% for the week. The Russell 2000 U.S. Smaller Companies Index fared the best with a loss of just over 1%. The worst was emerging market stocks down by over 3%. The S&P 500 was down about 1.5%, while the Dow 30 and All-Country World Index each were down by about 2%.
Long-term treasury bonds had the best week, rising about 2.5%. Other bonds didn’t fare as well. Treasury Inflation-Protected Securities (TIPS) gained about 0.5% and investment-grade bonds were a shade below them. High-yield bonds followed stocks down and lost about 0.75%.
The dollar started the week well and then lost some ground, dropping about 0.75% for the week.
Gold started the week badly but ended with a gain of about 1.5%. Energy-based commodities gained just over 1%, and broader-based commodities were a shade below them.
Some Reading for You
Here’s the latest estimate of retirement medical expenses.
This post reviews some widely-followed financial rules of thumb that need reconsideration.
Here’s a warning about what could be a developing problem in China.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
January 17, 2014 04:25 p.m.
Your Retirement Finance Week in Review
Time is running short, but you still can arrange to join us at the Orlando World MoneyShow January 29-February 1, 2014, at the Gaylord Palms Resort & Convention Center. Conference attendance is free. To register, set your web browser to http://www.WorldMoneyShow.com and use source code 034009, or call 800-970-4355.
Most investors spend a lot of time contemplating the wrong things when evaluating the stock markets. A lot of time is spent examining trends in the economy and earnings. Those factors are important over the long term, but they aren’t the greatest influence on stock prices in the short- and intermediate-term.
Stock indexes move up and down based on changes in valuations or what analysts call “the multiple.” There are different valuation measures to consider, but let’s consider the price-earnings ratio. This basically measures how much each investor is willing to pay for each dollar of earnings. When investors are feeling optimistic about the future they will pay a higher multiple; they’ll pay more for each dollar of earnings. When the future seems bleak, the multiple will decline because each dollar of earnings is less valuable to investors.
Consider 2013. The U.S. stock indexes increased around 30%. Earnings overall didn’t increase anywhere near 30%. The economy also didn’t grow at a 30% rate. But investors increased the prices they were willing to pay for stocks by 30% over the course of the year, and this was during a year when earnings growth and economic growth were stagnant or falling most of the year.
Many factors go into whether investors are willing to pay a higher or lower multiple for stocks. Falling inflation favors a higher multiple, when rising interest rates lean toward a lower multiple. Investors might pay a higher multiple today if they think the economy or earnings will grow faster at some point in the future. Another important factor is alternative investments. If nothing else looks attractive, investors will buy stocks. International investors will buy U.S. stocks when they believe the dollar will be strong or they want a safe haven from expected problems outside the U.S.
So, the question you need to ask is: Will investors be willing to pay a higher multiple for stocks as the year goes on? If they’ll pay the same multiple, then stocks likely will rise 5% to 10%, consistent with the likely earnings growth for 2014. If the combination of factors above will make investors willing to pay more for stocks, then the indexes will rise more than 10%. On the other hand, it would be “look out below” if investors suddenly are willing to pay much less for each dollar of earnings.
My guess is that current trends will continue and investors will be willing to pay a bit more for stocks and the economy will do better than currently anticipated. But there’s a lot that could intervene to change things. That’s why I’m recommending continued stock investments as part of diversified portfolios but that investors be prepared to reduce stock allocations as the year goes on.
The Data
This was a fairly light week for economic data, but the numbers released continue to indicate that economic growth is increasing. The economy adjusted to higher interest rates and fiscal tightening. The labor market continues to improve, and inflation is not an imminent problem. The disappointing employment reports of last week clearly are anomalies. The Fed’s Beige Book, released this week, makes that clear. Some portions of the country reported increases in hiring and spot shortages of skilled labor.
That doesn’t mean growth is robust. Economic growth is below average and should be better. The improvement could be derailed by policy mistakes or outside events, such as another crisis in Europe. The improvements in the labor market are coming very slowly. But it is unmistakable that recent trends are positive and the U.S. slowly is improving.
The market-moving report of the week was retail sales. Sales growth for December was positive and above expectations. More importantly, when auto and gasoline sales are removed, retail sales growth was very strong. (This is despite disappointing holiday sales reports from several retailers.) When recent months are examined together, households clearly are comfortable with their current situations.
The key, of course, is whether that will continue. Wage growth was weak the last part of 2013, and a fair amount of the sales increases were paid for by reduced savings. Households are comfortable reducing savings when the values of stocks and homes are rising. I don’t expect either to rise at the same rate in 2014 as in 2013. Maintaining retail sales growth will require increases in wage growth, and that in turn might hurt profit margins. So, we’re at a precarious point in the economy.
The Job Openings and Labor Turnover Survey (JOLTS) indicates some improvement in employment. Job openings topped four million for the first time since early 2008. The percentage of people quitting jobs held steady, which is a sign that people are feeling comfortable enough to leave jobs in search of better opportunities.
New unemployment claims declined modestly.
Consumer Sentiment as measured by the University of Michigan came in a little below expectations and remains below the post-recovery high. It’s hard to draw conclusions from one month’s report, and markets didn’t react much to it.
