This Bull May Still Have Room to Run

The following article was originally posted at http://www.horsesmouth.com

This may seem like a cop-out, but let me explain. I am not necessarily saying that this bull market will continue to run, (and anyone who thinks they actually know whether it will or not is a fool), but what I am saying is that I am sick and tired of all the talking head talk that this bull must be near its end because 1. It has gone on for so long, or 2. We are at new highs, so market must go down.

First let me touch on a real basic physics lesson. If you are trying to measure how far something has gone, like a bull (market) you need to know two things. Both the time involved and the speed at which it has travelled. Think of it this way. After two hours of running participants will be scattered all over the course during the Boston Marathon. Simply calling the race after two hours would leave many slower runners with plenty of race yet to run while the top runners have finished.  Current market analysis seems to ignore the speed factor.

If we apply this to the market let’s see how far we have really come during this “extended” rally. In the graph below we are looking at GDP after four separate recessions. Thinking of speed as the rate of GDP growth, this rally is made up of amateur runners vs. the Kenyan runners of the 1934 – 1940 recovery!

Chart 1. Economic Recoveries

Post Recession GDP Recoveries

Source: http://www.Crestmontresearch.com

While annual change in GDP is not correlated to the stock market, over the long term the two are coincident if not causal. From the above it can be seen that the economy has not yet grown substantially over the last seven years. Below is a chart comparing total GDP growth over each period in constant inflation adjusted terms.

Table 1. GDP Growth Comparison

GDP $ Growth Post Recession Total growth in GDP
1934 – 1940 47%
1976 – 1982 14.30%
1983 – 1989 29%
2010 – 2016 12.70%

                                        Source: http://www.BEA.gov

Based on the data above the economy grew at more than twice the recent amount in the ’83 – ’89 recovery, nearly 4 times as much in the ’34 – ’40 recovery and even outpaced growth from ’76 – ’82. Keep in mind that was the time of “stagflation” and 1982 was the second year of the Great Recession!

It seems to me that the current economy has substantial room to grow and by extension the stock market as well.

A Look at the Stock Market

There is also a discussion point made that says that the above analysis maybe correct, but the stock market is way ahead of the economy. Therefore a stock market correction is overdue, even if we avoid an economic recession. Balderdash! It is all a matter of perspective.

The chart below shows the return on an investment in SPY, the SPDR’s S&P 500 Index ETF from 8/31/2000 – 06/05/2017. The start date is the market high before the start of the “Tech Wreck” – 9/11 market crash from 2000 – 2002. The horizontal white line shows a level 0% return from the start.

Chart 2. SPY Total Return

SPY from 2000

Source: www.investorsfasttrack.com / Bill DeShurko

The bull has run its course argument looks at the market performance from the bottom in 2009 to the present. And in fact the market has had a cumulative return of 320% since then. However, the early returns off the lows only resulted in an investor recapturing their losses from the tech wreck and the financial crisis as the return since the breakeven point from 2000 is only 135%.

[Author’s Note: Let me summarize that for you. An investor in a low cost ETF Index Fund (SPY) from 8/31/2000 – 9/26/2011 would have lost about 50% of their money twice and made absolutely zero money for 11 years! Nice strategy….]

But measuring a bull market from the bottom of a bear market seems disingenuous to me. A bull is about making money. For any investor from before the bear market, the bottom back up to the previous level (the 0% line above) is just a matter of a recovery of losses. Recovery is not a bull market. Defining a bull market from a market low is akin to saying a cancer patient starts their recovery from the day of surgery or start of treatment. That is not recovery! Recovery starts after the treatment is over and barring a relapse ends when the Doctor gives the “cancer free” pronouncement. Similarly bull markets don’t start until after the treatment  period.  As seen above bear markets can relapse too. A better definition of stock market recovery is to start when the market reaches its previous high and stays above that level. By that definition this Bull started in September of 2011 and has provided us with a 135% gain.

The question is, “How does this stack up historically?”

Since 1900 the stock market has gone through bull and bear cycles. Unless the market drops by some 60% or so we broke the old high in 2000 and have stayed above it since 2011. An 11 year bear market. About average since WW II.

Chart 3. Secular Stock Markets

chart3

Source: http://www.crestmontresearch.com

 

Looking at bull markets by comparison from 1940 – 1965 the market gained a cumulative 955%! And during the great bull from 1980 – 2000 another 1099%. By comparison our current 135% gain seems rather paltry! We certainly aren’t at the end of this bull market just because we are at record highs!

So What Does Matter?

