Published May 8, 2020

At the beginning of this year, the U.S. stock market showed robust strength. Negative headlines were not enough to keep the market from rising; it continued its record-setting bull market run.

Then, just like that, it was over. The bull market did not end because of economic issues. This bull market ended because of a virus, and the growing realization of its impact on the global economy. The end of the market run was sudden and ferocious. Veteran investors were shocked and surprised. Warren Buffett observed that in all his years of investing, he had never seen anything like it.

Since the market is usually a forecaster of the economy, it appeared that the market was forecasting an event as big as the Great Depression, with unemployment at levels unseen at any time previously. Liz Sonders, chief investment strategist for Charles Schwab, said it was the Great Depression, the crash of 1987 and the 9-11 attacks all rolled into one.

Then on March 23, the U.S. equity market struck its low point for the year thus far. Since March 23, the market has been on a tear. First dismissed as a bear market rally, the market rose by more than 23 percent, qualifying it as a new bull market. The rise erased one half of the market drop since late February. The lessons: Do not give up on the American economy. Stay invested. Do not try to time the market.

Global efforts by central banks in the U.S. and worldwide to buoy the system led to the sudden and steep rise. Citibank estimates that central banks this year will buy $5 trillion in bonds, which is […]

Published April 10, 2020

From its all-time high on Feb. 12, the S&P 500 hit a bottom of 2,237 on March 23. But will it still go lower this year? After the longest bull market in stock market history, the coronavirus dealt a body blow to the market. The market drop was the most precipitous in history. History tells us that the market will recover, but over what time period? Will it be a V-shaped or U-shaped or L-shaped recovery?

Since 1929, the S&P has suffered 14 bear markets, defined as peak-to-trough losses of 20 percent or more. That being said, bear markets result in declines of 39 percent on average, and last about 19 months. If this one feels particularly bad, it’s because it is. We’ve had a decline almost on a par with a typical full bear market cycle in just about three weeks.

Over the past 25 years, there have been seven virus-related market episodes. While there were market dislocations during these episodes, none of the infections were as contagious as the current coronavirus. While the Ebola virus outbreak in West Africa was potentially more problematic, it was contained quite quickly and a wider contagion was avoided. With this history as background, it’s easy to see why governments globally were perhaps lulled into a state of relative complacency.

The litany of records broken is long, but that is history. Central banks around the world have reacted to the challenge. The U.S. and other governments have launched massive stimulus packages. Help is on the way, but will that help cause more problems?

The massive stimulus packages will be inflationary. Money will become less valuable and things more dear. That […]

Published March 6, 2020

This month I have received more than the usual amount of correspondence asking where my column is. It is flattering to know that people care, but pity the poor columnist in a market of volatility and government by tweet. Sometimes circumstances change so rapidly, I can’t keep up with the changes.  But should you care about the volatility anyway?

Investors are people, and people are often impatient. No one likes to wait in line or wait longer than necessary for something – especially today, when so much is just a click or two away.

This impatience also manifests itself in the financial markets. When stocks slip, for example, some investors grow uneasy. Their impulse is to sell, get out, and perhaps get back in later. If they give in to that impulse, they may pay a steep price.

Across 30 years through Dec. 31, 2018, the Standard & Poor’s 500 posted an average annual return of 10 percent. During the same period, the average mutual fund stock investor realized a yearly return of just 4.1 percent. Why the difference? It could partly stem from impatience.

It’s important to remember that past performance does not guarantee future results. The return and principal value of stocks will fluctuate over time, as market conditions change. And shares, when sold, may be worth more or less than their original cost.

Investors can worry too much. In the long run, an investor who glances at a portfolio once per quarter may end up making more progress toward his or her goals than one who anxiously pores over financial websites each day.

Too many investors make quick, emotional moves when the market dips. Logic may […]

Published February 7, 2020

“It’s very hard to say what is affecting financial markets with any precision or confidence.” – Jerome Powell, U.S. Federal Reserve Board chairman.

Longtime readers of this column will recall that I am fond of quoting Will Rogers, who had rare sagacity. He once said “it is very difficult to make predictions, especially about the future.” Now, our Federal Reserve chairman agrees with him.

As we started the year, rosy optimism prevailed. The equity markets were up. Strength in the markets begat more strength, and it looked like we were off to a good start for the year. A good start to the year usually means a good year; optimism prevailed. The Federal Reserve met and pronounced the economy solid. The Fed declined to move rates, because a cut wasn’t needed, and an increase was not warranted. President Trump did not agree: The Fed should get smart and cut rates, he opined, arguing that high interest rates were putting the U.S. at a competitive disadvantage. (Interest rates are at historically low levels.) The president yearned for the negative interest rates of Europe, but they weren’t forthcoming.

