What’s Going on in the Markets October 7, 2018

Last week was one of the “worst” for the stock markets in many months, even though the S&P 500 index was barely down 1%, and the Dow Jones Industrial average remained virtually unchanged. However, the tech-heavy NASDAQ lost 3.2% and small capitalization stocks were down 3.8%. International stocks declined about 2.35%.

The proximate “cause” of the weekly decline was blamed on fast rising bond yields (when bond yields go up, that means bond prices go down). The ten-year treasury note yield rose 0.16% to 3.2%, while the 30-year treasury bill rose 0.20% to 3.4%.  These are their highest levels since July 2011 and August 2014 respectively.

Despite a weaker than expected September monthly jobs report, with 134,000 jobs added in September (185,000 were expected), we are seeing wages grow 2.8% year-over-year, while the unemployment rate has declined to match the low of 3.7%, last seen in 1969. Wage inflation is the biggest threat to stable prices, and portends more aggressive interest rate hikes by the federal reserve in the future.

Too Much of a Good Thing?

With the economy hitting on all cylinders, jobs are plentiful and consumers are extraordinarily confident. In fact, the latest survey from the Conference Board puts the September reading of the Consumer Confidence Index at the highest reading since September 2000. Paradoxically, frothy confidence and complacency typically coincide with a run up to a final bull (up-trending) market peak.  With five out of the last seven bull market tops over the last 52 years, exceptionally bright consumer outlooks peaked coincidentally with the S&P 500, and declined with the onset of a bear (down-trending) market. The only exceptions were 1980 and 1987, when the bear declines were driven by an abrupt monetary shock.  So even though we are in the midst of a “Goldilocks” economy, a significant downturn in consumer confidence could negatively impact the economic outlook.

Since the financial crisis of 2009, the Federal Reserve has kept interest rates abnormally low, and is currently committed to a gradual path to normalization. There is a fear, however, that the Fed might fall behind the curve and could be forced to move faster than expected. That increases concerns that interest rates might push the economy into a recession.

Time to Get Defensive?

Over the past couple of weeks, as the number of stocks that were advancing (versus those that were declining) saw deterioration (despite the indexes setting new all-time highs),  we started getting more defensive in client (and my personal) investment portfolios by selling some partial positions and increasing market hedges. This past week, we saw some further stalling and heavier volume selling in the markets than we have seen in quite a few months. For client portfolios, we already had reduced exposure to the markets, and with the recent increased institutional selling, I plan to slightly further reduce exposure on rallies in the coming weeks.

Everybody seems to be expecting a 4th quarter (November/December) post-mid-term election rally, which makes me a bit suspicious that we might not get one. The 3rd quarter of a mid-term election year is usually biased to the downside, but instead, this time around, we went on to make new all-time highs. Did we pull forward 4th quarter returns into the 3rd quarter? We’ll soon find out.

If you’re not inclined to sell anything, thereby recognizing capital gains this year, you could consider 1) making use of inverse funds (also referred to as bear market funds); 2) buy put options to hedge your portfolio; and/or 3) sell call options against stock and ETF positions on bounce-backs, the first of which I expect to see early this coming week.

But don’t let the tax “tail” wag the investment “dog”; take some chips off the table while you can, not when you’re forced to. In these algorithmic and high-frequency trader driven markets today, the velocity to the downside, as we saw in January earlier this year, can be stunning. Also, don’t forget that if you sell something in your IRA or 401(k), you won’t be generating any taxable capital gains.

With interest rates clearly headed higher, I wouldn’t be moving money from stocks to bonds as a defensive measure right now. As this past week attests, both bonds and stocks can go down at the same time, leaving cash or inverse funds as a couple of feasible places to “hide out” on a fraction of your overall investment portfolio. A buy point in bonds will be coming soon, but one should wait until they stabilize. If you find yourself overweight in bond exposure, a rally is sure to come, which you should take advantage of to reduce exposure.