Earnings, earnings and earnings. S&P 500 corporate earnings growth has been anemic since 2011, with a fairly rare non recessionary drop in 2015. With growth returning in 2016 and expected into 2018 it would be rare for a bear to start as earnings are growing. But without an economic jolt from corporate and personal tax cuts all bets are off. Deregulation will certainly help smaller businesses but I’m not sure it is enough to spur wage growth. If wages and earnings can grow simultaneously I would not bet on an early end to this Bull Run.

And one final note: a 10% drop is not a correction, it used to be a one or even two time annual event. A real bear means a 40% drop or more, and likely over a multi-year period.

Sell Off?…Really?

For decades the iconic bull of Wall Street has symbolized the spirit of the American charging_bull_new_york_city_566247entrepreneur. Risking their own wealth to make fortunes by creating new businesses with the help of the financiers of Wall Street. Hard charging traders and investors became legendary making and losing fortunes. The likes of Jesse Livermore, George Soros, Jim Rogers and even Jordan Belfort, made famous by Leonardo DiCaprio in the movie “The Wolf of Wall Street”.

This past Friday the NASDAQ exchange dropped about 2.5% in a day. Let me remind readers, the NASDAQ is the home of the technology leaders Amazon, Face Book, Google, Apple and many more. The “Teck Wreck” from 2000 through 2002 saw the NASDAQ drop 90% in value!!! Since the NASDAQ is typically where growing and emerging companies list their stocks, the index is typically very volatile as many stocks are very sensitive to the ability of the company to generate an ever increasing stream of earnings. Any risk to these earnings can cause volatility. So when the market dropped 2.5% on Friday I yawned, went out and played golf and went about my normal weekend activities.

The financial pundits had a very different reaction. I saw and heard comments like: “Slammed”, from the Wall Street Journal; “Sell off Wrecks Tech” at theStreet.com; and “Rout” at http://www.MarketWatch.com. The TV media was in a frenzy with topics on hedging, managing portfolios in a crash, debates on whether to sell and go to cash or not…

Again, the NASDQ only dropped 2.5%! And it was just one day! (editor’s note: one day does not create a trend).

I was left a little embarrassed. And would like to suggest that maybe the Wall Street Bull be replaced by a new figure that better represents the new modern “Wall Street”…

Sta Puff Man          ….the Stay Puft Marshmallow Man!

Common Risks in Retirement

The following article was recently updated at Investopedia.com 

My comments are under the Interest Rate Risks sub head. If you are considering an annuity, you may want to read this first.

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The most careful plans and preparation for retirement can fall apart due to an unexpected death, illness, a stock market crash or a pension plan that goes bankrupt. In addition, it is not unusual for people to live more than 30 years in retirement, due to increased rates of early retirement and rising life expectancy – which, in itself, presents a major risk that retirees will outlive their assets.

The longer the time spent in retirement, the harder it becomes to be certain about a retiree’s financial outcome. In planning for retirement – or living it – you must understand the risks that lie ahead and how they could undermine your financial security.

Types of Post-Retirement Risks

The Society of Actuaries (SOA) in the United States identified a number of post-retirement risks that can affect retirees and their financial security. They’re grouped into four categories. People preparing for retirement or already in retirement should consider them carefully:

  • Personal and family – Changes in your life or the life of a loved one could affect your retirement income stream.
  • Healthcare and housing – These include the risk that failing health will require moving to a facility with professional caregivers.
  • Financial – These risks revolve around inflation, investments and stock market activities.
  • Public policy – Government can make decisions that could affect retirees.

“There are many unexpected demands for a retiree’s funds. For that exact reason every one needs a realistic emergency fund. If a retiree needs to take large amounts of tax-deferred money early in retirement, it may result in future dollars being spent today. It not only decreases the amount of lifestyle money available; the money is gone, along with the potential to earn a return (compounding effect) that was to assist the retiree in the future. Spending dollars today takes away the future growth of that money, which may have been critical to maintaining a certain lifestyle or not outliving your money,” says Peter J. Creedon, CFP®, ChFC, CLU, chief executive officer, Crystal Brook Advisors, New York, N.Y.

Personal and Family Risks

Employment Risk

Many retirees plan to supplement their income by working either part-time or full-time during retirement. In fact, some organizations prefer to hire older workers because of their stability and life experience. However, success in the job market may also depend on technical skills that retirees cannot easily gain or maintain. Employment prospects among retirees will vary greatly because of demands for different skills and may change with health, family or economic conditions.

Choosing the point at which you want to retire is integral to retirement planning. Later retirement is an alternative to increased saving, but there is no certainty that appropriate employment will be available. Working part-time is an alternative to full-time employment, and part-time jobs may be easier to obtain. (Read more about working past retirement age in Stretch Your Savings by Working into Your 70s.)

