@theMarket: Another Week of Market Volatility
As the month wound down, so did stocks. Pronouncements from Washington dominated the market's direction on a daily basis. We can expect to see that trend continue as the summer doldrums reduce liquidity and exaggerate market swings.
The adage of "sell in May," however, did not fulfill the bears' expectations this year.
Actually, the month of May has been pretty good for stocks recently. The S&P 500 Benchmark Index gained a smidge over two percent for the month this year. That's not to say those gains were easy. The stress level for those who are trying to trade this market is through the roof.
And that's because two opposing trends are impacting the financial markets. The first is short-term volatility caused by political events. At the moment, these are mostly trade-related: tariffs and counter-tariffs, NAFTA concerns, and China trade. All of the above have generated a war of words (or tweets) and, depending on someone's mood in the morning, can spark 1-2 percent movements in the index in either direction. The falsehoods, about-turns, and misinformation have day traders going crazy.
And don't forget the international events. This week, Italy dominated trade, as a political/financial crisis may be brewing in Europe's fourth-largest economy. A new prime minister, Guiseppe Conte, was appointed Friday as an uneasy coalition of populists and right-wingers agreed to compromise in the wake of a severe financial downturn in Italian financial markets this week.
We will wait for future developments (see my column published yesterday on the subject) before giving the green light to Italy and Europe. At the same time, the Trump/Kim show continues. The off again, on-again charade is accomplishing what both egomaniacs want most: more time in the limelight.
Then there is the longer-term trend, which centers on real fundamentals: unemployment, inflation, interest rates, global growth and the like. All of these indicators are still flashing positive for the stock market. As readers know, I have been urging investors to focus on that trend and ignore the noise caused by all the short-term, headline-grabbing events.
Take today's much-heralded employment report. The U.S. unemployment rate has just hit an 18-month low at 3.8 percent. We haven't had a lower rate since the year 2000. Wage growth came in at 2.7 percent compared to a year ago. That is a stellar performance, no two ways about it.
This report, however, was marred by controversy. Prior to its release, Donald Trump tweeted a "heads-up" that he was "looking forward to seeing the employment numbers at 8:30 this morning" — obviously a tip that the numbers would be good. Federal rules (as Trump knows but ignored) state that no one in the executive branch can comment on major economic reports until an hour after they are released. Since few individuals (but almost all institutions) trade in the hours before and after the markets open, Trump's comments enabled bond, currency, and stock market futures traders at big institutions to profit from this information.
At the end of the day, what matters is the economic trends, and right now the trends are your friends. Until the data say otherwise, investors should remain invested, ignore the short-term volatility traps and enjoy the summer.
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The Independent Investor: Italy's Crisis Threatens Financial Markets
A political crisis in the fourth largest economy in Europe has spilled over into the financial markets. Global stock exchanges greeted Italy's present political dysfunction by registering major declines — and the crisis may just be getting started.
Back in 2010 through 2012, readers may recall a similar eurozone calamity. Greece was at the center of that maelstrom and, at its worse, threatened the viability of the European Union and its currency, the Euro. This time around, many of the same issues are now bedeviling Italy. The country has the third largest debt load in the world after the U.S. and Japan. It still suffers from double-digit unemployment while their economy continues to stagnate.
At times like this, voters usually look for something to blame. Most Italians have focused on their membership in the EU as the cause for all of their woes. After an inconclusive election several months ago, Italy has been in a no man's land of political inertia. Two opposing parties: a far-right party (The League) and a populist party (the Five Star Movement) share power. They recently proposed a new government to break the deadlock.
The problem was that their candidates presented a threat to those who still wanted to maintain membership in the EU. Their proposed finance minister, for example, was a confirmed foe of both continued membership in the EU and the Euro. He scared the bejesus out of officials throughout the EU.
As a result, Italian President Sergio Mattarella vetoed the appointment and instead appointed a technocrat, whom he hoped would reassure the financial markets and the rest of Europe.
Both opposition parties are furious. It appears that their ire is backed by the voter population. The League has nearly doubled in popularity, while the Five Star Movement is maintaining its 30 percent political base. Comments from several EU establishment members this week have only fueled the fire of outrage among Italians.
Threats of serious financial repercussions if Italians encourage more populism within their government has had the opposite effect. Most politicians are now calling for yet another round of new elections. Financial markets are afraid that the results could be a referendum on whether Italy will remain or exit the EU.
The lessons learned after the Greek Crisis have not been forgotten. Neither Germany nor the rest of the EU want any further cracks in the Eurozone, especially after Brexit. Europe's central bank has a lot of experience defending the Euro in times like this as well.
Italy, as one of the founding members of the union, also knows the consequences of exiting the EU. Given their debt load and sputtering economy, Italy would most assuredly see a run on their banking system, which could spike inflation, riots, demonstrations, deaths and most likely a severe recession and even higher unemployment.
