August, 2018. Where are we?

Markets around the world continue to struggle this year – unlike last year – with American markets struggling the least, by the way.  We seemed to be making a run at challenging the January high for the S&P 500 last week, but Turkey’s problems took care of that.  By the way, the ETF for Turkey, is now down about 61% this year.  That smells like an opportunity, but the point of this blog is not to day trade; it is to help people grow capital over a long period of time in a sensible risk-adjusted way.

Speaking of “long term” results, pundits on cable television are overwhelmingly lined up to see our markets collapse soon for no better reason than, well….they’ve been rising since 2009. Which is true.  But what is not true is that markets that rise for nine years have to die soon.  For sure, they will roll over at some point. And recessions are inevitable.  But is nine years the life expectancy of all bull markets?

Goldman Sachs, a major player and thinker in the financial markets – you have probably heard of them – has done some work on the question of how long markets can rise?

Spoiler alert: a long time!

They studied countries where growth cycles lasted more than 10 years and found:

  • Australia, from 1992 to the present(26 years and running)
  • The United Kingdom, from 1992-2008 (16 years)
  • Canada, from 1992-2008 (also 16 years)
  • and Japan, from 1975-1992. (17 years)

Goldman Sachs also found some similar advantageous factors that had contributed to the run of good fortune these countries shared and further found that these same factors are also present in U.S. financial markets today. These factors contribute to the likelihood (with no guarantee, of course) of a continuation of our own current bull market beyond ten years:

  • a relatively flat Phillips curve (the relationship between inflation and unemployment)
  • strengthened financial regulation
  • and a lack of financial imbalances.

In the past three U.S. expansions, which takes the US economy back into the ’90s, the late-cycle phase of our economic expansions has lasted 2-4 years, suggesting the next recession could be as far out as 2021. Again, no guarantees on that, either.

So, yes, trouble will come, an adjustment will take place; how severe, no one knows. Though it’s coming.  But for those who find Trump intolerable, and believe he will crash civilization and the economy with it, try to look passed his personal demeanor to his policies.  It is those, after all, that are buoying our rising economy.  Try not – I’ve said this before – to let your politics intrude on your investment judgment.  For now, and likely for some while longer, the winds are at investors backs. The NASDAQ has already hit new highs, so has the Russell 2000 index of small companies.  But the DOW and S&P, not yet.

In closing, please take a moment and ponder the words of one of the greatest investors of all time, Peter Lynch, of Fidelity’s Magellan Fund: “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”

God bless you all.

Posted in economic recovery, fear, investment myths, investment wisdom, market corrections, Market falls, market volatility, Personal Finance, retirement investing, stock rallies, Successful living | Leave a comment



The US economy grew at 4.1% in the second quarter of this year. That’s the June quarter just ended, of course. And it’s the first report on that quarter’s growth, subject to revisions. 2018’s first quarter growth was upped a little bit, too, this morning. To put today’s economic growth number into perspective, a quarter’s growth that powerful hasn’t visited the USA since 2014, and that one was a fluke, amid national governmental policy that largely demonized corporate success. Back then, our government betters advising us assured us, many times, that 2% was both good and likely the most we were going to get going forward in the “new normal” US economy. Redistribution, please remember, is very, very costly.

Well, surprise! For all his profound faults, his raging ego, his brittle personality, his history of serial philandering, and his bizarre comments and tweets, Donald Trump has proved to be a genius in much of his policy setting.

So where do we go from here?

Well before I even speculate, the market’s reaction today to this news seems to yearn for the good old days of 2% growth, along with promises for more and bigger redistribution, more regulation, and higher taxes.

Markets, you must understand, are very astute in the long run, can be very stupid in the short run.

It is also worth reminding all of us, from time to time, that almost any description and every prediction about the future of the U.S. Economy and its stock market involves a gross oversimplification of an extraordinarily complex system.

Pundits, commentators and portfolio managers – people like me, in other words – often write a “market outlook,” implying they can forecast how stocks are likely to do over the next few months or so, or until it is time for the next market outlook.

Yet, no one knows what the market is going to do over any time period that would be of interest and value to the typical investor.  The operate word in that last sentence is “knows:” no one knows.

Still, the most common question I get from many friends as well as readers of this blog is “what’s your outlook for the market?” I then dutifully provide one, not because I know or even have a strong opinion, but because I am asked.