“Not having employment at any point can reduce your retirement income from Social Security as well as if you have a pension from your employer. It may also take longer to collect your pension if there is a stipulation regarding years of service,” says Allan Katz, CFP®, president, Comprehensive Wealth Management Group, LLC, Staten Island, N.Y.

Longevity Risk

Running out of money before you die is one of the primary concerns of most retirees. Longevity risk is an even larger concern today as life expectancies have risen. The life expectancy at retirement is just an average age, with about half of retirees living longer and a few living past age 100. Planning for only enough income to live to your supposed life expectancy will be, happily, inadequate for about half of retirees. But the downside of living longer is increased exposure to other risks that are listed below.

Those who are managing their own retirement funds over a lifetime have to perform a difficult balancing act. Being cautious and spending too little might needlessly restrict your lifestyle – especially in early retirement when you are the healthiest and most mobile – but spending too much increases the danger of running out of money.

A pension or annuity can mitigate some of the risk because it provides an income stream for life. However, there are some disadvantages, including loss of control of assets, loss of ability to leave money to heirs and cost. Although it’s unwise for people annuitize all their assets, annuities should be considered in retirement planning. (For more information on how annuities can provide steady income in retirement, read Inflation-Protected Annuities: Part of a Solid Financial Plan and Personal Pensions: Repackaging the Annuity.) But also carefully investigate any company where you’d place an annuity, be cautious of fees and consider other options, such as laddering bonds. There are also interest rates to consider when buying an annuity (see below).

Death of a Spouse

The grief over a spouse’s death or terminal illness contributes to high rates of depression and suicide among the elderly. Then there’s the financial impact: A spouse’s death can lead to a reduction in pension benefits or bring additional financial burden, including lingering medical debts. Also, the surviving spouse may not be able or willing to manage the finances if they were usually handled by the deceased spouse.

Financial vehicles are available to protect the income and needs of survivors after the death of a partner or spouse, such as life insurance, survivors’ pensions and long-term care insurance. Estate planning is also an important aspect of providing for survivors. (For information about estate planning, see Top 7 Estate Planning Mistakes.)

Change in Marital Status

Divorce or the separation of a cohabiting couple can create major financial problems for both parties. It can affect benefit entitlement under public and private retirement plans, as well as individuals’ disposable income. (For more information, read Divorcing? The Right Way to Split Retirement Plans.)

Splitting the marital assets will almost certainly lead to an overall loss in standard of living, especially if it was necessary to pool income and resources to maintain the standard of living to which both parties had become accustomed. Some experts believe that an individual may need about 60% to 75% of a cohabiting couple’s income to maintain his or her standard of living. This is because some expenses, like rent and utilities, remain the same, regardless of the number of people living in a household.

Although divorce rates among older couples are far lower than for younger couples, it is not uncommon for a retirement-age couple to get a divorce. Prenuptial agreements may be used to define each party’s right to property prior to marriage. (Read more about prenuptial agreements in Marriage, Divorce and the Dotted Line. Or maybe a postnuptial agreement is for you – read Create a Pain-Free Postnuptial Agreement to find out.)

Unforeseen Needs of Family Members

Many retirees find themselves helping other family members, including parents, children, grandchildren and siblings. A change in the health, employment or marital status of any of them could require greater personal or financial support from the retiree for that individual. Examples of financial assistance include paying healthcare costs for an elderly parent, paying higher-education fees for children or providing short-term financial assistance to adult children in the event of unemployment, divorce or other financial adversities.

“Bailing your adult kids out of their repeated financial mistakes can derail your retirement. For some people it’s like taking an unexpected cruise every year with all of the expense and none of the fun. It’s important to set boundaries on excessive gifts or emergency checks when you leave your steady paycheck behind. Or, if you think this may be an issue, tell your financial advisor about it so you can work those expenses into your retirement income plan,” says Kristi Sullivan, CFP®, Sullivan Financial Planning, LLC, Denver, Colo.

Retirement planning should recognize the possibility of providing financial support for family members in the future, even if this does not seem likely at or before retirement.

Healthcare and Housing Risks

Unexpected Healthcare Needs and Costs

These are a major concern for many retirees. Prescription drugs are a major issue, especially for the chronically ill. Older people usually have greater healthcare needs and may need frequent treatment for a number of different health-related issues. Medicare is the primary source of coverage for healthcare services for many retirees. Private medical insurance is also available, but it can be costly. (Read Getting Through the Medicare Part D Maze and 20 Ways to Save on Medical Bills for tips on managing prescriptions and other healthcare costs.)

