Some Things That Grabbed My Attention This Week

There were some interesting developments affecting your retirement finances in the last week.

We might have seen a major turning point in the stock market. If this turns out to be a lasting change, it will have a significant effect on many investors.

Since the end of the financial crisis, growth stocks have outperformed value stocks by a wide margin. Momentum stocks, which generally are considered growth stocks, also have been big winners.

But in the last couple of weeks, growth stocks and momentum stocks did much worse than value stocks. Over this short period, growth stocks have fallen behind value stocks by the widest margin since March 2009, according to Bespoke Investment Group.

Growth stocks and momentum stocks have propelled the market indexes ahead of most active investment strategies. The trend has been a major cause of the shift of money into index strategies instead of active management.

The strength in momentum stocks also led many investors to favor what’s become known as “factor investing” strategies.

We’ve had several brief periods in this bull market in which value stocks did better than growth stocks. Those periods proved to be short-lived.

Historically, value outperforms growth for a period of years, and then there’s a flip in growth’s favor. For decades, academic studies revealed the markets have a “value premium” because value stocks earn higher returns than the indexes with less risk over the long term.

In recent years, however, some observers speculated that going forward, growth stocks always would outperform value stocks because of significant changes in market structure and technology.

Value stock advocates have disagreed. The most significant and recent argument in favor of value stocks is this paper by John Pease of the investment firm GMO.

Rob Arnott, of Research Affiliates, and his co-authors wrote a paper explaining why many investors will not receive the benefits they expect from “factor investing,” of which momentum investing is a major component. The paper is significant because Arnott has been a major advocate of factor investing. I’m watching to see if this shift in value’s favor has legs.

Inflation also has been in the news. The Consumer Price Index (CPI) showed annual inflation above 2% for several consecutive months for the first time since the financial crisis. The strong labor market and rising average hourly earnings raise some concerns that higher inflation is here to stay. It is important to look behind the headlines to find the real story. The details reveal high inflation isn’t likely to be a problem.

If economic growth was leading to higher inflation, we would see that in the prices of cyclical services. Yet, the detailed data show that inflation for cyclical services is tame.

This is the case though retail spending has been fairly strong and the employment market is healthy. This means there are long-term factors that are keeping a lid on cyclical services prices, and that’s likely to continue.

The prices of goods haven’t been subject to much inflation for some time. That’s the result of global competition, technology and other factors. That hasn’t changed and isn’t likely to change.

Housing has been a major contributor to inflation in this recovery. But the CPI measurement overstates housing inflation. Even so, housing inflation in the CPI stabilized over the last year or so.

Medical care was a major contributor to the recent inflation increases. But the CPI’s measure of medical expense inflation is much higher than in other inflation measures, such as the Personal Consumption Expenditure (PCE) index. It also is likely that the medical care inflation surge is temporary because it was driven by rising insurance premiums.

In short, I don’t see a sustained rise in inflation that many are worrying about.

Monitoring Medicare Mistake

We’re very close to Open Enrollment time for Medicare, and its employees are working feverishly to fix a mistake on its website. Traditionally, the website has had a Plan Finder tool that enabled beneficiaries and their advisors to compare the total costs of different Part D prescription drug plans using the medicines the beneficiary is taking. It is the most commonly used feature on the website.

But Medicare redesigned its website recently. Somehow the redesign omitted this key feature. The website still has a Plan Finder tool that enables the user to compute the separate costs of each plan. But the tool doesn’t compute a total cost of each plan and enable an easy comparison of the total costs.

Medicare is trying to have this fixed by Oct. 15, the beginning of Open Enrollment.

The Data

Consumer Sentiment, as measured by the University of Michigan, rebounded in the first part of September to 92.0 from 89.8 at the end of August. This is a recovery from August’s steep drop, but the measure still is eight points lower than the recent high in May and among the lowest levels of the last three years.

Consumers generally took a break from spending in August, according to the latest Retail Sales report.

The headline number was strong with a 0.4% increase. That follows a 0.8% increase in July. But after excluding autos and gas, sales increased only 0.1% in August, compared to 0.9% in July.

Retail sales are volatile from month to month. It is best to look at average sales growth over several months. That number indicates consumer spending still is strong enough to keep economic growth positive.

Manufacturing is growing at a lower rate in the New York area, according to the Empire State Manufacturing Survey. The index was reported at 2.0 for September, compared to 4.8 in August. Details of the survey aren’t good. The six-month outlook took a steep drop in September, and capital expenditures fell to their lowest level in three years.

But the Philadelphia Fed Business Outlook Survey was a strong 12.0 for September, down from 16.8 in August. Most components of the survey were strong, though confidence in the future was down sharply.

But Industrial Production increased by a sharp 0.6% in August, compared to a 0.1% decline in July. Manufacturing production increased 0.5%, compared to a 0.4% decline in July. Even better, production of business equipment increased 1.0%.

The housing market might be recovering from its slump earlier this year.

The Housing Market Index from the National Association of Home Builders (NAHB) exceeded expectations by rising to 68 from 67. It seems the August decline in interest rates helped new home sales.

Housing Starts also had a sharp surge in August. Single-family home starts increased 4.4% for the month and now are up 2.2% over 12 months. The August levels set a new high for this expansion, coming in a little above the previous high set earlier in 2019.

Both housing starts and permits are at their highest levels since before the financial crisis. Even so, both measures are below historic average levels. When adjusted for population, they are at historic recession levels.

Existing home sales had another good month in August, rising 1.3%. That follows a 2.5% increase in July. Over 12 months, existing home sales have jumped 2.6%.

The Leading Economic Indicators Index was unchanged in August, following a sharp jump in July. The August reading was in line with expectations. The Conference Board reported the August reading likely means we’ll have modest growth in six months.

New unemployment claims increased a modest 2,000 to 208,000. Again, that keeps the claims numbers near historic lows.

The Markets

The S&P 500 rose 0.28% for the week ended with Wednesday’s close. The Dow Jones Industrial Average added 0.10%. The Russell 2000 declined 0.31%. The All-Country World Index (excluding U.S. stocks) gained 0.32%, while emerging market equities increased 0.10%.

Long-term treasuries fell 0.58% for the week. Investment-grade bonds declined 0.03%. Treasury Inflation-Protected Securities (TIPS) lost 0.25%. High-yield bonds rose 0.23%.

In the currency arena, the U.S. dollar fell 0.07%.

Energy-based commodities rose 2.58%. Broader-based commodities added 1.73%, while gold dipped 0.28%.

Bob’s News & Updates

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