Thursday, February 11, 2016

Nervous About the Stock Market?

     The stock market affects my life, and I bet it affects yours as well. Those of us without a pension have our "pension" (if we have one at all) in the form of an IRA or 401K, which is likely invested primarily in mutual funds holding stocks and bonds.

     But even for those who do have a pension ... where do you think the pension fund gets the money to pay your benefits? Largely from the stock market. One of the most significant holders of stock in America is CalPERS, the pension fund for California state, school and public agency employees.

     (Honestly, that's one of the things that makes me nervous about Bernie Sanders. I am no defender of Wall Street ethics, but I can only think that if the president were to go to war with Wall Street, as Sanders wants to do, one of the casualties would be my pension. So I'd be more comfortable with the reformist approach of Hillary Clinton who, for example, proposes the elimination of the egregious tax dodge called "carried interest" that allows executives to pay lower taxes on their income. Now, if we could only do something about those ceo's who ... oh, don't get me started, that's another subject.)

     Be that as it may, since the beginning of the year the stock market has swooned, making me more than a little nervous about my IRA. So I turned to my financial guru, Jeremy Kisner of Surevest Wealth Management in Phoenix, to gain a little perspective on the situation. Here, with his permission, I've distilled some of what he has to say to us retirees:

What Is Going on with This Market?
     Last year volatility in the stock market returned after several years of steady gains. The VIX, a measure of volatility also known as a “fear gauge”, has recently hovered between 20-30, representing 60 percent more volatility than a year ago. However, by historical standards, this is not unusual. From 1990 through 2014, the VIX spent nearly a third of its time between 20 and 30. Still, the uptick in volatility has been unnerving for many investors.

     The major stock market averages were essentially flat in 2015, while oil and other commodities were crushed. One of the culprits was the Chinese economy. But the headlines coming out of China obscure the fact that a lot of the U.S. economy is on fairly steady footing. We have record car sales, rising home values, low unemployment, low commodity prices for producers and low gas prices for consumers, strong corporate balance sheets, increasing profit margins, and decent retail sales numbers. Indeed the U.S. economy showed enough strength for the Federal Reserve to raise interest rates in December.

     What everyone wants to know is: Will markets continue to fall? When will they bounce back? Is this a time to get more conservative or more aggressive?
     For the answer, we can either look at history, or the predictions of market analysts. I try to ignore the analysts. Why? An article Strategists: Full of Bull reviewed 186 market forecasts over the past 19 years and reported the average forecast was not only wrong ... it was more wrong than if you had made no prediction at all!

     Market analysts have a bullish bias, with only 9 percent predicting a down market in years when the market was down. So far, this year is no exception. Analysts have an average forecast for 8 percent growth. Who knows? That may come to pass. But so far the lousy forecasting ability of these experts appears to be intact. So most investors are best served by ignoring forecasts by people in the media who espouse their convictions with authority -- and end up being wrong.
     Stock market corrections are actually a normal part of equity investing. The S&P 500 has declined 10 percent or more 29 times from 1935 through 2015. The average decline was 21 percent, occurring once every 2.75 years. In hindsight, there are explanations for these corrections. Yet trying to predict when the next one will occur is impossible. By the way, the average rebound from those declines has been 68 percent.

     So let's look at what has actually happened over the past 70 years. The stock market has ended up declining in more than half of the years when it was down in January. The average yearly decline was 3.2 percent. But that doesn’t sound too scary when you consider that we are already down about 10 percent year-to-date. One interesting point to add is that the worst January of the past 70 years was 2009 when the market dropped 8.6 percent in January. Stocks continued to sell off for a couple more months, but then rebounded to end the year up 26 percent!

     Stock market corrections are scary and unpredictable. Market analysts use all kinds of statistics to explain (in hindsight) what happened. The reality of the situation is financial markets are primarily driven by investor psychology based on short-term events, and it’s very difficult to determine how greedy or scared people will get at any moment.

     Imagine if you had built a family business over the course of several decades. Today, your company is growing and highly profitable. Would you sell your company (or part of it) and buy it back every few months? Of course not. Yet today, investors can buy and sell shares in a nanosecond with very little transaction costs. This is why we have so much volatility. The short-term value of your investment portfolio is more reflective of investor sentiment than the long-term value of the underlying assets.

     It is helpful for investors to understand that market returns over the long run come down to two things: jobs and earnings. People will continue to buy products and services as long as they have jobs. Some people question the quality of jobs and the accuracy of the numbers, but job growth has exceeded expectations for the past year, and the unemployment rate is down to a healthy 4.9 percent.