The Society of Actuaries (SOA) says that healthcare costs can be mitigated to some extent by committing to a healthy lifestyle that includes eating right, exercising on a regular basis and using preventive care. In addition, long-term care insurance can pay for the cost of caring for disabled seniors.

Change in Housing Needs

Retirees may need to change from living on their own to other forms of housing, such as assisted living, which combines care with housing, and independent living, which combines some assistance with housing. Housing that includes care can be quite costly, and the most appropriate form of housing for an individual in a given situation may not be available in the chosen geographic area or may have a long wait for entrance.

The likelihood of requiring day-to-day assistance or care rises substantially with age. When this will need to happen is often hard to predict because it depends on one’s physical and mental capabilities, which themselves change with age. Changes can occur suddenly, due to an illness or accident, or gradually, perhaps as a result of a chronic disease. (Read more about your options in Long-Term Care: More Than Just a Nursing Home.)

Lack of Available Facilities or Caregivers

Facilities or caregivers are sometimes not available for acute or long-term care, even for individuals who can pay for it. Couples may be unable to live together when one of them needs a higher level of care. For people who have lived together for decades, this can result not only in increased costs, but in emotional stress.

In general, little advice is available from the state or the financial-services industry on planning for long-term care costs. This may lead consumers to make uninformed decisions or to defer them and hope for the best.

Financial Risks

Inflation Risk

Inflation should be an ongoing concern for anyone living on a fixed income. Even low rates of inflation can seriously erode the well-being of retirees who live for many years. A period of unexpectedly high inflation can be devastating for those living on a fixed income.

According to the SOA, retirees and would-be retirees should consider investing in equities, a home and other assets, such as Treasury inflation-protected securities (TIPS) and annuity products with a cost-of-living adjustment feature. These types of products help offset inflation. In addition, would-be retirees can choose to continue working – even if it is only on a part-time basis. (Learn how inflation-protected securities can help in Curbing the Effects of Inflation.)

Interest Rate Risk

Lower interest rates reduce retirement income by lowering growth rates for savings accounts and assets. As a result, individuals may need to save more in order to accumulate adequate retirement funds. Annuities yield less income when long-term interest rates at the time of purchase are low. Low real interest rates will also cause purchasing power to erode more quickly.

“In today’s interest rate environment, an annuitant is locking in a payout based on today’s interest rates for the rest of their life. The interest rate used for calculating your payout will be in the 2% range. The question to ask is, ‘Are you really willing to lock in that low an interest rate for the rest of your life?’” says William DeShurko, chief investment officer, Fund Trader Pro, LLC, Centerville, Ohio.

Lower interest rates can reduce retirement income and can be particularly risky when people are depending on drawdown from savings to finance their retirement. On the other hand, a problem also exists if interest rates rise, as the market value of bonds drops.

“With interest rates so low, retirees need to understand the impact higher inflation and rates will have on their bond investments. Bond prices move inversely to interest rates. For example, if a bond has a duration of seven years and rates jump 1% higher, they could see the value of their bond fall by about 7%,” says Dan Timotic, CFA, managing principal of T2 Asset Management in Oakbrook Terrace, Ill.

Increases in interest rates can also negatively impact the stock market and the housing market, thereby affecting the retiree’s disposable income. As such, high real interest rates, over and above rates of inflation, make retirement more affordable. (See Why do interest rates tend to have an inverse relationship with bond prices? for related reading.)

Stock Market Risk

Stock market losses can seriously reduce retirement savings. Common stocks have substantially outperformed other investments over time, and thus are usually recommended for retirees as part of a balanced asset allocation strategy. However, the rate of return that you earn from your stock portfolio can be significantly lower than the long-term trends. Stock market losses can seriously reduce one’s retirement savings if the market value of your portfolio falls.

The sequence of good and poor stock market returns can also impact your retirement savings amount, regardless of long-term rates of return. A retiree who experiences poor market returns in the first couple of years in retirement, for example, will have a different outcome than a retiree who experiences good market returns in the first couple of years of retirement, even though the long-term rates of return might be similar. Early losses can mean less income during retirement. Later losses can have a less-negative impact, as an individual may have a much shorter period over which the assets need to last.

Business Risks

Loss of pension funds can occur if the employer that sponsors the pension plan goes bankrupt or the insurer that is providing annuities becomes insolvent.
Defined-contribution plan accounts are not guaranteed, and plan participants bear losses directly. However, unlike pension plans, the balances in these accounts usually do not depend on the financial security of the employer, except for the employer’s ability to make future contributions and in cases where plan balances include employer stocks. Depending on an individual’s allocation, the risk of such losses is based on the market performance of the investments or on possible failure of the employer’s business if the account is concentrated in employer stock. Ultimately, most investments will always be subject to business risk.