Know Your Risk

To be clear, I may be early & wrong, but growth and bellwether names have been getting hit hard of late. Any measure of risk management over the last 9-1/2 years has reduced overall returns to be sure. And if you have a very long term time horizon, this may turn out to be a garden variety 5-15% pullback on our way to new highs, so you may choose to do nothing.

With interest rates finally rising meaningfully, institutions showing some inclinations towards selling (which we haven’t seen since January-February), some key sectors  faltering (such as financials and housing), and consumer confidence at all-time highs, this is a time to protect market profits and capital. If you’re fully invested, it can’t hurt to take some of your bull market gains off the table.

As mentioned above, the current period around mid-term election years is usually a strong one, and economic and corporate profit strength are at record highs, so this may be a normal correction on our way to new stock market highs. The last quarter of this year and first quarter of next year have historically been very strong, and that’s what I’m expecting. But just in case it isn’t, it may be prudent to somewhat reduce exposure here.

I am not calling for a bear market or market crash. I see nothing out there to panic about right now. You can bet that if I see anything like that brewing, you’ll be hearing from me again, urging you to drastically reduce market exposure.

As always, this article is not a recommendation to buy or sell any securities. I may not be your portfolio manager or financial planner, know little to nothing about your risk tolerance, time-frame or financial goals, so I can’t really advise you. I am only sharing what I’m seeing after a prolonged run in a persistently accommodative monetary environment, which is getting less so (central banks, federal reserve tightening monetary policy and raising rates). This might turn out to be the pull-back to buy instead of sell, but if you don’t have cash ready on the side to invest, can you really take advantage of it?

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

What’s Going on in the Markets January 18 2016

Wow! There’s no diplomatic way to say this: the global stock markets are in panic mode right now. In two weeks of trading, the U.S. S&P 500 index is down 8% on the year, which brings us close to correction territory (a 10% decline), and has some predicting a bear market (a 20% decline).

On top of that, we’ve been hearing a widely-publicized, rather alarming prediction from Royal Bank of Scotland analyst Andrew Roberts, saying that the global markets “look similar to 2008.” Mr. Roberts is also predicting that technology and automation are set to wipe out half of all jobs in the developed world. If you listen closely out the window, you can almost hear traders shouting “Sell! Head for the exits! We’re all gonna’ die!!!”

When you’re in the middle of so much panic, when people are stampeding in all directions, it’s hard to realize that there is no actual fire in the theater. Yes, oil prices are down around $30 a barrel, and could go lower, which is not exactly terrific news for oil companies and oil services concerns—particularly those who have invested in fracking production. But cheaper energy IS good news for manufacturers and consumers, which is sometimes forgotten in the gloomy forecasts. Chinese stocks and the Chinese economy are showing more signs of weakness, and there are legitimate concerns about the status of junk bonds—that is, high-yield bonds issued by riskier companies with high debt levels, and many developing nations. These bonds have stabilized in the past few weeks, but another Federal Reserve interest rate hike could destabilize them all over again, leading to forced selling and investors taking losses in the dicier corners of the bond market.

If you can think above the shouting and jostling toward the exists, you might take a moment to wonder about some of these panic triggers. Are oil prices going to continue going down forever, or are they near a logical bottom? Is this a time to be selling stocks, or, with prices this low, a better time to be buying? Are China’s recent struggles relevant to the health of your portfolio and the value of the stocks you own?

And what about the RBS analyst who is yelling “Fire!” in the crowded theater? A closer look at Mr. Roberts’ track record shows that he has been predicting disaster, with some regularity, for the past six years—rather incorrectly, as it turns out. In June 2010, when the markets were about to embark on a remarkable five year boom, he wrote that “We cannot stress enough how strongly we believe that a cliff-edge may be around the corner, for the global banking system (particularly in Europe) and for the global economy. Think the unthinkable,” he added, ominously.   (“The unthinkable,” whatever that meant, never happened.)