     Earnings of publicly traded companies are historically traded by investors at a multiple of 15 times. This means if a company earns $1 per share, its stock trades at $15 per share. When the company grows its earnings, there is typically a corresponding increase in its stock price. The U.S. stock market is currently valued at about 15x earnings, near its historical average. Investors are usually rewarded for selling when earnings multiples rise significantly above their long-term averages and for buying when they fall below. In addition, having a globally diversified portfolio enables us to invest in markets that trade at discounts to ours as well as into asset classes that are out of favor (or, "on sale").

     Will companies be able to continue to grow and hire more people? Consider this: despite what may happen in the next couple of quarters, the global population is expected to increase from 7.3 to 9.6 billion people between now and 2050. That is a lot more customers to buy cars, computers, food, clothing and everything else. The world is growing, and so the companies in your investment portfolio are likely to find ever-more-profitable ways to serve their growing client bases.

     The most important part of successful investing is to find a viable strategy and stick with it. The worst thing to do is to second guess yourself because of a disappointing period. If you just stay the course, you can probably be “average”.  In most things in life we do not strive to be average. However, the average returns for stocks, bonds and balanced portfolios are the safest and surest way to grow your retirement portfolio over the long term. Most people think in a time horizon of weeks or months; and the common way people predict the future is to look at recent experience and expect it to continue into the future. The reality is that financial trends reverse themselves abruptly, making it hard to see any pattern in the time horizons that most investors consider. As an investor you have to train yourself to think in terms of years, even decades.

     Also, sometimes the “averages” seem suspect because we assume that yearly stock and bond market returns would be clustered around the average. But that is not the case. Market returns in any given year are rarely close to their long-term averages. For example, the average return for stocks from 1926 to 2014 was 10.2 percent. How many times during those 89 years do you think the annual return fell between 8 and 12 percent? Incredibly, that only happened six times.

     So you cannot expect an “average” return this year, or next. You may get much more or much less. But history has shown that over time, average returns will make your retirement plan work, even if in any given year, that may be hard to see. But as I covered in more detail in my article When Will You Need The Money? with time comes predictability … and averages.



Tabor said...

I have no idea without more research about the Clinton approach to the market vx. Saunders. I do feel great transparency is what we need. I am a big fan of Senator Elizabeth Warren who is also a sunshine/antiseptic promoter for middle America. I also know that recently the market fall has lost me $70,000!

Stephen Hayes said...

I'm not too worried about what Bernie might do to the stock market. I like Bernie but he can never accomplish his goals.

DJan said...

Thank you for this well reasoned post, Tom. I took my retirement in monthly annuities in 2009. I have been riding the waves and valleys ever since. And as the deepest valley never meant I was having to eat cat food, I have stayed the course. It has all returned and I have no intention of changing anything now. I see that ti will be reasonable, if not perfect, for the time I'll need them. :-)

Olga Hebert said...

I read every word! So I wait things out more because I am too stupid or lazy to do anything else, but somehow I remain optimistic.

Anonymous said...

" It is helpful for investors to understand that market returns over the long run come down to two things: jobs and earnings. People will continue to buy products and services as long as they have jobs. Some people question the quality of jobs and the accuracy of the numbers, but job growth has exceeded expectations for the past year, and the unemployment rate is down to a healthy 4.9 percent. "

Around 9 million people, or roughly 45% of the unemployed have totally given up looking for jobs. And those numbers increase every day. These people are not included in the 4.9% unemployment rate. If these people can not find jobs and have given up, how or why do you expect the future population growth to expand one day and seek employment if there really aren't enough jobs to go around now?

Your formula or theory doesn't work.

We both can agree that jobs, and the more people working at jobs helps America's economy as well as the global economy. With the work slowdown in China and its domino-effect across the planet, surely you can see that a bounceback is not in the immediate forecast? If there is to be a solution to this problem, then the solution is JOBS. Always was. And always will be.
Who, among all the candidates is even discussing 'jobs'?

Surely, you must also know that Wall Street is computer driven. There really aren't humans anymore doing the buying and the selling. When you 'invest' in Wall Street, you're putting your hard earned cash in a computers hands. Is that what you want to do? Same as gambling in Vegas. Surely you must know that Vegas is all computer driven. You only win when someone programs a computer to let you win. Hillary can't do anything about Wall Street. Unless she wants to start arresting and locking up computers.

The only person who states he can get people jobs is Donald Trump. And I believe him. He's a top notch employer. Bernie isn't going to hire anyone. Neither is Hillary. They're just going to keep taking money from the rich till there are no more eggs left under the Golden Goose's basket. Then what are y'all going to do?