Public Policy Risk

Government policies affect many aspects of our lives, including the financial position of retirees. These policies often change over time along with government policy. Policy risks include possible increases in taxes or reductions in entitlement benefits from Medicare or Social Security.

Retirement planning should not be based on the assumption that government policy will remain unchanged forever. It is also important to know your rights and to be aware of your entitlements to state and local authority benefits.

The Bottom Line

Even the best-laid retirement plans can fail as a result of unexpected events. Although some risks can be minimized through careful planning, many potential risks are completely out of our control. However, understanding what the potential post-retirement risks are and considering them in the retirement planning stage can help to ensure they are mitigated and properly managed.

“The number one risk is the lack of a plan for the course of retirement. Without a plan, the journey will not have a chance to be what you envision,” says Kimberly J. Howard, CFP®, founder of KJH Financial Services, Newton, Mass.

How Our Fiduciary Standard Protects You

OUR PLEDGE TO THE
FIDUCIARY STANDARD
• Always put your best interests first.
• Act with prudence, providing you with
the skill, diligence and good judgment of a
trust advisor.
• Provide full and fair disclosure of all important facts.
• Ensure all investment advice and analysis is accurate and complete.
• Avoid conflicts of interest and fairly manage, in the clients’ favor, any unavoidable conflicts of interest.

 

You may have heard media reports about a new fiduciary rule for retirement accounts that President Trump has rescinded. Understandably, you have questions about how this might impact to your accounts. The rule was designed to ensure recommendations made by financial advisors to their clients regarding their retirement accounts are always made in the best interests of the client without any conflicts of interest.
The good news is that doesn’t affect your accounts at all. As a Registered Investment Advisor, we are already under the highest fiduciary standard – so enacting the rule or rescinding it doesn’t change our status. We have had this higher standard in place all along and will continue to do so. It’s always been part of our DNA.
As your financial advisor, we have been serving you as a fiduciary all along
A “fiduciary” who manages an investor’s assets has a legal and ethical obligation to put the investor’s interests first. That means helping the investor make decisions in his or her best interests. This fiduciary standard has always been at the core of our firm’s mission to our clients.
Here’s how we protect you and your investments:
• We always put your needs first. We are committed to the highest professional and personal standards, and this commitment remains as strong as ever. Our sole focus is on your financial needs and goals and how we can best help you pursue them.
• We always act in your best interests. We are committed to putting your needs and goals before those
of our firm. We strive to avoid any conflicts of interest, and if they arise and are unavoidable, we disclose these to you immediately. We provide a high level of transparency around any fees or expenses associated with your accounts, so that you always know what you own and what you’re paying for it, so there are never any surprises.
• We are an independent and objective resource. As an independent firm, we provide you with objective, unbiased advice based solely on your needs and goals. We provide guidance that is truly objective, unencumbered by any potential conflicts of interest. We have no vested interest in promoting a particular product or service. Our only interest is that your financial objectives are met.

UNDERSTANDING THE FIDUCIARY STANDARD
In financial services, there have traditionally been two types of standards: the suitability standard and the fiduciary standard.
The suitability standard is defined as determining whether an investment product or strategy is “suitable” for the investor based on his or her financial objectives and risk comfort level. Many advisors operate under the suitability standard where the advisor simply determines whether a recommended product or strategy is suitable for the client.
The fiduciary standard is a higher level of responsibility for the advisor. The fiduciary standard goes beyond suitability and requires that any advice on products and strategies be provided in the best interests of the investor. The fiduciary standard of care requires that the advisor take into consideration whether the fees are reasonable, whether there are any conflicts of interest, and whether the investments are adequately diversified.
OUR COMMITMENT TO YOU
As your advisor, we adhere to the fiduciary standard, and we believe this model of disclosure and transparency is in your best interests. In our view, you deserve to have your needs put first and the strategies and investment products we recommend should align according to those needs.
Our fiduciary standard mandates that every single recommendation we make must be based on your best interests, and there is no circumstance when we can place our interests above yours. By adhering to the fiduciary standard, we believe we can provide you with the highest standard of care for all your investment and retirement needs.
SAFEGUARDING YOUR FINANCIAL DREAMS
When it comes to managing your money, your financial relationships should be built on a foundation of trust, integrity and transparency. Not all firms and advisors adhere to the same legal and regulatory standards.
We remain committed to earning and maintaining your trust through expert advice and effective strategies