Unemployment remained low. Consumer confidence stayed strong, even as consumer stocks, as measured by their ETF, were weak. U.S. growth in domestic product was the slowest since 2016. The president blamed the Federal Reserve, but not the trade war.

As always, there was plenty to worry about. The markets were overextended, and a correction was due. Still, the equity market marched ahead; until it didn’t. News of a new virus spreading globally hit, and markets tumbled. Since it is hard to make predictions about the future, it is unknown at this […]

Published January 10, 2020

Much has been written about the classic financial mistakes that plague investors, family businesses, corporations and charities. Similar financial missteps also plague retirees. The beginning of a new decade is a good time to review these.

Calling them “mistakes” may be a bit harsh, because not all of them represent errors in judgment. Yet whether they result from ignorance or fate, we need to be aware of them as we plan for and enter retirement.

Leaving work too early

Adding years of earnings and savings can add significantly to the investment portfolio one will rely on in retirement. Also, since Social Security benefits rise about 8 percent for every year one delays receiving them, waiting a few years to apply for benefits can provide greater retirement income. Filing for monthly benefits before reaching Social Security’s Full Retirement Age (FRA) can mean comparatively smaller monthly payments. If possible, delay claiming Social Security until one must file for it, and see significantly more monthly benefits.

Underestimating medical bills

According to the latest estimate from the Center for Retirement Research at Boston College, the average retiree will need at least $4,300 per year to pay for future health care costs. Medicare will not pay for everything. That $4,300 represents after-tax, out-of-pocket costs and accounts for dental, vision and long-term care.

Taking potential for longevity too lightly

Actuaries at the Social Security Administration project that around a third of today’s 65-year-olds will live to age 90, with about one in seven living 95 years or longer. The prospect of a retirement being 20-30 years or longer is not unreasonable, yet there is still a lingering cultural assumption that our retirements might duplicate the sometimes […]

Published December 6, 2019

In this column, you have often heard me refer to the market climbing a wall of worry.

Surely, at this time, the market has a lot to worry about.  Is that the reason the equity markets have climbed 20-30 percent year-to-date?

The slowing global economy, trade war with China, Brexit missteps, Hong Kong demonstrations and interest rates inverting have all been headline news and negatives for the U.S. economy and the stock market.

“Trade wars are good and easy to win,” opined President Trump, as he began the current dispute with China. With each passing month, we are told we are winning the trade dispute and that an agreement is at hand –  even inches away, according to the White House – yet the dispute continues and in some cases worsens.

If you can count the outcome of the demonstrations in Hong Kong as a sign of winning against China’s control, then we should be optimistic.  But political unrest in Hong Kong is threatening global stability.

Brexit also threatens disruption of the global economy, with the only solution offered being another general election in Britain; no consolation there.

The U.S. interest rate yield curve briefly inverted, so the Federal Reserve lowered interest rates again. Was that a solution or just another problem?  Wherever one looks there is worry, and yet the U.S. equity market appeared strong with the S&P up 25.3% from Jan. 1, 2019, through Dec. 1, 2019.  The Nasdaq was up 30.6% and the Dow Jones Industrials up 20.3% during the same time period.

The S&P added 3.4% for the month of November, while the Nasdaq gained 4.65% and the Dow 3.7% for the month. The S&P and […]

Published October 11, 2019

Longtime readers of this column may recall that I often write that the market climbs a wall of worry. This year has been no exception.

In spite of raucous headlines and recurring bad news, the U.S. equity market has increased 18.2 percent this year through September. European and Asian markets (the MSCI EAFE index) are up 13 percent. The U.S. real GDP annualized growth rate is at 2 percent. Consumer confidence has remained strong. Inflation is subdued.

But U.S. economic production is slowing, as is capital spending and investment. Indeed, on the first day of the new quarter, the U.S. manufacturing survey (the ISM index) came in at the lowest level since June 2009; it was the second consecutive month of contraction. While business leaders and economists blame tariff wars, President Trump took Federal Reserve Chairman Jerome Powell to the whipping post, calling the Federal Reserve Board – his appointees – “pathetic.”

Consumer spending is about 70 percent of the U.S. economy, so when the consumer is happy, the economy is strong. The U.S. consumer is important to the world economy too. Right now the consumer confidence level is strong, although weakening with the slate of bad news.

