- April produced the first negative return for the S&P 500 since November of 2011, while the Dow had a very slight gain. This is causing many of the bears to call for a market decline, especially now that we have entered the May through November time period, which is often referred to as the least productive six month time period in the stock market. In fact, there is a theory that says, “sell in May and go away”. This theory was recently debunked by an excellent article written by the Associated Press and printed in many of the nation’s newspapers. Why should it be a surprise to anyone that the market had a monthly decline for the first time since last November? The market doesn’t go straight up. It does rest, and sometimes even takes a step or two backwards before it starts moving forward again. Corrections are a natural part of a bull market. At the end of the day, it will all be about earnings and in the first quarter many more companies than usual beat earnings expectations. Yes, we will be the first to agree that expectations were low, so maybe that isn’t too surprising. Nonetheless, the market, which is a forward looking vehicle, had already priced in these lower expectations.
We often caution investors not to listen to the “headline pundits” as they are more interested in selling themselves than they are in helping investors. Today there are even worse pundits pounding on investors than the ones who are trying to sell fear and greed. These are the political operatives for President Obama and the likely Republican nominee, Mitt Romney. If you are a Republican, you look at the GDP growth in the first quarter of this year at 2.2% and you are cheering because you want to point to the weak economy we have under the President. On the other hand, if you are an Obama supporter, you talk about the millions of jobs that have been created over the last 15 months, talk about how we are moving in the right direction, and that the last thing voters should want to do is to change the captain of the ship. These campaign operatives on both sides really do not understand the economy…at least when they are supporting their candidates. It will be important to look beyond the political rhetoric to their “real plan” (something neither of them has done a good job of presenting in detail) for our country and economy to move forward.
The question is whether the proverbial glass is “half full” or “half empty”. Someone recently reminded us that the glass is always full – half with water and half with air. While we are generally optimistic, and this clearly is an optimistic point of view, the fact is that the glass appears to be more half full than half empty. First of all, despite the weak GDP numbers, we find that consumer spending actually grew by 2.9% during the first quarter. That means that the other 30% of the economy was relatively anemic, but that is okay because it was the part that was growing very quickly during the last two quarters of 2011. One of the major reasons for the slowdown is the decline in the growth of government spending (yes, it really is happening), as the President and Democrats want to make the deficit and debt issues as small as possible in the upcoming campaign. This will create a further drag on the economy over the next quarter or two, but not by enough to pull us back into recession this year.
The housing market continues to get hammered in the press, but some bright spots are emerging. For example, the inventory of homes for sale is now at a five month supply, which is generally considered “healthy”. Fewer new households were created over the last four years, as many young people moved back into their parents’ homes, while they waited for either a job and/or a better economy to give them confidence to get a mortgage. That is starting to happen today with interest rates continuing to be some of the lowest in history. Finally, there has been significant legal immigration into the U.S. over the past four years and all of these immigrants need to find homes. In the beginning, they sought out apartments/rentals, and thus the apartment industry did very well during the Great Recession. Now, they are starting to purchase homes.
- If you listened carefully to the CEOs during their earnings announcements, they were tepidly upbeat – but upbeat nonetheless, as they looked forward into the remainder of the year. On a day-to-day basis the markets will be driven by the headlines and emotions. We encourage you to refrain from getting caught up in that fray. At the end of the day it will be about an economy that moves forward creating jobs and not one built on the back of debt.
- About 90 days prior to one’s birthday, Social Security has traditionally mailed an estimate of the future benefits available to each worker. Not only does the report provide a history of earnings, but it also shows the benefits available at various ages including age 62 (the earliest year in which one can begin to receive benefits), the full retirement age (currently 66), and age 70, which is the maximum amount of benefits possible. However, Social Security has decided to save money and go digital. People will only receive the paper statements in the mail after they reach age 60. If you want to see the benefits prior to that time, you must visit: www.ssa.gov and create an account to look at your benefits. It is very important to do this every year to ensure that the Social Security Administration did not make a mistake in the wages eligible for Social Security benefits. Cheaper? Yes. More convenient? Perhaps. Harder to remember to do this important step? Absolutely.