Investopedia Q & A

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WILLIAM DESHURKO’S ANSWERS
How can a nontraditional college student gain more income to provide for a brighter future?
Well you could try and win the lottery, search www.ancestory.com for an unknown rich relative, or marry rich. Rule those out and your best alternative is to get that degree… Read More
Are qualified dividend paying stocks a reliable source of passive income for retirement?
Yes…Yes…and Yes!!! Not only are taxes lower on dividends then an IRA withdraw, but think of it this way; if you take regular distributions from a mutual fund within your IRA,… Read More
Does rolling over 401(k) funds to an IRA for charitable contributions satisfy my RMDs?
Regardless of the purpose, you can always roll over a 401(k) plan investment into a rollover IRA without paying taxes. Since the money is not taxed at this point and remains… Read More
How would rolling over my 401(k) to a Traditional IRA affect my contribution limit for 2017?
Rolling over a 401(k) plan account will have no effect on the amount you can otherwise contribute to a regular or a Roth IRA. Congratulations, you have a nice start on… Read More
Should I hold on to a temporarily suspended stock?
Well, if its been suspended, you don’t have much choice! Once the stock begins trading again, you will need to make that decision. My suggestion is to do as much… Read More
What should we do with two mature IRA CDs?
I see some form of this question all the time, and it is confusing. An IRA is not an investment, it is a tax designation that applies to virtually any… Read More
I received a lump sum pension when I retired. Can I roll this lump sum into a 401K or IRA?
You can roll it into an IRA and defer taxes until you make withdrawals. If you already received the money, you have 60 days from the receipt to deposit it… Read More
Are penny stock mutual funds a solid aggressive investment?
You assume that an “aggressive” mutual fund will make you more money than a less aggressive mutual fund. Why? Aggressive means more risk. Risk means there is an increasing possibility… Read More

Why the 1%Will Continue to Broaden the Wealth Gap

I recently came across the graphic below,  it illustrates why the top 1% are where they are. I know Amazon sells everything to everybody, but over $200,000 of sales a minute? Wow. Just consider if every company depicted could monetize each transaction for say, just a penny each? Do the math. Warning: you need to understand exponential numbers as your calculator probably doesn’t handle enough zeroes on its display.

In our hyper-charged world of politics, the top 1% are vilified by many. But the founders of the firms below represent a good part of that list. Many provide services that are free to the user. How do you regulate that? NetFlix provides a service for a fraction of their cable competitors. They are rich, not because of gouging their customers, but because the internet has created a massive market that we could not have imagined 20 years ago.

Volume can work in reverse too. What if Amazon’s margins decreased by a penny a transaction? That is the risk with such high volume companies for the average investor. A tiny hiccup in earnings can cause a massive sell off in stock price. Go back and follow the stock price of a few companies during the tech wreck.

Here is the direct link to The Visual Capitalist with a clearer image.

internet-minute-2016

Q & A at Investopedia

I have recently started working with Investopedia.com. I will be providing original articles, quotes for other writers and answering Questions submitted by readers. Below are the questions and answers for the past week. Please click the “Read More link to view the entire interest. Please click to Follow me as well and you’ll be notified of my postings as they are posted.investopedia-logo

Which retirement account should we set up for our children?
I would go for an individual stock or two that are “Dividend Aristocrats.” These are companies that have increased the dividends paid to their shareholders for at least 25 years,… Read More
How should I keep my savings with a bigger investment goal in mind?
That’s what banks are for, you trade off low return for low or really no risk. Don’t think you are a dummy for doing so, there is $14.6 trillion dollars… Read More
Can my employer keep the interest earned from my 401(k)?
Definitely not, if what you say is what is happening. First, a 401(k) is an off shoot of a profit sharing plan. Point is that the plan document, which he… Read More
Now that the DJIA has reached 20,000, is it still a good idea to invest in the market?
Great, but loaded question! First, yes the market has gone straight up since 2009. But until 2013, it was only regaining what it lost in the financial crisis. This is… Read More
Is further action required on my end for a miscalculation of my RMD?
The way we handle this is to correct the RMD with draw immediately, which it appears you have done. The IRS actually says that they may impose a penalty of… Read More
Is it worth it for my husband to contribute to his 401(k), despite his age?
The RMD for a 74 year old on $25,000 is just over $1,000. So by contributing $25,000 to a 401(k), you defer taxes on $25,000 of taxable income. According to… Read More
How can I supplement my income until I am able to withdraw from my retirement account?
If your non-qualified savings is over $30,000 ($1,000/month x 30 months), then just keep the money in the bank and make your $1,000 withdraws. If your savings is less, or… Read More
Should I retire at 66 years old and use my IRA for income before taking Social Security?
Definitely “Yes.” There are two advantages to delaying your Social Security payments. First, your annual payments will increase by about 8% per year between now and age 70. You can… Read More
Which investment vehicle will produce the most long term growth for my children?
Comparing a Roth to an index fund is apples vs. oranges. A Roth IRA is a designation for an account with specific rules that allow for tax free earnings. You… Read More
Do I have control over how my employer-sponsored 401K assets are invested? What are my options?
A 401(k) is generally a self directed retirement plan. Your employer chooses a list of fund choices, but you determine which funds to use for your personal portfolio. This can… Read More
Mr. DeShurko is a registered representative of Ceros Financial Services, Inc, (Member FINRA/SIPC). Ceros is not affiliated with 401 Advisor, LLC or Fund Trader Pro. The views expressed are those of Mr. DeShurko and do not necessarily reflect those of Ceros Financial Services, Inc., its employees or affiliates.