Again, in July 2012, his analyst report read, in part: “People talk about recovery, but to me we are in a much worse shape than the Great Depression.” Wow! Wasn’t it scary to have lived through, well, a 3.2% economic growth rate in the U.S. the following year? What Great Depression was he talking about?  Taking his advice in the past would have put you on the sidelines for some of the nicest gains in recent stock market history. And it’s interesting to note that one thing Mr. Roberts did NOT predict was the 2008 market meltdown.

Since 1950, the U.S. markets have experienced a decline of between 5% and 10% (the territory we’re in already) in 35.5% of all calendar years—which is another way of saying that this recent draw down is entirely normal. In fact, our markets spend about 55% of the time in this range (pulling back).  One in five years (22.6%) have experienced draw downs of 10-15%, and 17.7% of our last 56 stock market years have seen downturns, at some point in the year, above 20%.

Stocks periodically go on sale because people panic and sell them at just about any price they can get in their rush to the exits, and we are clearly experiencing one of those periods now. Whether this will be one of those 5-10% years or a 20% year, only time will tell. But it’s worth noting that, in the past, every one of those draw downs eventually ended with an even greater upturn and markets testing new record highs.

Many investors apparently believe this is going to be the first time in market history where that isn’t going to happen. The rest of us can stay in our seats and decline to join the panic.

Without a doubt the market picture looks dour, and it’s hard to see red on our screens and declines on our monthly statements. A disciplined approach that takes into account your goals, risk tolerance and time horizon remains the best way to approach when and how you’ll sell. There’s always a better day to sell since strength always returns to markets after a panic. Your patience is always rewarded in the markets, though I acknowledge that it’s easier said than done. If investing in the stock markets was easy, then returns would not be anywhere near as rewarding as they are.

In our client portfolios, we continue to look for opportunities to add to positions in good funds and companies at the appropriate time. We continue to maintain a healthy cash position, and have increased our hedges. While we may see additional selling to start the week (which starts on Tuesday due to the Martin Luther King, Jr. holiday), I suspect that the selling is somewhat exhausted in the short term, so I’m expecting a robust bounce as early as this week (I saw signs of selling exhaustion on Friday January 15). The quality and duration of that bounce will tell us more about what’s to come, and whether more defensive measures are warranted.

Nothing in this note should be construed as investment advice or a recommendation to buy or sell any security. If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.

Sources:

http://finance.yahoo.com/news/why-the-heck-are-the-markets-tanking-165146322.html

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7857595/RBS-tells-clients-to-prepare-for-monster-money-printing-by-the-Federal-Reserve.html

http://www.publicfinanceinternational.org/news/2012/07/economic-crisis-%E2%80%98worse-great-depression%E2%80%99

http://blogs.spectator.co.uk/2016/01/the-author-of-the-rbs-sell-everything-note-has-been-predicting-disaster-for-the-last-five-years/

http://www.marquetteassociates.com/Research/Chart-of-the-Week-Posts/Chart-of-the-Week/ArticleID/140/Frequency-and-Magnitude-of-Stock-Market-Corrections

The MoneyGeek thanks guest writer Bob Veres for his contribution to this post

What’s Going on in the Markets January 7 2016

Have your long-term financial goals changed in the last four days?

Are American companies becoming less valuable because investors in China are panicking?

Is there any reason to think that because Chinese investors are panicking, that Chinese companies are less valuable today than they were a few days ago?

These are the kinds of questions to ponder as you watch the U.S. stock market catch a cold after China sneezed.  In each of the first four trading days of the year, China closed its markets due to a rapid fall in share prices—a move which may have made the panic worse, since it made investors fear being trapped in stocks that are seen as dropping in value.  It’s unclear exactly how or why, but the panic spread to global markets, with U.S. stocks falling 4.9% to mark the worst first-of-the-year drop in history.

