Permanent Value

Weekly Market Commentary

Bruce Doole
December 17th, 2014

The Markets

Ouch!

It was no fun to be an investor last week. The week prior, a commentary in The Wall Street Journal’s blog, MoneyBeat, offered this insight:

“Falling oil prices are thought to be good for stocks because they stimulate consumer spending and hold down inflation. The lower costs support economic growth, boost corporate earnings, and lessen pressure on the Federal Reserve to raise interest rates. The stock market loves that mix.”

That was not the case last week. A selling spree, sparked in part by concerns related to energy, led to virtually every major world stock index (every one that Barron’s follows, anyway) moving lower. The single exception was the Shanghai Composite and that was flat.

It seems the International Energy Agency’s prediction that demand for energy would grow more slowly in 2015, combined with the fact supply of some resources has been growing, addled investors and they sold everything but the kitchen sink. Even industries that may be helped by lower energy costs – consumer goods, consumer services, health care, and others – lost value. In the United States, stock markets delivered their worst performance in more than three years, according to Barron’s.

Have investors lost sight of the fact the United States has a consumption-driven economy?
The Federal Reserve Bank of St. Louis reported personal consumption – how much Americans are spending on goods and services – was 70 percent of gross domestic product (the value of all goods and services produced) in the United States during the third quarter of 2014. Lower energy prices tend to put more money in the pockets of consumers so they can spend more and that can help the economy grow. In fact, U.S. News reported, “…approximately every penny decline in the price of a gallon of gasoline translates to about $1 billion in additional disposable income for American households.”

It’s interesting to note consumers – a group that overlaps with investors in a Venn diagram – are more confident than they have been in almost eight years, according to data released by the University of Michigan and cited by Barron’s.

WHAT DOES THE FUTURE HOLD?

The good news is most analysts expect economic growth in the United States to continue. The Wall Street Journal, The Economist, The Federal Reserve, and the International Monetary Fund all have forecast gross domestic product growth in the United States at 2.5 to 3.0 percent for 2015. That’s not quite as good as the 7 percent growth forecast for China or the 6.5 percent growth estimated for India, but it’s decent for a developed nation with a mature economy.

There are factors that could hurt the economic outlook in the United States. Economists participating in The Wall Street Journal’s Economic Forecasting Survey said a negative global event was the biggest threat to U.S. economic growth followed by slower global growth. Three of the risks The Economist believes could keep companies from operating at target profitability during 2015 include:

• Deflation in the Eurozone: “A Japanese-style stagnation in the euro zone would have profoundly negative implications for global demand, especially at a time when growth in the emerging markets is also softening.”
• Spillover from Syria’s Civil War: “…The prospect of [ISIS] diverting its energies from Iraq and into Syria and its neighbors (such as Lebanon and Jordan) could prompt an uptick in oil’s political risk premium once more.”
• Escalation of the Russia-Ukraine conflict: “…The recently imposed trade restrictions have not only plunged Russia into recession, but also contributed to sinking industrial output in Germany… further sanctions could see Russia cutting off natural gas sales to Ukraine or the European Union (as is currently already reportedly occurring with supplies to Poland)… [these acts] would no doubt have a deleterious impact on the [Euro] region’s economic recovery.”

There are also factors that could improve the outlook. The Wall Street Journal’s survey found economists believe tightening labor markets, higher wages, better consumer spending, and low energy prices could support U.S. economic growth during 2015.

- Peak Advisor Alliance

Weekly Focus – Think About It

“The way a team plays as a whole determines its success. You may have the greatest bunch of individual stars in the world, but if they don’t play together, the club won’t be worth a dime.
–Babe Ruth, American baseball player

Week In Review – 12/11/14

Bruce Doole
December 11th, 2014

You’ll never guess who’s saving the most for retirement

Investors age 65 and above experienced the biggest increase in retirement savings compared with those from other age groups as the stock markets soared this year, according to a study by Hearts & Wallets. People in the 65-74 age group saw their retirement assets climb to $3.5 trillion this year from $2.3 trillion last year, the study finds. U.S. households posted a 16% increase in investable assets last year, with total assets valuing $41.2 trillion, the research also finds. –Time Money