Without a job, nobody buys anything, does anything, pays anything (taxes) or has services done. If you want to cure your investment blues, hire (elect) someone who will bring jobs to the masses.

PS: in case you haven't noticed, nobody is buying anything for real. Holiday retail numbers were dismal. WalMart closed 100 stores and laid off 100,000. Sports Authority filed bankruptcy last week. Sears, Macy's J.C.Pennys are closing stores like crazy. Banks are laying off people. Oil companies are going out of business. Coal towns are closing up.

No time in history has anyone seen the financial start to a new year 2016 like the one just played out. There's no precedent. The shields are down. Now we are going to see the REAL economy for what it is. My only advice: make sure you have some real hard cash on hand because from what I can sleuth, that's what most investors are doing right now: Selling and switching to cash. I know, I know...the financial experts will tell you that the markets always come back. But as we all noticed, 2016 set a new precedent. This really is new territory we are all traveling in.

Just my 2 cents. IMHO.

Anonymous said...

hillary clinton is a very ugly woman. I can not imagine looking at that ugly face for the next four years.

Tabor said...

Your anonymous reader seems to want to judge people on their looks rather than their history and policies. I think too many voters are that superficial and attracted by nice suits.

Anonymous said...

1. Can someone tell me the population of baby boomers?
2. Can someone tell me how the current near zero (USA) or negative (EURO and JAPAN) interest rate changes the ways of retired people spending?
3. Will you spend more if interest rate is 4% or more?
4. The economics problem we have here is

Quantitative Easing (printing money) -> interest rate going down (good for manufacturers initially)-> consumers spending less(especially for those people depending on savings) -> manufacturers eventually have problems selling their products) -> excessive plants have to be shut down and unneeded jobs will be eliminated -> consumers spend less -> ...

5. Yellen sees this problem and wants to raise interest rate up but nothing she really can do quickly before recession/depression takes place.

Sally Wessely said...

My husband always tells me we are in it for the long haul. It goes up. It goes down. It evens out. I hope that trend is one we can count on.

Janette said...

Really? No one can fix it so we should not even dream to get it fixed?
Hillary---NOOOOO! Untrustworthy. My kid is in the military. I am petrified to have someone like her in charge. The Clintons seem to love to put their toe in and get people killed, and then pull out quickly leaving a mess.

The market goes up. The market goes down. There is no way to beat the market computers. Keeping in mind that the "market" is actually a private industry might help people invest. The only way to get control is to arrest and convict those who own the computers or the programs when the market makes a big boo boo and the public loses a LOT of money. Go Bernie!

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Anonymous said...

You are right about pensions being invested in stocks. This is one reason why investing SS funds in the stock market may be a dumb idea. Economics is a complicated subject, and Bernie who went on his honeymoon with his wife in the USSR is not too bright on this subject. The current political situation is very scary. I like Hillary, always have, but she's in danger of being in deep trouble with the FBI.

Anonymous said...

There's a 50% probability of a recession in 2017. But here's a silver lining: no Clinton as President, Fed chairwoman may be reluctant to raise interest rates again.

Anonymous said...

I'm voting for Hillary Clinton as the best choice I'm offered.
Bill in Florida

pia said...

I will agree with Cyndi that Wall Street is computer driven. It's computers that fuel the pre and after hour markets. It's computers that can drive the price of a stock up and down 40 times a day.
Our economy is changing. Why go to Wal Mart when Amazon can deliver the same goods?
25 years ago we went from a manufactoring/service economy to a tech/communication one. People who understood that and didn't invest in say pets (dot) com did very well. So did people who invested in high interest muni bonds---that's over now obviously.
The reality is that nobody and I mean nobody understands what's happening as we have never had such a volatile stock market before. So many companies are doing so well yet nobody is buying their stock because they didn't do exactly as well in the fourth quarter as the analysts (who are usually always wrong) predicted. Makes no sense.
People think they can outthink the stockmarket so they do margin. Now their margin's being called. Shorting the market sounds like a great idea until you realize you need to time it perfectly. Then it's not so great.
2009 isn't a great year to use as an example as the average person continued losing money. Yes the Dow went up but...It wasn't until 2011-2012 that many people began recovering. It was a hard run.
This wasn't a political post but since the commenters made it into one---as a New Yorker I'm ashamed that Donald Trump and I come from the same borough. As a Southerner I will go to the polls in less than two weeks and cast my vote for Bernie. Wall Street needs the Glass Steagal act brought back and transparency because god knows it's the least transparent thing around. Anybody who isn't scared doesn't understand that what goes up then goes down doesn't necessarily go up again. But maybe if you have high dividend high quality stock funds it might not matter. Or.....