Think Twice Before Relying on Target Date Funds

I recently worked with Ellen Chang on an article on Target Date funds that was posted on the-street. Ellen cites poor overall performance, lack of risk management and high fees of many target date funds as a reason to seek out better investment alternatives for your retirement investing.

The entire article can be found here.

Mr. DeShurko is a registered representative of Ceros Financial Services, Inc, (Member FINRA/SIPC). Ceros is not affiliated with 401 Advisor, LLC or Fund Trader Pro. The views expressed are those of Mr. DeShurko and do not necessarily reflect those of Ceros Financial Services, Inc., its employees or affiliates. Past performance does not guarantee future results.

 

Looking Past the Hype, What’s a Trump Presidency Mean for the Markets?

Now that the Trump crash (albeit when most of us were sleeping) and the Trump rally (albeit a short covering rally) have come and gone let’s get past the hyperbole and look at some factors that will most certainly affect the markets during the next four years.

Regardless of who won the election, demographics will continue to be a major headwind pushing down GDP growth potential. Not only are the boomers aging and moving into their lower consumption years, but the larger millennial demographic have either eschewed completely or delayed the traditional move to the suburbs with a new family in tow. While there is the potential for a new baby boom, bigger than the post WWII boom it’s not a sure thing with a generation more motivated by career growth, potentially extended life expectancies and “experiences” along the way.

demographicsSource: http://www.businessinsider.com

The result, as seen below, is that our population (without immigration) is no longer growing. And the U S is not alone. Every industrialized nation plus both China and Russia is facing a shrinking population.

population-growth

While annual growth rates for the stock market and annual growth rates for GDP do not correlate, over the long run the stock market and GDP must move together. The graph below depicts the annual level of U S GDP with the Dow Jones Industrial Average. You can see that while the stock market can be volatile, it does trend to the same level as GDP. And currently, there isn’t a lot of room for the market to rise relative to current GDP.

sp-v-gdp

Source: Mitchell DeShurko, data from The World Bank and 1stock1

GDP can also increase with higher productivity, but U S Productivity growth seems to have stalled…

U.S. Productivity Quarterly/Annual Change

u-s-productivity

Source: http://data.bls.gov/pdq/SurveyOutputServlet

We’ve also seen that the worker participation rate has been at an all time low. And the trends are projected to continue for the next several years. According to the Bureau of Labor Statistics,

…the labor force participation rate declined by 2.4 percentage points over the 2000–2010

period and is projected to drop by another 2.2  percentage points between 2010 and 2020.

These two declining factors lead to a projected annual growth rate of only 0.7 percent for the

labor force from 2010 to 2020, a 0.1-percent drop from the annual growth rate exhibited in

the 2000–2010 timeframe.

Lower population growth, low productivity, and declining labor participation rates are not an economic head wind, it’s a hurricane!

And if demographics aren’t bad enough…

Let’s look at our dept and the hurricane turns into the perfect storm. Looking at the chart below you can see that about half of all our outstanding debt will come due over the next 10 years.

u-s-debt

Source: https://www.treasurydirect.gov/govt/charts/principal/principal_debt.htm

Mr. Trump has been very critical of Federal Reserve policy that has kept interest rates at historic lows for years. Even though the Fed is supposed to be independent of government policy, his stance has certainly opened the gate to future Fed rate increases.

interest-expense

Source: https://www.treasurydirect.gov/govt/charts/charts_expense.htm

Total Public Debt Outstanding: $19,805,715,000,000.00

Average interest Rate 10-16 2.216%

Interest Expense $432,650,000,000.00

10/31/2016 https://www.treasurydirect.gov/govt/reports/pd/mspd/2016/opds102016.pdf

Assuming just a 1% increase in the Government’s cost to borrow and rounding up to account for Mr. Trump’s projected deficits, adds approximately $50 billion a year to interest costs. Adding 2% and bringing interest rates to more “normal” historic levels adds $100 billion…a year. Looking at the chart below, you can see we are already spending more on interest expense than all but four other budget categories.

budget

More debt and higher interest rates mean higher interest expense as a percentage of our entire budget continues to grow and makes it harder for economic stimulus through deficit spending.