On the other hand, the NFIB Small Business Optimism Index increased more than expected. The Index generally rose through the last half of 2013 after lagging the rest of the economy since 2008. But the NFIB Index remains well below average levels during normal times and really hasn’t recovered since the financial crisis. Even so, the recent improvements indicate that the economy is strong enough that growth is filtering down from the largest companies to the smallest ones.
Several week reports were attributed to the unusual December weather. The Housing Market Index from the National Association of Home Builders declined a little, but not a significant amount. Housing starts also fell after strong gains the previous month. And some analysts attributed the decline in Consumer Sentiment to the weather.
This week’s manufacturing reports were very positive. Industrial Production increased in line with expectations after a strong November. And the manufacturing component of the report was above expectations. The Empire State Manufacturing Survey (which has been lagging most of the other surveys recently) showed a strong increase this month, and the Philadelphia Fed Survey had a good increase.
Both the Producer Price Index and Consumer Price Index increased more than in recent months, but the increases were right in line with expectations. Inflation remains below the Fed’s 2% target. Deflation continues to be more of a threat than inflation in the near term.
The Markets
It was a mixed week for stock indexes, after a weak start to the year. After a decline on Monday, most indexes rose the rest of the week and were set to close on positive notes until losing ground in the last hour on Friday. The exception was emerging market equities. They finished the week down almost 1.2% and were down all week Smaller U.S. Companies as measured by the Russell 2000 Index did best, returning 0.6%. The Dow 30 and All-Country World Index broke even, and the S&P 500 had a marginal loss.
Bonds also had a mixed week. Interest rates declined a bit, giving long-term treasuries a gain of above 0.8%. High-yield bonds gained about 0.2%, while investment-grade bonds were just below them. Treasury Inflation-Protected Securities (TIPS) lost about 0.2%.
The dollar had a good week, rising almost 0.8%. That wasn’t good for international bonds. International TIPS, for example, lost more than 1%.
Commodities had a rough start to their week but recovered to close the week on positive notes, though they also gave up ground in the last couple hours of trading for the week. Gold fared the worst. It was down almost 1% early in the week but closed with a 0.4% gain. Broad-based commodities did best with a 0.8% gain, but they were up over 1.2% earlier in the week. Energy-based commodities gained about 0.4%, following a steep decline in the last hours of the week.
Some Reading for You
When you use statistics to make decisions, you should have the right statistics and interpret them correctly, whether the decisions are about golf or investing. Consider these developments.
What will be the source of the next international crisis? Here’s some brainstorming.
Is labor force participation declining because of an aging population or people are giving up? A 2006 report forecast it would occur because of aging, before there were any problems with the economy.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
January 10, 2014 04:35 p.m.
Your Retirement Finance Week in Review
Happy New Year. I hope that your year is off to a good start and that we’ll enjoy a prosperous 2014 together.
To that end, there’s still time to join us at the Orlando World MoneyShow January 29-February 1, 2014. The conference is going to be at the Gaylord Palms Resort & Convention Center. Conference attendance is free. To register, set your web browser to http://www.WorldMoneyShow.com and use source code 034009, or call 800-970-4355.
Before we dive into the latest economic and market news, let’s do a quick review of 2013.
On the economic front, the U.S. closed the year with a positive surge. Almost all the data improved in the last weeks of the year. That indicates the economy finished absorbing the effects of the interest rate increases that occurred beginning in May. In the last month or so, it appears the economy was growing at an annualized rate of 4% or so. That’s much higher than the growth rate for the whole year and also since the bottom in 2009. What remains to be seen, as has been the case since 2008, is whether the growth can be sustained. So far in the recovery, it hasn’t been able to sustain growth without substantial help from the Fed. The economy will continue to receive that help, though it likely will be less help than since late 2012.
In the markets, it was the first mixed year since the crisis bottom. Since the Fed began intervening, most assets tended to rise or fall together. We had a different story in 2013. U.S. stocks were far away the leader in global investments. Small cap stocks returned over 36% while the S&P 500 returned almost 30%. The Dow 30 returned almost 27%. The best-performing sector in the U.S. markets was consumer discretionary, followed closely by health care.
The returns weren’t as attractive elsewhere. Developed European stock indexes generally had positive returns, though they weren’t as high as U.S. returns. The EAFE broad-based index of international stocks returned 18%. Emerging market stocks lost almost 6% for the year, despite a positive fourth quarter. Broad-based commodities lost almost 8%, while energy commodities rose about 6%. Gold had its worst year in a long time, losing over 28%.
Bonds also had a bad year. Long-term treasuries lost about 16%, and intermediate-term treasuries lost over 7.5%. Broader-based bond indexes also lost 4% to 5%. Only high-yield bonds had a positive year among bonds.
The Data
After a burst of positive data to close 2013, this week had a relatively small amount of data, and most of it focused on employment.
The widely-followed and overhyped Employment Situation reports closed the week and disappointed many people. The recent positive data plus strong employment reports earlier in the week created high expectations for the Friday jobs reports. On Wednesday, ADP announced that it had revised
