Permanent Value

Week In Review – 8/31/15

Bruce Doole
August 31st, 2015

3 Things You Should Never Do With A 401(k)
A 401(k) plan is a great way to save for retirement. It lets you set aside pretax money from your paycheck, lowering your taxable earnings. Meanwhile, the money you save in a 401(k) grows tax-free.

Unfortunately, employees often make mistakes when it comes to how much they contribute to their 401(k)s. They might make poor investment choices or even mishandle funds. Here are three things you should avoid doing with your 401(k) so you don’t jeopardize your retirement savings.

OWN TOO MUCH COMPANY STOCK

It might seem like a good idea to own shares of your company’s stock if your employer offers it as an investment option — and nearly 40 percent of plan sponsors do, according to a report by Aon Hewitt, a human capital and management consulting service. But actually, there are risks.

If you invest too heavily in your company’s stock, your portfolio won’t be diversified and will be too closely tied to the performance of just one firm, according to the Financial Industry Regulatory Authority. After all, if the company’s performance tanks, your 401(k) balance is sure to go down with it.

Plus, some companies place restrictions on employees’ ability to sell stock, limiting your control over your investments. Ideally, you shouldn’t have more than 10 percent to 20 percent of your total investments in company stock, according to FINRA.

GAMBLE ON HIGH-RISK INVESTMENTS

The most common 401(k) investment choice is the mutual fund, which holds a variety of stocks and bonds. However, some plans let participants buy an assortment of securities through a brokerage account.

Unless you’re an experienced investor, you probably want to leave the stock picking up to the pros so you don’t end up with risky assets. This means you might want to stick with mutual funds. However, you still need to be careful when choosing funds. You don’t want to take on too much risk by investing only in stock funds. Even the youngest 401(k) plan participants should still allocate 10 percent of their portfolio to bonds, said Jean Young, senior research analyst with the Vanguard Center for Retirement Research.

AVOID STOCKS ALTOGETHER

According to a “How America Saves 2015? report conducted by Vanguard, 5 percent of participants in Vanguard-administered 401(k) plans don’t have any stock holdings in their accounts. This is a mistake even for investors with low risk tolerance or those close to retirement. Because most people can now expect to live 20 to 30 years into retirement, they need the higher rate of return that stocks offer as a hedge against inflation, said Young.

 

Week in Review – 8/24/15

Bruce Doole
August 24th, 2015

3 Reasons Not to Worry About the Fed’s First Rate Hike
The first interest rate hike by the Federal Reserve in more than nine years will not be the big event that the market has been anticipating, according to a panel of fixed income strategists and portfolio managers who participated in a recent Envestnet Institute webinar.

Their reasons have nothing to do with the latest market rout, which, has more than erased any gains in the stock market this year, and could potentially delay a Fed rate hike. They relate instead to the context in which the Fed will be raising rates and the history of market performance when the Fed has tightened policy before.

Here are their reasons why investors and advisors shouldn’t be overly concerned about an increase in the Fed funds rate, the short-term interest rate that the Fed directly controls and that banks use to lend funds to one another overnight.

1. Rates Will Still Remain Low & Negative for a While
The Fed will raise rates only 0.25% this year, finally moving off zero, or more specifically off the 0-0.25% range it has maintained since December 2008. Even after the first rate hike, “the Fed will be fairly accommodative for a number of years,” said fixed income strategist William Rodriquez of BlackRock. “The pace will be benign enough to not be ultimately market-disruptive.”

“The Fed is not off to the next tightening cycle,” said Scott Eldridge, director of fixed income product strategy at Invesco PowerShares Capital Management, noting that the Fed remains concerned about the weakness of the economic recovery and the persistent lack of inflation indications. “We don’t expect to see like we’ve seen in the past, that ratchet, ratchet ratchet type tightening policy at every meeting, but much more of a move and pause, move and pause with maybe 2-3 moves over the next 6 months.”

“Even if the Fed were to raise interest rates 25 basis points this September or December – we’re not ruling out October – once you subtract the weak inflation rate you’re still negative with regard to real Fed funds,” said Rodriquez. “It isn’t until we approach real Fed funds in excess of 2% to 3% where you start to see some real tightening in the marketplace.”

(The Fed has an inflation target of 2%. Its favorite inflation measure is personal consumption expenditures minus costs for food and energy, known as core PCE, which is running at 1.29%. So with a 0.25% Fed funds rate, the real rate is -1.24%.)

2. Higher Borrowing Costs Won’t Hurt, Could Even Help
Ultimately a Fed rate hike will lead to higher borrowing costs, but not right away — and maybe not at all for long-term loans. If he’s right, then the rates on long-term loans like 30-year fixed mortgages won’t rise.On the other hand, Rodriguez said, the higher cost of Fed funds “will ultimately translate into a higher cost of capital [for corporations]” and encourage CEOs and CFOs to invest in capital projects sooner than later “for fear of rising interest rates it the future.” He said it’s already happening given the $124 billion in corporate debt issued in July.