So what’s the good news?

The U S economy generated $17947 billion US dollars in 2015. That means every 1% in marginal GDP growth adds $179 billion dollars to the economy. This more than offsets the drag that will be created by rising interest rates.
While the variables are too many to really try and weigh the pros and cons of interest rates, tax policy, deficit spending, etc. there is reason to hope that at worst GDP growth accelerates at a modest rate. Over the long run, the next 10 to 20 years GDP absolutely has to grow to continue to offset the drag from higher debt, and the increasing costs of government mandatory spending. Tax cuts do stimulate the economy.

The Office of Management and Budget (OMB) estimates revenues at 19.1% of GDP for FY 2017. That’s close to the historical 19% target. Back of the napkin calculations say that if taxes were cut by 5% that would add $1.75 trillion to the economy. If GDP were to increase by just 1% as a result, the annual deficit would not increase. But $1.75 dollars added to the economy can create a lot of jobs.

While both Presidents Bush and Obama have been criticized for their deficit spending, with anemic economic results, an argument can be made that the numbingly tepid growth was just the best the economy could do. So while there are reasons to believe the combination of tax cuts and spending will give a boost to economic growth.

If so, where are the best places to invest?

Below is a heat map of exchange traded funds, showing the one week return after the election. Dark red are losing ETF’s and green those with positive gains.

heat-map

Source: http://finviz.com/map.ashx?t=etf&st=w1

Clearly international of all regions, fixed income and gold have been the biggest losers. Domestic stock sectors real estate, technology and utilities have taken it on the chin as well. Small Caps are outperforming Large Caps.

Despite the selloff of many dividend paying stocks, I still believe that dividends provide a solid source of return should economic growth not materialize as hoped. But using the heat map above I’ve focused on mid and small cap dividend payers. I also think any technology selloff is overdone. If a tax holiday is passed for foreign cash stocks like Microsoft, Cisco, and Oracle stand to benefit. And they pay a nice dividend while we wait and see what unfolds. Banking should be a long term beneficiary as there will be major revisions to Dodd Frank. But I’m a little leery of healthcare until seeing what the “replace” part of repeal and replace (referring to ObamaCare) actually looks like.

The bottom line is that the future is always uncertain. I really don’t think today is any different than any other day. Crystal balls are always misleading. But there are undeniable trends that need to be watched and accounted for.

Mr. DeShurko is a registered representative of Ceros Financial Services, Inc. (Member FINRA/SIPC).  Ceros is not affiliated with 401 Advisor.  The views expressed are those of Mr. DeShurko and do not necessarily reflect those of Ceros Financial Services, Inc., its employees or affiliates.401 Advisor, LLC currently (12/5/2016) owns shares of Microsoft (MSFT) and Cisco (CSCO) in client accounts.Past performance does not guarantee future results.  There is no guarantee that any investment or strategy will generate a profit or prevent a loss. 

Happy Thanksgiving!

I hope that this Thanksgiving finds everyone in relatively (we’re all getting older, aren’t we!) good health, surrounded by friends, family, food and beverages of your choice. While many of us have lost friends and family members that may have gathered with us in the past, or we may be suffering through our own health problems, or facing other personal or economic difficulties, Thanksgiving is a uniquely American Holiday that is all about giving “Thanks”. So might I suggest that while we say a prayer for those in need, and those we’ve lost, we focus on what we do have and what we can truly be thankful for.

I’ll start by saying a big Thank You, to all of our clients for trusting me with your investments.  Many of us have seen a lot of changes together over the years (going back to 1987), and in terms of change the future doesn’t look to disappoint. While the past never fully prepares one for the future, it does provide guidance. So here is a toast to successfully navigating through our financial futures together. And hope that there will be more opportunities then setbacks in the years ahead.

Enjoy your turkey, enjoy your family and friends and spend a few days relaxing with a smile on your face as we all have so much to be thankful for.

Mr. DeShurko is a registered representative of Ceros Financial Services, Inc. (Member FINRA/SIPC). Ceros is not affiliated with 401 Advisor or Fund Trader Pro. The views expressed are those of Mr. DeShurko and do not necessarily reflect those of Ceros Financial Services, Inc., its employees or affiliates.
Past performance does not guarantee future results. There is no guarantee that any investment or strategy will generate a profit or prevent a loss.


bill@401advisor.com • 937.434.1790

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Charles H. Dow Award Winner 2008. The papers honored with this award have represented the richness and depth of technical analysis.

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