For long-term investors, the result is much the same as if you went to the grocery store and discovered that the prices had fallen roughly 5% across the board.  At first, you might think this is a great bargain. But then you might wonder whether the prices will be even lower tomorrow or next week.  One thing you probably WOULDN’T worry about is whether prices will eventually go back up; you know they always have in the past after these sale events expire.

Will they?  The truth is, nobody knows—and if you see pundits on TV say with certainty that they know where the markets are going, your first impulse should be to laugh, and your second should be to check their track record for predicting the future.  Without a working crystal ball, it’s hard to know whether the markets are entering a correction phase which will make stocks even cheaper to buy, or whether people will wake up and realize that they don’t have to share the panic of Chinese investors on this side of the ocean.  The good news is there appears to be no major economic disruption like the Wall Street derivatives mess that triggered the 2008 downturn.  The best, sanest investors will once again watch the markets for entertainment purposes—or just turn the channel.

I overwhelmingly hear pundits predicting a bear market in 2016 (a bear market is defined as a 20% or more decline from the last market peak). “The bull market has gone on way too long, economic data is deteriorating, the Federal Reserve is raising interest rates, geopolitical events spell doom, we’re heading for a recession, oil is going to $1 per barrel” are all reasons our markets are headed for a tumble. Remind yourself that no one knows for sure what might happen, and while a bear market might assert itself in 2016, no one can reliably predict when it will come. All we know for certain is that it sets up opportunities

So what should you do? If you’ve enjoyed nice gains in your portfolio from this bull market, then you should consider cashing in some of those gains. It never hurts to take some money “off the table” and have some cash reserves to take advantage of better prices. Don’t panic sell–wait for the inevitable bounce that always comes after a multi-day selloff. You’ll be glad you did.

If you’d rather not tax the tax hit on your gains, there are ways to hedge your portfolio so you can at least sleep better at night. Speaking of that, if you’re up at night worrying about your portfolio, then you need to figure out whether you’ve taken on too much risk for your temperament and investing time horizon. You should first discuss all of this with your financial advisor/planner. Don’t have one? We’re glad to help.

As for our clients, we’ve been raising cash and doing some hedging ourselves over the past year. While there are some concerning recent economic trends and technical market anomalies, we don’t see signs of an impending recession on the horizon. We look for indications of a recession, because recessions usually lead to bear markets.

Nothing in this note should be construed as investment advice or a recommendation to buy or sell any security. If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.

Sources:

http://www.ft.com/intl/cms/s/0/f248931e-b4e5-11e5-8358-9a82b43f6b2f.html#axzz3wc533ghn

http://www.ft.com/cms/s/0/bc8c0d60-b54d-11e5-b147-e5e5bba42e51.html?ftcamp=published_links%2Frss%2Fhome_us%2Ffeed%2F%2Fproduct#axzz3wc533ghn

The MoneyGeek thanks guest writer Bob Veres for his contribution to this post

Rate Hike Hype

While I’m still a tad skeptical, we will almost surely see the U.S. Federal Reserve Board (Fed) start the long process of ending its intrusion into the interest rate markets, by allowing short-term rates to rise starting on Wednesday. It will be the first time the Fed has raised rates since 2006, and for some it will mark the beginning of the final chapter of the Great Recession.

Since 2008, as most of us know, returns on short-term bonds have been at or near zero percent, which is a consequence of the Fed keeping the Federal Funds rate—the rate at which it will lend banks virtually unlimited amounts of money, short-term—at 0.125%. The average Fed Funds rate has historically been 3.5% to 4.0%, so this is a considerable amount of stimulus.

At the same time, the Fed has purchased more than $3.5 trillion worth of Treasury securities and home mortgage pools as part of its quantitative easing (QE) programs, bidding aggressively against much smaller buyers, which is another way of saying: forcing the rates on these bonds down closer to zero.