This reminds me of an economist named Ken Arrow who was asked during World War II to provide a long range weather forecast for an upcoming military campaign, which would involve land, sea, and air operations. I’m not sure why an economist was asked about weather, but Ken said a forecast of the requested length was worthless because no one knew how to forecast the weather for a week out, let alone the length of time his superiors wanted. He was told to provide it anyway; and when he asked why, the answer was “for planning purposes.” So, I suppose, that also goes for market forecasts. That is not to say there are not some useful things that can be said about the market at any point in time, but they are mostly observations about what is going on NOW, not meaningful predictions about what the future holds, which is what’s most important – yet unknowable – to any investor.

However, peeking under the covers, what is going on now is that the bull market that began in March 2009 continues. Yippee! The S&P 500 Index was up a modest 2.6% in the first six months of 2018. The market had a 10% correction after its peak on January 26, but then resumed its advance. The path of least resistance since 2009 persists, if irregularly, higher and remains so.

For sure, there have been issues over the last nine-and-a-half years that looked ready to kill the market – there always will be, please know – the most serious of which was the euro crisis of 2011, which many feared would lead to a repeat of the crisis of 2008, but which was averted. Then, too, we all may remember the first six weeks of 2016 which saw the worst start for the S&P in its history  – in its HISTORY! – as big worries about China and Russia, coupled with collapsing oil prices and worries about the pace of the Federal Reserve’s tightening and the upcoming presidential election tanked stocks to the tune of some 10.3%. But the market recovered as it became clear those fears were just that. Today, the market is up some 50% from the swoon it took at the start of 2016.

I hope you and your long-term retirement account caught that lovely ride up.

Now, following the least volatile, smoothest ride up in US markets ever in 2017, 2018 is more normal. That is, it is more volatile, but the direction has been, as is usually the case – 2/3rds of the time – most years, higher. And as usual, there is no shortage of issues to threaten the market’s continuing advance. Trump’s wall between the U.S. and Mexico is small potatoes compared to the towering wall of worry the market has been climbing since March 2009, which has kept investors – amazingly, to me – selling their stocks to pour money into…(drum roll, please) … bonds. Yes, BONDS!  This year so far, investors have pulled $40 billion out of stocks and put $80 billion into bonds.

What on earth are these poor people thinking!?  Come to think of it, I don’t think they are thinking.

As one set of worries prove unfounded, as the media pound away at Trump and predict impeachment for treason or terminal depravity or idiocy, another set of world problems arises to be confronted. And so far, the problems seem to be getting handled. If there were few or no “what abouts?” –  such as, what about the tariffs and the possible trade war, what about the flattening yield curve, what about high valuations, what about earnings growth peaking, what about the Fed tightening, what about oil and gasoline prices going up, what about the dollar’s strength and emerging markets’ weakness, what about North Korea, or Russia, or China – to name only a few, then stocks would be so expensive they would have nowhere to go but down once some new “what abouts” arose. This bull market will end one day for sure, and it will end the way all bull markets end: when the economy rolls over and earnings decline and unemployment rises, or when stocks get too expensive relative to their earnings (up 20% this quarter alone) or the returns available in other assets.

But that ain’t yet.

And no one knows when any of these bull-market-ending events will occur, although, again, they assuredly will occur again (and again) at some point.

What is the case now is that the economy and US companies’ earnings growth are both strong, as is dividend growth (8% year over year), returns on capital and margins, and inflation is low (but ticking higher). Stocks are not yet expensive relative to bonds, the latter of which are very expensive relative to stocks. Yet people still jump from stocks perceiving that bonds and CDs and other interest-oriented “safer” investments are the place to be before the world and America go to hell in a hand basket.

You can do that, too. Sell your stocks to buy, say, a CD.  But I’m not traveling on that train. At least not yet.

For now, the path of least resistance for U.S. stocks remains higher.

God bless you all.

Posted in economic recovery, fear, investment myths, investment wisdom, market corrections, market volatility, retirement investing, saving, stock rallies, Successful living | Leave a comment

Stay the Course

In my days working at Fidelity, I recall legendary investor Peter Lynch saying that we have to be careful not to get scared out of our investments. Earlier still, at a talk at Columbia University in New York, where I went to school once upon a time, I heard Warren Buffett say two things that have stuck with me like a bad stain from lunch.  Buffett’s first memorable point was that “good investing is like driving a car on the wrong side of the road and hearing lots of people yelling at you to get back in line.” Buffett’s great, second point was that to be a good investor a person doesn’t need a high IQ or multiple degrees; he or she doesn’t need to be a genius, either.  What’s needed is the right temperament.

So beginning with those three, great points from two master investors – about being a contrarian, about holding to one’s convictions, and not letting emotions overwhelm you – lets look at where the market is today, my long-term investors, and what we long-term should and should not do.

In sum, we should stick to our knitting, keep on keeping on.