There’s a lot not to trust about annuities

Sales pitches about annuities can distract retirement savers from making an informed investing decision, writes Stan Haithcock of MarketWatch. Instead of listening to advertisements, seminar presentations and agents, clients are advised to read the annuity contract or policy, Haithcock writes. “There are no surprises, secrets, or hidden gotchas in the contract. Nothing is over hyped or bullet pointed in the policy. There are no hypothetical, theoretical, projected, back-tested, or hopeful return scenarios in the annuity contract.” –MarketWatch

4 ways your home can help fund retirement

Clients can boost their retirement savings by making wise housing decisions, according to this article in U.S. News & World Report. Retirees can live on a limited budget if they have paid off their mortgage, which could add substantially to their expenses. They may also consider downsizing or relocating to a place with lower cost of living. Renting is another viable option if they want to sell their homes to augment their retirement savings. –DailyFinance

Best Social Security strategies for married couples

A married couple can boost their retirement benefit payments from Social Security if they know how to optimize their spousal benefits, according to this article on Kiplinger. One of them may file for and suspend his retirement benefit until age 70 so the spouse can receive spousal benefit on his record. Another strategy is restricting an application, in which the lower-earning spouse files for her retirement benefit so the higher-earning spouse can claim spousal benefit on her record and defer his own retirement benefit. –Kiplinger

- Source: Financial Planning

THIS WEEK’S ECONOMIC DATA

  • The Institute for Supply Management manufacturing index slipped to 58.7 in November, down from 59 the previous month.
  • October construction spending rose 1.1% in October, topping market expectations.
  • Private sector employers added a seasonally-adjusted 208,000 jobs in November, the fewest since August.
  • U.S. productivity grew at a 2.3% annual pace in the third quarter.
  • Weekly U.S. jobless claims fell by 17,000 to 297,000.
  • Russia now projects its economy will shrink by 0.8% in 2015, down from a previous estimate of 1.2% growth.

– Source: Ivy Fund

Week In Review – 12/4/14

Bruce Doole
December 4th, 2014
Misconceptions and Overconfidence Are Serious Problems
Most Americans do not have adequate understanding about retirement as illustrated by the low scores in a test designed to gauge their knowledge in planning for the golden years, according to a report from the New York Life Center for Retirement Income at The American College. Despite the lack of knowledge, many of the respondents show a high level of confidence about their financial ability to plan for retirement, the report says. This mismatch of knowledge and confidence is a serious problem, says David Littell, the Director of the New York Life Center for Retirement Income, as it can lead to uninformed retirement planning decisions. Littell notes that Americans struggled to answer basic retirement planning questions in key areas such as Social Security benefits, annuities, retirement investments, longevity, and long-term care planning. –Forbes

The powerful (and expensive) allure of guaranteed retirement income
Since the Great Recession, investors have chosen investments with a guarantee over those that promise higher growth potential but carry a greater risk, according to a recent study. As such, clients who invest their retirement savings become more interested in annuities while experts are pushing for annuities to be included in employer-sponsored defined-contribution plans. –Time Money

Playing 401(k) catch-up might cost you $1 million or more
Workers in their 50s are allowed to make catch-up contributions to their 401(k) plans to boost their savings and prospects for a comfortable retirement, according to this article on DailyFinance. However, younger workers need to max out their 401(k) contributions to take advantage of compound interest, which enables their money to grow over the years. –DailyFinance

Best strategies to boost your Social Security benefits
There are a number of effective claiming strategies for people to maximize their Social Security benefits, according to an article on Kiplinger. The retirement benefit will be based on the earnings in the 35 highest-paid years, the age to file for benefits, and marital status. When choosing the right strategy, clients need to account for these variables, as well as the possibility that they may live longer than expected. –Kiplinger

- Financial Planning

THIS WEEK’S ECONOMIC DATA

  • U.S. GDP rose at a 3.9% annual pace in the third quarter – up from a previous estimate of 3.5%.
  • U.S. consumer confidence fell to 88.7 in November, down from 94.1 in October.
  • Germany’s GDP rose 0.1% in the third quarter, up from a 0.1% contraction in the second quarter.
  • U.S. consumer spending rose 0.2% in October.
  • First-time U.S. jobless claims were up 21,000 to 313,000 for the week ending Nov. 22.
  • U.S. inflation rose 1.4% over the past 12 months, as measured by the personal consumption expenditures index. Core PCE inflation, which excludes volatile food and energy prices, was up 1.6%.
  • U.S. durable goods orders rose a seasonally adjusted 0.4% in October, due primarily to a spike in bookings for military aircraft.

- Source: Ivy Fund