Pulling back out of these interventions is going to be tricky, in part because shifts in interest rates have a direct impact on a still-fragile U.S. economy (higher rates mean higher borrowing costs, potentially less corporate investment and lower profits), and even trickier because we don’t know how investors will react. In the past, the markets have panicked at the mere mention of a cutback in Fed involvement, and (more recently) have also risen on the same news, presumably because people drew encouragement from the confidence the Fed was showing in the strength and resilience of the U.S. economy.

There are also some tricky mechanical problems. The central bank will try to control the extent that short-term rates rise and fall by raising the interest it pays to banks for the reserves held at the Fed, and also cautiously raising the amount it pays money market funds for short-term trades known as “reverse repurchase agreements.” The mechanics are highly technical and complicated—and still unproven, although there are reports that the Fed has been conducting tests for the past two years.

As the markets react, either upwards or downwards, there are a few things to keep in mind. First, despite the headlines soon to be blaring from every financial section of every newspaper in the country, the rate is expected to move very modestly from .125% to .375%—clearly a small first step in a long journey toward the long-term average. After each step—prominently including this one—the Fed will evaluate the consequences before deciding to make future changes. If the economy slows, or if there are signs that inflation is falling below the Fed’s 2% annual target, it could delay the next move by months or even years. That caution greatly reduces the danger of any kind of serious economic pullback.

It’s also worth noting that the Fed has announced no plans to sell the nearly $4.2 trillion worth of various bonds—including the aforementioned Treasuries and mortgages—that it owns. At the moment, the bank is simply rolling over the portfolio, meaning it reinvests $21 billion a month as bonds mature. Eventually, most observers expect the reinvestment to stop and the Fed to allow the huge bond holdings to mature and fall off of its balance sheet. The fact that this is not being done currently reflects the exquisite degree of caution among Fed policymakers, who don’t want to rock the boat too fast or too hard.

Finally, some have wondered about the future of mortgage interest rates as the Fed begins a cautious exit from the bond markets. Interestingly, recent history shows that mortgages haven’t been especially influenced by changes in the benchmark rate. The last time we saw extremely low interest rates, after the tech bubble burst in the early 2000’s, the Fed brought its Fed funds rate down to 1%. It began raising rates by 0.25% a quarter starting in the summer of 2004, but over the next four months, the 30-year fixed-rate mortgage actually fell from 6.3% to 5.58%. By the time of the last increase in the summer of 2006, mortgage rates were running at 6.68%, just a half-percent higher than they had been at the previous Fed funds rate low.

Nobody knows exactly what to expect when the announcement comes on Wednesday, but you can look for the investment markets to bounce around a bit more than usual, and economists—including the teams employed by the Fed—to examine every scrap of data about the impact on the economy over the next quarter. At that time, Fed policymakers will face another decision, and there is no reason to expect them to be less cautious than they have been recently. For many of us, the rate rise should be reason for celebration, a sign that the long recession and period of economic uncertainty is finally starting—carefully—to be put in our rear view mirror.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.

Sources:

https://www.washingtonpost.com/news/where-we-live/wp/2015/12/14/what-a-fed-rate-hike-could-mean-to-mortgage-borrowers/

https://www.washingtonpost.com/news/wonk/wp/2015/12/14/the-federal-reserve-will-likely-raise-interest-rates-this-week-this-is-what-happens-next/

http://www.usatoday.com/story/money/2015/12/14/this-week-december-13/77155714/

The MoneyGeek thanks guest writer Bob Veres for his contribution to this post

2015 First Quarter Report: Stop Awaiting the Fed

The first quarter of the new year has brought us small positive returns in many of the U.S. and global indices, and more than the usual amount of anxiety along with them.

The Wilshire 5000–the broadest measure of U.S. stocks and bonds—was up 1.61% for the first three months of 2015, which is remarkable considering that the index lost .75% on the last day of the quarter. The comparable Russell 3000 index has gained 1.80% so far this year.