Many political analysts argue that the Italian crisis is a simple extension of a broader global trend. On one side are the populists or "have-nots" that have been left out of a generation of booming international trade. To them, that economic model has simply left the rich richer and the poor poorer.
On the other side are those riding a new wave of nationalism fueled by a wealthy establishment, whose only objective is to keep their place in the sun. These radical right-wingers are promoting an extreme form of an economic model that the opposition believes is not only obsolete but generating even higher levels of inequality and injustice. It is a global contest of two extreme movements. The winner has yet to be announced.
So far, most of the financial damage has been contained to Italy. Both their stock and bond markets experienced hefty losses this week. The financial contagion that occurred during the Greek Crisis five years ago, which spread to the rest of Europe and ultimately the world financial markets, has yet to materialize.
Most financial experts believe that things won't get to that point. Both sides are aware of what is at stake and hopefully will back away from a gunfight at high noon. Although I hold with the consensus view for now, I will be watching events closely in the days and weeks ahead, so keep reading.
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@theMarket: Nothing Memorable in the Markets this Week
Most indexes ended the week where they started. While day traders may have lost or gained from intraday moves, serious investors simply ignored the constant and contradictory stream of news coming out of Washington.
It isn't worth the space to comment on all the on-again, off-again series of tweets and statements that has become part of our daily diet. The main events that did carry some substantive weight were the House rollback of the Dodd-Frank rules. This easing of regulations on all but the largest banks, removes the required ‘stress tests' from most banks. While it relaxes some of the more stringent rules on banks, it does continue to regulate those areas that ushered in the financial crisis.
Bank stocks, which had already run up in anticipation of these changes, sold off on the news. Financial analysts believe that the new rules will trigger a wave of mergers and acquisitions among regional banks now that the government will be no longer watching every move they make.
The Federal Reserve Bank's minutes from their May meeting were also released. It gave market participants some hope, at least for a day or two, that the Fed would remain accommodative regarding interest rates. None of the members seemed worried that the economy could be overheating.
While June and probably September rate hikes are still on the table, the Fed members appeared to be relaxed when it comes to their inflation targets. Inflation hit 2 percent in March, but the central bank does not appear to be overly concerned that it has reached that number. Some believe it won't remain there and will fall back in the months ahead.
I guess the biggest disappointment for investors was President Trump's announcement that the June 12 summit meeting between him and Kim Jong Un is now off the table. Stocks worldwide sold off on the announcement. Whether or not this is just one more tactic in Trump's "Art of the Deal," remains to be seen. However, investors should realize that many of the issues between the U.S., North and South Korea, and China are not going to be resolved by a one-time meeting of these two leaders.
For example, Kim's sudden change of heart over his nuclear program, which occurred in late April, may not be all that it seems. Last month, the University of Science and Technology in China revealed that the mountain above North Korea's main nuclear test site at Punggye-ri had collapsed following a nuclear test in September of last year. Estimated at 100 kilotons, the blast was the sixth test and ten times stronger than any of the previous five.
As a result, a wave of earthquakes rocked the mountain and surroundings, creating so much tectonic stress that parts of the mountain collapsed, and fissures appeared throughout the mountain. Scientists believe that any further tests within this mountain range could generate a "critical failure" that could cause a wide-scale environmental disaster. Although no radioactivity has been identified along the China-North Korea border, Chinese scientists fear that radioactive dust could be leaching through tunnels, cracks and holes in the mountain.
Adding weight to this news, despite the name calling and North Korea's threats to drop all efforts of denuclearization this week, Kim went ahead and carried out the demolition of all the tunnels leading into its nuclear testing facility in the mountain. Why?
I'm guessing all these good-faith efforts by Kim are a sham. Contrary to his public statement that his nuclear weapons program is "complete," it is far from it, but his main testing facility has become a radioactive hell hole. China's concerns that the spread of North Korean radioactivity is a clear and present danger is probably the real reason for Kim's supposed change of heart.
In any case, we will continue to hear more on this. Meanwhile, the markets will continue to consolidate, until they don't. Once this period comes to an end, we should resume our climb higher, so stay invested.
Please take a moment this weekend and remember the fallen. I know I will. Semper Fi.
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The Independent Investor: It Is No Longer Enough to Simply Manage Money
Back in the day, money managers were revered. News stories spotlighting the year's "hottest hands," or that hedge fund's rising star were all the rage. Retail investors chased performance and paid for it. But times are changing, and simply beating the market for a year or two fails to impress most investors.
And with good reason.
Most of us are in the investment game for the long haul. We are saving for retirement: a process involving decades of saving and planning. Chasing the firm or adviser that "beat the market" this year has turned out to be a disastrous approach to that concept.