- This is an excerpt from Time Magazine in an article called “The Debt Bomb”: “Never in history have so many…owed so much money with so little promise of repayment. At stake is a gargantuan debt held by banks, governments, and international financial institutions around the world…much of it may never be paid off, and a major default…could trigger far reaching political and economic reactions everywhere. The global economy may be a time bomb.” This certainly sounds familiar, but this excerpt came from the January 10, 1983 edition of Time Magazine. Thus, we can only conclude that 19 years ago perception was very similar to what it is today.
- The jobs number came out on March 4th and the stock market immediately turned negative because the number was about 30,000 less than anticipated. We are not going to belabor everything at this point, but we remind you to take a long view. The last time non-farm payrolls registered a loss was in September, 2010. Having moved forward since that time, non-farm payrolls have added a net 3.1 million jobs over the past 20 months. Yes, everyone would like to see the jobs numbers higher and they eventually will be. Patience is a virtue.
- Contrarian theories abound concerning the herd mentality when it comes to investing. For example, back in February, Barron’s had a front page that said “Dow 15000” and some would argue that that was just as much of a death note for the market as for an athlete being on the cover of Sports Illustrated. We are not too terribly worried when we see only one article of this nature, but when the topic appears in many news articles it is a potential red flag; although not a guarantee that anything will happen. Another way to look at contrarian theory would be home ownership, which fell to the lowest level in 15 years at the end of the first quarter when only 65.4% of Americans owned a home. This topped out in June, 2004, when 69.2 % of Americans owned homes. Just as when home prices were soaring and everyone said, “this time it’s different”, the same can be said on the way down. Nothing goes up forever, and nothing goes down forever. Banks are being much more careful in approving short sales, and in fact, last year there were more short sales than foreclosures at many banks. Homebuilders have cautiously started applying for new permits. Interest rates are at an all-time low, having touched 3.8% for a 30 year mortgage this past month. Putting that into perspective, many Baby Boomers remember the ‘70s and being delighted to get a mortgage at any interest rate, but being ecstatic if the rate was lower than 15%! In short, the housing market, which is the biggest laggard in the economy at the moment, will eventually kick-in, and when it does, it will be a definite positive for everyone.
- Early projections for the Social Security wage base in 2013 have been put at $113,700, which is up $3,600 from this year. It’s hard to believe that budgeting will start in just a few months at many firms whose fiscal year is the calendar year.
- Way back in the mid ‘90s, we wrote a Bullet that talked about how the next heavy round of inflation would occur when Baby Boomers were attracted out of retirement and back into the labor force. Would they do it because they were not happy with retirement? No, they would do so because the money being offered to them was so attractive they could not turn it down. Why would employers want to do this? They needed to “buy back” that intellectual knowledge. At the moment, however, Baby Boomers appear to be helping the unemployment numbers. While it is clear that some Baby Boomers are continuing to work longer than they wanted to while their 401(k) and other investment accounts improve, many are just moving ahead with retirement in spite of it all. Sure, some of them are retiring because they can’t find a job, but others are doing it because they simply want to, and others because they have been unemployed for the past couple of years and have found they like it. As the Baby Boomers retire and move out of the labor force they will create job openings and/or not take a job that could go to a younger person. This means that the unemployment rate will decline. The younger employees will likely receive a smaller salary than their Baby Boomer brethren, which means that companies should have greater margins and thus better profits. Sounds good so far, doesn’t it? Then, what happens when those Baby Boomers stress the Social Security and Medicare systems? Those who continue to work may see their Social Security and other taxes rise as a result of that stress, which means that they will have less disposable income, which means that the economy doesn’t grow as fast, which means lower profits. Isn’t it funny how things run in cycles and the law of unintended consequences comes into play?
- For the tenth year in a row, Fidelity Investments came out with their estimate as to the cost of medical care for a married couple who retires in 2012. It is 4% higher than it was last year and now sits at $240,000, up from $160,000 when the report was first done in 2002. This estimate could change dramatically because of the Supreme Court ruling on Obama’s Health Care Bill. To make matters worse, it does not include any costs for most dental services or long-term care. (Source: Boston Globe/Associated Press)
As always, we encourage you to give us a call if you would like to discuss anything further. We will visit again soon. Proudly and successfully serving our clients for over 25 years.
RAY, KIM, ERIC, BRUCE, LOU, NANCY, TINA, and JON
©5/15/12 ProVise Management Group, LLC
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