The slowdown in capital spending is becoming more apparent. The International Monetary Fund has been warning about slowing for many months. We see it in Europe and Asia, and it is coming to the U.S. The long-term bull market has people thinking about a slowdown. When enough people think the economy is slowing, it becomes a self-fulfilling prophecy.

Adding to recession worries is the long-term trade conflict between the U.S. and China. The trade conflict has extended far beyond the […]

Published September 9, 2019

Investors suffered in August from sharp moves in stock prices, as our nation’s trade dispute with China and an inverted yield curve took stocks on a wild ride.

The S&P posted 11 moves of more than 1 percent in only 22 trading sessions for August. The declines included three sessions of at least 2.6 percent as well as the worst day of the year on Aug. 5.

The CBOE Volatility Index, considered to be the best gauge of fear on Wall Street, traded as high as 24.81 in August, before pulling back to around 18.

The increasing volatility was largely due to U.S.- China trade relations and a recession signal being flashed by the bond market.

August began with President Trump tweeting that he would place an additional 10 percent tariff on $300 billion in Chinese imports starting Sept. 1. The announcement wiped out the gain of more than 1 percent on the day, and the S&P finished down 0.9 percent that day.

On Aug. 5, Trump accused China of currency manipulation, and the S&P dropped nearly 3 percent.

Trade tensions escalated when the Chinese announced new tariffs on $75 billion of U.S. products. Trump responded by ordering U.S. firms to leave China and announced higher tariffs.

Overall the market lost nearly 2 percent in August – its worst month since May, when it dropped 6.6 percent.

Energy and financial stocks were the worst performers. Technology stocks suffered too.

Don’t expect much improvement in September, which since 1950 has been the worst month for the market. According to the Stock Trader’s Almanac, the S&P suffers an average loss of 0.5 percent for the month.

The meeting of the Federal Open Market Committee in September might […]

Published August 9, 2019

With the broad stock market up 17 percent year to date, the U.S. would seem to be on strong economic footing. Job growth is robust, profit growth is good enough, unemployment is low and consumer confidence is strong. So what is so wrong that the Federal Reserve was prompted to cut interest rates? Interest rate cuts are usually reserved for a weak economy.

There are numerous reasons. The president mounted a campaign to get the Fed to cut rates, which worked. The Fed was intimidated into cutting rates, because the financial markets came to expect a cut and actually demanded it. How can a market demand anything, let alone a rate cut? Well, when the financial markets bet that interest rates will go down and rate cut expectations go up, the Fed is in the crosshairs. The president’s demand clearly influenced the Fed.

Why did the president want a rate cut? The short answer is that it was good for his reelection prospects. The president has enjoyed the benefit of a strong economy, but with his favorability numbers still weak, he wanted some insurance.

Adding fuel to the fire, the president’s tariff wars are taking their toll. He promised that trade wars are “easy to win,” but they are proving to be anything but. Instead of working through existing trade agreements, the president opted to tear them up, bypass our trade allies and go head to head with China.

The president found the Chinese intransigent. That should not be a surprise to anyone with even the slightest knowledge of China. After all, China has a culture built over thousands of years as well as a long history […]

Published July 8, 2019 

U.S. equities markets streaked to new highs in the first half of 2019, in spite of a sharp downturn in May. The S&P index for the first half of the year jumped 18 percent. Before we become too smug, however, the Chinese Shanghai index and the Russian index were up over 20 percent; even emerging market Egypt, which I just visited, was up.

Best performing sectors in the U.S. were technology and consumer discretionary, with health care bringing up the rear. The prospects for the rest of the year are less sanguine.  The expansion is historically long, and the effects of the “tax cut” are wearing off.

Attention now shifts to Federal Reserve interest rate decisions. With Fed futures now forecasting a 100 percent chance of an interest rate cut, the only question appears to be whether it will be 25 basis points or 50 basis points. There is very little discussion, let alone support for no rate cut. The wisdom of a rate cut is questionable, given that the economy is very strong (though slowing). With 7 million jobs available and only 6 million people to fill them, it is difficult to see the economic need for a cut. It would be an “insurance cut,” because there are signs that the U.S. and global economies are flagging. So there is political pressure to “goose” the economy. With these rate cuts, the Fed would have fewer tools at its disposal to cut rates when they are actually needed.

The actual cause of the slowing global economy is tariffs. The on-again, off-again tariff war has created uncertainty. Investors hate uncertainty. Companies have postponed capital expenditures, because they are uncertain […]