Most of us have now realized that you can't beat the market. Sure, for a certain period of time — days, months, even a few years — you can, if you are lucky. Over time, however, your performance will revert to the mean, which in this case is the average returns of the market overall. So, paying a money manager a high fee year after year to provide outsized performance is a fool's game.
On occasion, I meet some prospective clients, who still believe that's possible. They have run from adviser to adviser with great hopes followed by disappointment, and then bitterness and blame. As a fiduciary, I am required to tell them the truth. For those who don't believe it, I quickly show them the door.
Given the facts of financial life, why, therefore, should you pay a money manager yearly fees simply to give you what the market gives you? Why not save your money and buy an index fund and be done with it?
I think that is a rational approach for some of us, at least those who can weather the ups and downs of the markets without getting emotional (selling low and buying high). If you have the discipline to stick to a plan for many years without swerving, changing, or being influenced by outside events than you can manage your money as well as any manager. The problem is that few of us can do that. The rest of us need a coach and that's what you are paying for, but even that is no longer enough.
But how much is that worth? If, over the next decade or two, investment advisers continue to charge large fees for simply providing market returns and "coaching," I believe there will be far fewer of us around. The advent of artificial intelligence portfolios at substantially reduced fees is simply the first shot over the bow for an industry that hasn't changed in the 40 years I have been in it.
In my opinion, investment advisers are at a critical juncture. While they beat their chest for providing an extra percentage point or two for their clients, they ignore an entire array of financial challenges that could prove fatal to their clients. I have been writing columns on many of these issues for years.
The rising cost of health-care poses a greater challenge going forward than any down draft in the stock market. Protecting your assets and passing them along to your children is equally (if not more important) than identifying the next internet darling in the stock market.
When and who should take their social security benefits, or having enough money to put your kids through college are concerns that are just as important as what the market did this year. Elder care planning, financial planning and advice on veteran's benefits are some additional areas where more and more of us are going to need high-caliber expertise.
As market performance becomes the norm, and more and more investors focus on what really matters — a holistic approach to managing their wealth and welfare — who among the nation's advisers can offer all of these services? Outside of our firm, I can't think of any. And this is not an advertisement; it is a call to action for an industry that is stuck in their ways that they need to change or perish.
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The Independent Investor: Are Americans Saving Enough for Retirement?
If you simply read the headlines, you would assume that over half of Americans aged 55 and over, have no savings as they approach retirement. That's a dramatic statement, but is it true?
Most statisticians derive that data by adding up those who have an IRA or similar tax-deferred savings account such as a 401(k). The latest data compiled by the Federal Reserve Bank's Survey of Consumer Finance indicated that 53 percent of households, age 55 to 64, had some savings in those tax-deferred accounts. So, yes, by that standard, almost half of all Americans fail the savings test.
But what about all the people who work for the government? There are 22 million workers toiling away within the ranks of federal, state and local government, and all of them have traditional defined benefit pensions.
That's 14 percent of the labor force! Those pensions have amassed
anywhere from hundred thousand (maybe less) to $1 million or more.
While corporate pension funds have been seen a multi-decade decline among workers, there are around 13 percent of private sector workers who are participating in defined benefit pension plans. In fact, roughly 40 percent of all workers between 55 and 64 years of age are expected to receive a traditional pension benefit in retirement.
When you add all those segments together, the outcome is entirely different. Almost 75 percent of workers in the U.S. either have a tax deferred savings account or a pension account. That still leaves a goodly portion of Americans coming up short. However, all is not as bleak as it looks for those people.
Let's talk about the low-wage earners making around $10,000 per year over their lifetime. When they retire, they will receive Social Security benefits. Those benefits could equal as much as 84 percent of their yearly salary. Almost 19 percent of Americans fit within that category, according to the Social Security Administration,
Can some one in retirement live on $10,000 a year? Not likely. Remember that Social Security was never intended to be a retirement account. It was simply unemployment insurance that could help a worker feed his family until he found a new job during the Great Depression. Today, given that we now have unemployment insurance in addition to Social Security, the population has come to think of it as a retirement benefit.
As you can see, most Americans have and are saving for their retirement. That's not the question. How much you are saving is the critical variable in this equation. How much should I save, you might ask, to see me through my golden years? My answer is, whatever you might think, most of us are not saving enough.
The way to begin answering this question accurately is to find out how much you and your family are spending per year. For every household who can answer that, I see at least 20 families who have no idea what their yearly expenses are. It should be obvious that without knowing your expenses, there is no way you can know how much you might need once you retire.
My advice is to find out now, while you are young or at least middle-aged, and set up an appointment with a Certified Financial Planner. Few people have the ability and financial education to create a lifetime play of savings all alone. Make sure that the CFP is a fiduciary and spend the money.
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