2018 continues to be a very different year from last year.  We’re not down for the year, but – holy cow! – it seems to be marked by one disappointment after another.  The investment landscape seems terrible, nerve-wracking. Our President, who is also our investor-in-chief, feels that a tariff war is like a walk in the park.   That stance, along with a Federal Reserve that has raised interest rates twice this year so far and appears intent on raising them two more times this year – and four times next year – have a lot of investors fretting. Is a recession coming soon? Is a trade war around the corner?

Calm is less interesting to reporters than tense, but tense is what we have too much of today yet what we have to invest through.

Let me share a few perspectives that may put today’s troubles in some prospective.  First, tariffs.

Tariffs are not good.  They are, essentially, a tax on consumers.  Government gets some revenue but gums up the efficiency of commerce in the process and interferes with competitive improvements. I really don’t think Trump wants a tariff war, but he wants to make a point that the press, which is so relentlessly negative on him, will not help the public hear. Facts tells us that other countries put higher tariffs on our goods than we put on theirs.  Recent World Trade Organization figures tell us that AVERAGE USA tariffs on other nations are 3.5%, compared to 4.1% for Canada, 5.2% for Europe (the EU), 7% for Mexico, and 9.9% for China.  Sound like small differences, I know, but with very big numbers at stake, large amounts of money is extracted from Americans.

These percentages are, again, averages. Individual products flowing between trading partners can be higher or lower than the WTO averages. For instance, cars going to the EU from America are hit with a 10% tariff, but cars from the EU into the USA are hit with only a 2.5% tariff.  Is that fair?

On the other hand, pick up trucks going between the EU and the USA are tariffed in the opposite way; that is, the EU hits US imported pick ups with a much lower tariff than America hits EU pick ups coming into the USA.

We don’t hear these nuances on our news.   We hear only that Trump is trying to force tariffs on nations.  Again, Trump is demonized. But the President’s larger point  – for all his bluster and exaggeration and too much tweeting – is, “Hey! guys, why don’t we  – all of us – do away with tariffs altogether.”

My guess is that, in time, Trump and the US, because we are so large a trading partner, will force others to accord the US better tariff treatment.  That’s my guess.  I don’t believe a tariff war is coming: it would hurt our trading partners so much more than it would us.  I commend Trump for his courage and fortitude to try to make trading fairer for our workers, for the USA, and for others. The fact that other US Presidents ignored this injustice makes it no more right than that those same Presidents ignored US laws governing illegal immigration.

As for the Fed, here, too, context is lost.  We see only higher rates and that spells recession is around the block.

I beg to differ. Interest rates are still low, by historical standards, but moving up slowly, reflecting a strong and improving economy after ten years of being on bed rest or trapped by a President who was not particularly interested in economic growth.  And economic growth is a key element here. As long as the Fed’s rate increases do not get ahead of economic growth, we’re probably fine with respect to avoiding a recession.  What that means is that the Fed’s short term rate (“the Fed funds rate”) is right now between 1.75% and 2%, and is still below the ten-year treasury note (about 2.9%) and the growth rate of the economy.  That last number is a key, and the Atlanta Federal Reserve Bank estimates that the economy, in this second quarter of 2018, is growing at 4.7% a year. We’ll know better in a month or so, but that Atlanta Fed number is a stunner.  In the Obama years, the economy was growing, on average, at about 2% a year, and we were told that our aging economy couldn’t grow faster, that we should get used to “a new normal” and more government intervention.

My guess, folks, amid the heat and humidity of summer in the Midwest USA, is that we’ll get through the tariff stuff, after some threats and drama, with something better than we currently have in America, and that interest rates’ upward movements are not about to kill us or throw us into a recession. Not that we will never have a recession again, please know, but that we’re not about to have one yet.

So, as Lynch and Buffet told me I tell you: be a contrarian.  Stick to your convictions, and don’t let you emotions hijack your retirement.

God bless you all.


Posted in economic recovery, fear, investment myths, investment wisdom, market corrections, Market falls, retirement investing, stock rallies, Successful living | Leave a comment

Up, Down, But – Seemingly – Going No Where

At least, that’s what it seems like so far in 2018.

I can live with that, but I don’t know if you can. I hope you can. The market was up about 35% from Trump’s election night, Nov. 8th, 2016, up to the last week in January of 2018.  Since then, it has been churning in a period of digestion, or consolidation, of all those hefty gains. Since January 26th, 2018, American markets have been up at most about 7% and down about the same, all in the last four months. This could go on a while longer.  Right now, we’re up a little bit, between 1% and 2%, the kind of return you might get, or could have earned, from a nice ,on-line saving account, without any of the wretched volatility that we’ve lived through these last, four months.