The Wilshire U.S. Large Cap index gained 1.27% in the first three months of 2015. The Russell 1000 large-cap index was up 1.59%, while the widely-quoted S&P 500 index of large company stocks posted a gain of 0.44% in the first quarter of the year.

The Wilshire U.S. Mid-Cap index gained 5.77% for the quarter. The Russell Midcap Index was up 3.95%.

Small company stocks, as measured by the Wilshire U.S. Small-Cap index, gave investors a 4.51% return during three months of the year. The comparable Russell 2000 Small-Cap Index was up 4.32%, while the technology-heavy NASDAQ Composite Index gained 3.48% for the quarter.

Meanwhile, global markets are showing signs of life, which means returns comparable to the U.S. stock market. The broad-based EAFE index of companies in developed foreign economies gained 4.19% in dollar terms in the first quarter of the year, in part because Far Eastern stocks were up 8.27%. In aggregate, European stocks gained 5.15%, although they are still down more than 8% over the past 12 months. Emerging markets stocks of less developed countries, as represented by the EAFE EM index, fared less well, gaining 1.91% for the quarter. Many emerging markets are highly dependent on strong crude prices and stronger currencies, two factors working against them during this quarter.

Looking over the other investment categories, real estate investments, as measured by the Wilshire U.S. REIT index, was up 4.67% for the first quarter, despite falling 0.87% on the final day. Commodities, as measured by the S&P GSCI index, continued their losing ways, dropping 8.22% of their value in the first quarter, largely because of continuing drops in oil prices.

If you were watching the markets day-to-day, you experienced a mild roller coaster, what trading professionals refer to as a sideways market. One day it was up, the next down, each day (or week) seeming to erase the gains or losses of the previous ones. The best explanation for this phenomenon is that investors are still looking over their shoulders at interest rates, waiting for bond yields to jump higher, making bonds more competitive with stocks and triggering an outflow from the stock market that could (so the reasoning goes) cause a bear market in U.S. equities.

However, investors have been waiting for this shoe to drop for the better part of three years, and meanwhile, interest rates have drifted decidedly lower in the first quarter. The Bloomberg U.S. Corporate Bond Index now has an effective yield of 2.93%. 30-year Treasuries are yielding 2.48%, roughly 0.3% lower than in December, and 10-year Treasuries currently yield 1.87%, down from 2.17% at the beginning of the year. At the low end, you need a microscope to see the yield on 3-month T-bills, at 0.02%; 6-month bills are only slightly more generous, at 0.10%.

This interest rate watch has created a peculiar dynamic where up is down and down is up in terms of how traders and stock market gamblers look at the future. The generally positive economic news is greeted with dismay (The Fed will notice and start raising rates sooner rather than later! Boo!) and any bad news sends the stock market back up again into mild euphoria (The Fed might hold off another quarter! Yay!).

There are several obvious problems with this. First, probably least important, the Fed’s future actions are inscrutable. You will hear knowledgeable Fed-watchers say that the Fed will take action as early as June or as late as next year, and none of them really know.

Second, small incremental rises in interest rates are not closely associated with bear markets, as everybody seems to assume. Figure 1 may be a little hard to interpret, but each blue square shows the price/earnings ratio for the U.S. stock market as a whole after interest rates have risen to particular levels, almost all of them higher than today. What you see is that when rates have gone up in the past, the price people will pay for stocks has also gone up. Why? For exactly the reason you think: rising rates are a sign of a healthy economy, which is precisely why the Federal Reserve Board would decide that stimulus is no longer necessary. Companies—and their stocks—tend to thrive in healthy economies.

CA - 2015-4-1 - Figure 1

The chart also shows that rates can get too high for the health of stocks—the cutoff point seems to be up around 5.5% to 6%. But incremental quarter-point rises are not going to take the U.S. economy into that territory for a long time. History has shown that markets and interest rates can go up together for several quarters, after the market gets over the initial “shock” of the first interest rate hike. So far, the fed has given every indication that they will remain accommodative and patient.

