05 Aug 2011 Markets Suggest Double Dip
A friend suggested the other day that “if we are in a recession, at least we can now begin looking forward to the recovery.” The economy has certainly received some serious knocks lately and one could easily make the case that the two-year recovery is in trouble. Supply disruptions from Japan’s earthquake dealt the first blow followed by an equally devastating rise in oil and gasoline prices. Then came the political train wreck over the debt ceiling with questionable warnings of US default coupled with more substantial threat of a downgrade of US debt (S&P has not yet announced their decision). Add Europe’s debt problems and emerging market slowdowns and the global picture gets darker.
If consumers or small businesses had any confidence left following passage of the debt ceiling bill, it was strained anew by this week’s action in the capital markets. Hopefully, today’s surprise good news that employers added more jobs in July than forecast will stop the bleeding. But confidence is severely strained.
The US stock market as measured by the MSCI US Broad Market Index is down 12.5% from its recent end of April peak. In stark contrast, our most conservatively allocated Risk Averse portfolio (70% Treasuries and cash and 30% domestic and global equities) is little changed. The Barclay’s 7-10 year Treasury index increase of 10.33% on a total return basis since its recent low reached on April 8th has offset the risk of equities substantially.
Friday’s GDP number of .8% growth for the first half of 2011 sparked a powerful sell-off in stocks. Warnings over the weekend and this week of the economy being near ‘stall speed’ combined with debt problems in Europe pushed stocks down the hill after the debt ceiling increase.
Five of the nine guys who officially declare when recessions begin and end are negative on the economy. They don’t make predictions as a group, but they voice their opinions. Here are a few of their comments as reported by Bloomberg. “This economy is really balanced on the edge,” said Harvard University economics professor Martin Feldstein. “There’s now a 50% chance that we could slide into a new recession. Nothing has given us much growth.” Panel chair Robert Hall of Stanford University said a greater-than-expected slowdown in the first half of 2011 poses risks for the world’s largest economy. “The slower the growth rate, the more likely it is that an adverse shock would cause a recession.”
Robert Gordon of Northwestern University and Feldstein agreed that the “hangover” from the housing bubble continues to plague the economy. “There is a vast oversupply of housing that has crushed any chance of recovery of residential construction, which for the last three years has been operating at about 25% of the housing starts registered in 2005-06,” Gordon said.
One bright spot for the week is that the employers added 117,000 workers after a 46,000 increase in June, considerably more than originally estimated. The jobless rate dropped to 9.1%, but the improvement was due more to a shrinking denominator than a growing numerator. The labor force declined by 193,000 and the number of unemployed dropped by 156,000. The share of the eligible population holding a job declined to 58.1%, the lowest since July 1983. This is a key factor in explaining why tax receipts are down so far. The underemployment rate, which includes part-time workers who’d prefer a full-time position and people who want work but have given up looking, decreased to 16.1% from 16.2%.
Another highlight is that automobile sales jumped nearly 6% in July to a 12.2 million annual rate. Autos had posted four straight declines following the parts supply disruptions caused by the earthquakes in Japan. Chain-store sales were also stronger in July at the low and high ends. Deep discounters attracted more consumers away from the traditional chains as people try to stretch their dollars. Bloomberg reports that many of these chains offered positive earnings guidance for the coming quarter with only a few lowering guidance. But the good news, for now anyway, seems ineffective at stemming the declines.
Even more troubling than the economic news which is driving markets now, is the bellicose language that accompanies it in the printed and broadcast media. With quotes like “It was an absolute bloodbath” and “In this environment, no one wants to catch a falling knife”, it’s no wonder that people question and leave forever the stock market as a savings vehicle.
A quote in today’s Journal article entitled “Stocks Nose-Dive Amid Global Fears” sums up the voices of thousands of investors who have been abused by the financial services industry. “I’m just sorry to see my retirement going to hell,” said Robert Slocomb, an 82-year old retired Kodak optical engineer in Rochester, N.Y. Mr. Slocomb blamed the government’s handling of the economy for the market’s woes.
If Mr. Slocomb’s retirement is “going to hell” as he claims, then at age 82 he has himself and his advisor to blame, not the government. If his retirement is invested primarily in stocks, he should absolutely expect the kind of volatility and future uncertainty that he experiences today. The worst annual loss for a 100% equity portfolio is 40%. We’ve had two of those in the last 85 years. Odds are that all-equity portfolios lose money one in every four years. Most important, because Mr. Slocomb spends from his investments, he depletes them all the faster when markets wallop them.
Mr. Slocomb should meet a Wealthcare advisor who understands what is truly important to him and his family. He would proactively plan for rather than react to capital market swings. He would sleep so much better knowing that his plan can survive the worst of times and that it is stress tested and monitored continually. When his advisor calls him to offer advice, it is based on the robust statistical confidence of meeting his important goals and priorities, not on his opinions or hopes about an uncertain future.
Just as importantly, Mr. Slocomb would understand that the capital markets (stock and US Treasury), efficiently harnessed, provide ample returns for generating and sustaining wealth. It is not necessary for him buy mutual funds claiming to better market returns. Most fail and all are expensive and increase the uncertainty of meeting his goals.
If Mr. Slocomb was invested in one of our more conservative model portfolios, as his plan almost certainly would indicate, he would have experienced returns near 6% for the past five years and would be flat to down slightly in the latest turbulence. He would not be quoted in today’s Wall Street Journal foretelling of a dire end to his retirement. In fact he likely would not even read the Journal or watch the squawking heads of CNBC. He would be too busy living the dream that his plan had made a reality. Wonder if the Journal would be interested in retirement plans ‘going to heaven?’
Have a nice weekend.