Wait! Am I now subtly recommending that you turn your money over to an on-line saving account?

No, not at all.

However, I would strongly suggest that you have liquid assets, like checking and saving accounts, equal to several months of your needed expenses.  All your loot should not be in markets where values change all day long.

For your longer-term investments, I just hope you don’t lose heart with the amusement-park-like quality of the markets of late – up, down, all around, and going no where other than scaring you. If you’re an investor, you just have to learn to ride this kind of roller coaster.

Moreover, after a long weekend where many of us might have pondered more important matters, like the sacrifice of others for our collective liberty, our markets opened this morning in a hissy fit. It can be tough enough coming back to work after a long weekend, but this time we complicate things with a market noticeably in the red.

Hey, it happens. And it may go on for a while.

The immediate cause of today’s market challenges is Italy, that romantic playground in southern Europe where debt is deeper than the Adriatic Sea.

This morning, the Italians are struggling to form a government (yet again – almost 70 of them since WW II!). The two, extreme parties that polled best in the country’s recent election, parties seen as populist and hostile to the European Union and the euro, tried to form a ruling coalition.  But in Italy, unlike in America, the winners’ plans to form a coalition must be submitted to elites for approval. Well, the elites do not like the people of Italy questioning the EU or the euro, so the winners’ planned coalition has been nixed by the elites. (Can you imagine that happening in America?  Say, someone like a Donald Trump wins the Presidency, but an elite group – maybe, in America, made up of the press and opposing politicians, try to deny his elected legitimacy?  It could never happen in America, could it?).

So, these nasty, populist vs. elitist developments in Italy have fueled “risk-off” markets for now in Europe that have carried over to America and global markets, which are contending with their own already, basket full of ongoing uncertainties surrounding trade matters, diplomatic dealings with North Korea, and brewing challenges for emerging markets due to the strengthening dollar.

But of all these things, it is Eurozone matters that are the main driver of the feeling of market dis-ease this morning. Not surprisingly, yields for the 10-yr Italian treasury bond climbed almost overnight 39 basis points (or over 1/3 of a percent) to 3.08%.  Which to me, by the way, editorially speaking, still seems like a bargain.  We’re talking about Italy here, after all. America’s 10-year treasury early last week traded at 3.10% – two, one hundredths of a percent MORE than Italy’s treasury yield today!!! (America’s now at 2.88%, because of investors seeking a safe haven away from places like Italy). Would you rather own a ten-year Italian treasury or a ten-year US treasury? Which do you perceive to be the safer bet for the next ten years?  I’d put my chips on America, in spite of all our problems. But in Italy’s case, the more than a 1/3 of a percent rise so quickly is the ominous part.

The latest Greek, or I mean, rather, Roman tragedies for the eurozone are not new. It is sort of like Mt. Kilauea, in Hawaii, which has been active for a long time, but is now erupting again and catching everyone’s attention.

There has for a long time been an active lava stream of concerns about the survival of the European Union and the euro.

From time to time, those concerns erupt and leave everyone wondering if the end is near. This is, again, now likely the start of one of those times, but like the tourists and residents of Hawaii taking photos next to a lava flow, things are still at a stage where there is more wonderment than true fear the European Union is cratering.

In any event, to shift to the brighter side of investing for a moment, what’s going on in Europe could also be seen as a positive for the U.S. market. America certainly has some nasty political hangups, but the U.S. already has, and lives by, a regular and peaceful transfer of power, has an economy that is running relatively well right now, and a stock market that is exhibiting relative strength versus many other developed countries’ markets.

So the year grinds on.  “Sell in May and go away” has not proven the best of advice for investors this year.  But it’s only May 29th, and the market has today and two more days to play out.  It could get better. Or worse. We never know. Last year, everyone wondered, “Where’s the volatility?” Well, it turns out we were saving it for 2018. It’s here. It’s now.  But don’t let it scare you into making foolish choices with your long-term investment funds. Yes, you need short-term liquid funds to pay your bills.  But longer-term, you need equity-oriented investments that will help you with inflation and in growing wealth for later life.

God bless you all.


Posted in elections, fear, investment myths, investment wisdom, market corrections, Market falls, market volatility, Personal Finance, retirement investing, spending, stock rallies, Successful living | Leave a comment

The Water Torture Continues and What to Do About It

The stock market has been driving a lot of sensible people crazy the last several months. And I’m not sure it’s done yet. After a great January, there have since been some wild swings up and down. No less than five times the Dow lost 500 or more points in a single trading session, plummeting by more than 1,000 points two of those times. Not to be ignored, the S&P 500 index closed 10% or more below its late January peak, not once, but twice.