3. Markets Have Performed Well After Fed Hikes
Despite conventional wisdom, Frank Pape, director of consulting services at Russell Investments’ private client services business, said markets have performed well after the Fed begins to raise rates. Looking at past performance of major stock, bond and real estate investment trust indexes during the seven Fed tightening cycles since 1980, he found that returns were positive in the one year and five years following, ranging as low as 3.6% for the Barclays Bond Aggregate to as high as 13% for non-U.S. stocks in the first year.

 

-Source: Bernice Napach, ThinkAdvisor

THIS WEEK’S ECONOMIC DATA

  • U.S. Housing Market Index rose 1 point to a very strong 61 in August.
  • U.S. Housing Starts rose 0.2% in July to 1.206 million. However, permits fell 16% to 1.119 million due, in part, to a plunge in the Northeast.
  • U.S. Consumer Price Index rose only 0.1% in July to an overall inflation rate of 0.2%.
  • U.S. Jobless Claims remain low at 277,000 for the week of Aug. 15, up 4,000 from the prior week.
  • Great Britain Consumer Price Index retreated 0.2% in July, leaving the actual inflation rate at 0%.
  • Germany Producer Price Index was unchanged from June to July and down 1.3% for the year.
  • France PMI Composite for August fell 0.2 points from its July reading of 51.5.
  • European Union PMI Composite for August remained flat at 52.4, matching July’s reading.
  • Canada Retail Sales rose a higher-than-expected 0.6% in June. Year on year retail sales were up 2.2%.

-Ivy Fund

Week in Review – 8/17/15

Bruce Doole
August 17th, 2015

China’s Confusing Currency Devaluation Means Get ‘Buy Lists’ Ready

It used to be said that when the U.S. sneezes the rest of the world catches a cold. But this week China is the catalyst and the rest of the world’s financial markets, including U.S. markets, have been reacting.

China, the world’s second largest economy shocked financial markets Tuesday by devaluing its currency. The Dow fell 210 points Tuesday, losing 1.2%, and then as much as 277 points early Wednesday but then recovered completely, ending the session down just 0.33, virtually unchanged.

It was a wild ride. “Markets were taken by surprise and pricing in the worst,” says Marc Chandler, global head of currency strategy at Brown Brothers Harriman. “We still lack transparency and are not sure about the magnitude of the intervention.”

Here are some of the reasons the markets are confused.

For one thing they weren’t expecting China to change its policy and do so abruptly, without warning. But on Tuesday the Chinese government announced it would no longer decide the exchange rate of the yuan, which is pegged to the dollar, without taking into account other variables. Instead it would set the rate, known as the central parity rate taking into account the closing rate of the yuan the previous day, supply and demand conditions in the foreign exchange market and the exchange rate movement of major currencies. The new policy, announced as a one-time change, is more flexible and more market based. The devaluation could help boost Chinese exports, which would strengthen a weakening Chinese economy, and help China get IMF approval to include the yuan in its basket of major international reserve currencies.

Then, after the yuan lost almost 2% of its value against the U.S. dollar on Tuesday and looked to be setting up for a repeat performance on Wednesday the Chinese government intervened to prop up the currency, and it closed about 1% lower.

“Like much in China, the actual practice may deviate from what appears to be the declaratory policy,” Chandler writes in his marctomarket.com blog. “There is a great deal of uncertainty about what happens next.”

Nicholas Lardy, China expert and senior fellow at the Peterson Institute for International Economics, also doesn’t expect much long-term impact on U.S. markets from China’s move. “In the short-term [it] is causing significant volatility in the market but it won’t have long-term implications,” says Lardy. “On balance it will help sustain China’s economic growth and add flexibility on domestic policy and better economic performance.”

– Source: Bernice Napach, ThinkAdvisor

 

THIS WEEK’S ECONOMIC DATA

  • Japan Producer Price Index The decline in producer prices worsened in July (down 0.2%) not helping Bank of Japan’s fight against deflation.
  • China Industrial Production slowed in July to a pace of 6% on the year, its weakest since April and down from 6.8% in June.
  • Japan Machine Orders June seasonally adjusted machine orders (excluding volatile items) declined for the first time since February. They dropped a larger than anticipated 7.9% on the month and were up 14.7% on the year.
  • U.S. Jobless Claims remain low at 274,000 in the August 8 week.
  • Italy GDP The Italian economy expanded in the second quarter, increasing 0.2%.
  • U.S. Industrial Production rose 0.6% in July, bolstered by a 10.6% surge in motor vehicle production.

-Ivy Fund