Planning for Tomorrow’s Problems

How should portfolios be positioned for the long-term risks and worries in the economy?

That’s the key question facing many investors today, and how you answer it matters a lot to your long-term financial independence.

I don’t have to give you details about the risks and problems in the global economy. There are plenty of people talking about high levels of long-term debt, the limited ability of central banks to respond to problems, aging populations and more. There also are the non-economic problems that can adversely affect the economy, such as populism, the potential for wars and other sources of political instability.

Yet, for now the U.S. economy and the global economy are doing well. We review the economy each month in Retirement Watch, and we’ve been reporting that there is sustainable growth and no warning signs of imminent recession. The major risk is that central banks might tighten too much, too fast. But that isn’t happening now, and there’s a good chance it won’t.

So, what’s an investor to do when the long-term picture is fraught with risks but the short- and intermediate-term look pretty good?

First, recognize that there is a long-term economic cycle and a short-term cycle. This is normal. What’s different is that this is the first time during our lifetimes that the long-term cycle is negative. From World War II through 2007, the long-term cycle was positive, with growth and credit increasing. The cycle turned around in 2007 when debt levels became too high. The long-term growth outlook is tepid and debt is still too high.

The short-term cycle can be counter to the long-term cycle. In the positive long-term cycle, we had bear markets and recessions during that long post-war boom. Likewise, we now have a growing economy and bull market during this negative long-term cycle.

We should take advantage of the positive short-term cycle while it lasts but prepare for its end. We take advantage of it by searching for margins of safety and pockets of opportunity each month in Retirement Watch.

We prepare for the long-term cycle by recognizing that the short-term cycle can change. We invest primarily in liquid investments that can be sold when needed. We sell investments when their valuations are too high or their market cycle seems to be changing.

As always, we maintain balance and diversification. We can’t anticipate all the changes in markets and the economy, so we always want to own assets that will do well in most of the likely environments. The less time you want to spend monitoring and making changes in your portfolio, the more balance you need to protect yourself.

It is futile to try to anticipate when bad times will come again. Prepare your portfolio for them now by following our basic principles to earn safe, solid returns.

The Data

Small business owners still have a high level of optimism, though the Small Business Optimism Index of the National Federation of Independent Business (NFIB) fell a little for the month to 104.7 from 105.3. The NFIB did point out that the survey was taken before the bill to repeal the Affordable Care Act was withdrawn, and it doesn’t know how that might affect future survey results. Also, the uncertainty index component hit the second highest level ever.

Last week’s Employment Situation reports were considered a disappointment, but they weren’t as bad as the headlines.

Only 98,000 jobs were created, which was much lower than the last few months and lower than the previous day’s ADP employment report suggested. Mild winter weather probably made the first two months of the year artificially strong, while bad March weather probably held down that month’s job growth. The average over three months remains high. In addition, wages continue their steady, solid increases.

The JOLTS (Job Openings and Labor Turnover Survey) supported the strong job numbers for February. The JOLTS data is more detailed than the Employment Situation reports but is a month behind. Job openings in February rose 2.1%. The number of job openings is at its fourth-highest level since the financial crisis. There continues to be a gap between job openings and hiring. Indeed, hiring declined from the previous month, and hires are up only 2.4% over the last 12 months. Businesses continue to say they can’t find people with the right qualifications for the job openings they have.

New unemployment claims didn’t change much, declining by 1,000 to 234,000. As has been the case for months, all of the new unemployment claims numbers are near historic lows.

Overall, the labor market appears to be relatively strong, though there still are a number of people working part-time who would rather work full-time. Wage increases also are below the long-term average but are higher than they were through most of the recovery. That’s strong enough to keep consumer optimism high and the economy moving along.

Consumer credit had another solid increase. In addition, credit card use increased substantially after declining the previous month. Mortgage growth still is very slow, but credit growth through other means is healthy.

Wholesale prices declined over the month by 0.1% and are up 2.3% over 12 months, the highest level in five years. Food was up 0.9%, but energy was down 2.9% for the month. Excluding food and energy, producer prices were flat for the month and rose 1.6% over 12 months.

Consumer Sentiment, as measured by the University of Michigan, rose to 98 from 96.9. That’s a three-month high. Also, households’ optimism about their current financial situations and the economy rose to their highest levels since 2000.

The Markets

The S&P 500 fell 0.29% for the week ended with Wednesday’s close. The Dow Jones Industrial Average lost 0.26%. The Russell 2000 gained 0.54%. However, the All-Country World Index declined 0.24% and the emerging market equities slid 1.14%.

Long-term treasuries rose 1.38%. Investment-grade bonds added 0.62%. Treasury Inflation-Protected Securities (TIPS) appreciated 0.09%, while high-yield bonds rose 0.08%.

The dollar gained 0.27%.

Energy-based commodities returned 1.68%. Broader-based commodities rose 0.35%. Gold returned 2.25%.

Bob’s News & Updates

Most retirees leave a lot of money on the table by not carefully considering how and when to take their Social Security benefits. Avoid that mistake by educating yourself about the choices. Start with my report, Secrets to Boosting Social Security Benefits.

Do you have a Medigap plan to go along with traditional Medicare? Did you know that one major medical event can more than wipe out years of savings from not paying Medigap premiums? Which is the best Medigap plan for you? Learn more in the revised edition of “The New Rules of Retirement.”