And it all happened so fast.

That’s bad stuff. I hope, in spite of it, you are and continue to be able to focus on the long-term and not let your emotions take over amid these distressing, dramatic market moves. However, with trade war fears in the air, concerns about inflation, gas prices, rising interest rates, and debate around regulating the best performing sector of the market – the tech sector – you’re not the least bit crazy if you’re inclined to want to stop investing altogether. While there’s a lot of speculation as to what is causing these market hiccups, the reality is we just don’t know what it is or what’s ahead. In some ways that may feel worse because in so many ways, the economy looks so good. But what I do know is that the market is displaying some regularly-seen patterns, and we can learn something from them.

So then, first, what kind of advice can I give my worried or anxious investors?

The same advice that I often give you: Do nothing but try to stay calm.  If you or I were day-traders, then I’d have other advice.  But that’s not the point of this blog, and I find day-trading very dangerous business.

If there’s anything the day-by-day gyrations of the market teach us long-term retirement investors, it’s that slow and steady wins the race. Investors have long known that staying the course is one of the most important things to do – it’s just emotionally hard to do sometimes. Some of the best research on this topic comes from the so-called “Wizard of Wharton” – University of Pennsylvania professor Jeremy Siegel. In his 1997, New York Times best-selling book, Stocks for the Long Run, Siegel looked at the performance of equities from 1802 through 1997 – almost 200 years of investing.

His findings were, I think, astonishing: Despite the kind of day-to-day volatility that we have all been feeling the last few months, the actual long-run returns of stocks are remarkably consistent.

Here’s how he summarized his findings:

Source: Jeremy SpiegelTotal Return Index,” Stocks for the Long Run

What a chart!

Despite extraordinary changes in the economic, social, and political environment in this nation over the past two centuries, stocks have yielded between 6.6 and 7.2 percent per year after inflation, in all major sub-periods (or about 10% before inflation). The wiggles,dips, and bumps on the stock return line represent the bull and bear markets that equities have suffered throughout history. However, the long-term perspective the chart offers should radically change anyone’s view of the risk of stocks. The short-term fluctuations in the market, which loom, day-to-day, so large for investors, have little to do with the long-term accumulation of wealth.

Read that last line again.

Prof. Siegel found that almost no matter what period you looked at – the Civil War, World War I, World War II, Presidential assassinations, even the Great Depression (marked by the second black vertical line) – were mere hiccups compared to the overall trend. Stocks delivered about 7%, after inflation.

The pattern Siegel highlights in the history of US stocks repeats itself in other countries, including those that have experienced catastrophic collapses. World War II, for example, sheared 90% off the value of German equities – 90%!!!! – but German stocks completely rebounded by 1958, rising 30% per year on average from 1948 to 1960. German stocks went on from there to new highs. Averaged out over the long haul, their return is a consistent 6.6% annual, a number not far from Siegel’s 7%, post inflation, a figure that continues through this day.

The same is true for Japan, the UK, and all other markets that Siegel studied. Overall, everywhere, and all the time, in the short-run, we get volatility, but in the long run, wealth building.

Why, at moments like we’ve been in for the past three months, we don’t hear much about the power of long-term investing – and the truth about the futility of trading – is that long-term investing is, for the financial media at least, boring, unsexy, and cheap. The financial media thrives on encouraging you to panic, and large parts of the financial industry make money only if you do. Big moves sell newspapers, and high trading activity means commissions for online brokers. The only people who don’t profit from that activity are investors themselves.

The last three months have not been pretty and it’s not been easy doing nothing. It’s hard to stare down such a quick and significant market correction that ignores the best corporate earnings in the last seven years and the most significant tax reform in 30.  It’s hard in such a climate to stick to your knitting.

When the US government shut down in September 2013 during one of several recent budget showdowns, lots of people panicked. The same was true during the Greek Crisis, Brexit, and the last U.S. presidential election. But people who left the market or who stayed on the sidelines have paid handsomely for missing out on the 35% market rebound following the 2016 election up to the end of January, 2018. Markets, on average, recover from corrections in less than 90 days once they’re over, but corrections can, on average, run about three-to-nine months.  Remember, too, that markets rise about 2/3rds of the time and fall only about 1/3rd of the time.  Right now, we’re in one of those latter times.

If you invest regularly at work or in your IRA and rebalance your portfolio periodically, you’ll end up benefiting from market corrections in multiple ways. It won’t be painless or easy. But over the long haul, it can really pay off.

Try not to fret.

Posted in economic recovery, fear, investment myths, investment wisdom, market corrections, Market falls, market volatility, Personal Finance, retirement investing, saving, Successful living | Leave a comment