Finally, we should all welcome the Fed pullback, not fear it. A lot of the uncertainty among traders and even long-term investors is coming from anxiety over how this experiment is going to end. The U.S. Central bank has directly intervened in the markets and in the economy, and is still doing so. When that ends, normal market forces will take over, and we’ll all have a better handle on what “normal” means in this economic era. Is there great demand for credit to fuel growth? What would rational investors pay for Treasury and corporate bonds if they weren’t bidding against an 800-pound gorilla? Would retirees prefer an absolutely certain 4.5% return on 30-year Treasury bonds or the less certain (but historically higher) returns they can get from the stock market? These are questions that all of us would like to know the answer to, and we won’t until all the quantitative easing and interventions have ended.

What DO we know? Figure 2 shows that the U.S. economy is less dependent on foreign oil than at any time since 1987, and the trend is moving toward complete independence. Oil—and energy generally—is cheaper now than it has been in several decades, which makes our lives, and the production of goods and services, less expensive.

CA - 2015-4-1 - Figure 2

Meanwhile, more Americans are working. Figure 3 shows that the U.S. unemployment rate—at 5.5%—is trending dramatically lower, and is now reaching levels that are actually below the long-term norms. Unemployment today is lower than the rate for much of the booming ‘90s, and is approaching the lows of the early 1970s.

CA - 2015-4-1 - Figure 3

And real GDP—the broadest measure of economic activity in the United States—increased 2.4% last year, after rising 2.2% the previous year.   America is growing. Not rapidly, but slow growth might not be so terrible. Rapid economic growth has, in the past, often preceded economic recessions, where excesses had to be corrected. Slow, steady growth may be boring, but it’s certainly not bad news for the economy or the markets. For fun, look at Figure 4, which shows, in a creative way, the size of the U.S. economy compared with the rest of the world. Each U.S. state is labeled with an entire country whose total economic output is roughly equal to that state’s. The point: the U.S. is still a colossus that stands across the global economy.

CA - 2015-4-1 - Figure 4

It has been said that people lose far more money in opportunity costs by trying to avoid future market downturns while the markets are still going up, than by holding their ground during actual downturns. And, in fact, in every case so far, the U.S. market has eventually made up the ground it lost in every bear market we’ve experienced.  The last trading day of the 1st quarter looked quite bearish, as have many other gloomy trading days during this seven-year bull market. It seems like every week, somebody else has predicted an imminent decline that has not happened. People who listened to the alarmists lost out on solid returns. You filter out the good news at your peril.

For our client portfolios we continue to take a somewhat defensive stance as this aging bull market carries on.  Despite softening economic data during the past few months, we see little evidence or warning signs of an impending recession or severe bear market over the next 6-9 months, although that could change anytime. Nonetheless, we await opportunities to re-deploy some cash, but the market has been recalcitrant to give much of a pullback from its recent highs.  Bull markets rarely die of old age; they often die of over-exuberance.  So far, we’re not seeing much of a rush to equities; rather, we see the market still climbing the proverbial wall of worry.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.

Happy Easter!

Sources:

Wilshire index data: http://www.wilshire.com/Indexes/calculator/

Russell index data: http://www.russell.com/indexes/data/daily_total_returns_us.asp

S&P index data: http://www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf–p-us-l–

http://www.tradingeconomics.com/united-states/unemployment-rate

Nasdaq index data: http://quicktake.morningstar.com/Index/IndexCharts.aspx?Symbol=COMP

International indices: http://www.mscibarra.com/products/indices/international_equity_indices/performance.html

Commodities index data: http://us.spindices.com/index-family/commodities/sp-gsci

Treasury market rates: http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/

TheMoneyGeek thanks guest writer Bob Veres for co-writing this post.

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