Friday, June 28, 2013

Keeping the Long-Term Faith

After a very noisy drop over a couple of days last week, the stock market has been making a bit of a comeback this week. Through yesterday, the S&P 500 has actually had its best three-day stretch since the very beginning of the year, rising by 2.6 percent.

That doesn't quite make up for last week's slide, after the Fed made clear that its bond-buying program would eventually have to end. The S&P dropped 3.9 percent in two days at that point, and even with this week's rally, it's still down 1.1 percent for June, with one trading day left in the month.

But with 2013 almost exactly halfway in the books, the S&P is still up a strong 13 percent for the year. Even with the plunge over most of the last month - the S&P lost more than 5 percent of its value between May 21 and June 24 - it's been a very good year to be invested. One more lesson in avoiding the short-term roller-coaster movements of the market, and keeping your eye on the long term.

Thursday, June 27, 2013

The Rout in Bond Funds

The stock market has stumbled in recent weeks, but the bond market has been faring even worse. With long-term rates climbing by about 1 percent since the beginning of May, bond prices - which, remember, move in the opposite direction of their yields - have been plummeting. In the past month, every single fixed-income category tracked by Morningstar has posed a negative return.

And bond investors have been rushing to get out of the market. Through the first three weeks of June, bond mutual funds and ETFs have had $62 billion pulled out of them. That's already $20 billion more than the previous record for bond outflows in a month, set back in October 2008, in the midst of the financial-sector collapse.

Prior to June, there had been $115 billion deposited in bond funds and ETF this year. So the June withdrawals have already wiped out roughly half of this year's new fixed-income assets.

Wednesday, June 26, 2013

How Can Consumer Confidence Still Be Strong?

The surprisingly strong June consumer confidence numbers that came out yesterday may seem like a bit of a fresh start after the Wall Street meltdown we suffered through last week, but there's more to this than meets the eye. For one thing, the survey was conducted prior to June 13th, and the market started its steep decline nearly a week later, on June 19.

Nevertheless, a five-year high in consumer confidence is enough to get one's attention. The largest factor was increasing optimism about the job market, as well as the recent growth in the housing market. Add it up, and you get consumer confidence at its highest since January 2008, at the very onset of the recession.

Employment and housing are probably bigger factors in consumer confidence than stock prices, so the June figure might not have been hurt too badly by the market's decline even if it had been factored in. It will be interesting to see if the stock drop has any effect on July's confidence reading.

Tuesday, June 25, 2013

Dividends Still Growing

With all the bad news that came down from Wall Street last week, it's nice to be able to point to a positive development in the stock market world: Dividend growth continues to be strong. At this point, the vast majority of the stocks in the S&P 500 are dividend-payers, with the 409 such companies in that index representing a 14-year high.

And the amount those companies is paying out keeps growing. The first quarter sum of $319.8 billion paid out in dividends surpassed, by nearly 20 percent, the peak from before the financial crisis in 2008-09. Dividends per share for the first quarter grew 15 percent from the previous year.

The S&P 500 has been very strong in recent years, rising by 26 percent over the past 24 months. But its dividends have been even stronger, increasing by 30 percent over that time frame.

Monday, June 24, 2013

The Shrinking PC Inudstry

The fitful, protracted sale of Dell Computers this year has epitomized what has been a rather sudden downturn in the fortunes of personal computer manufacturers. After months of squabbling and dealmaking, the latest offer to Dell shareholders is to take the company private at $13,65 a share, despite the fact that an asset management firm that is one of the major investors in the company estimates the stock to be worth $24 a share.

Dell's fate is not unlike that of another once-formidable PC giant, Hewlett-Packard, now struggling to find its legs once again. The emergence of tablets and smartphones has greatly reduced the markets for PCs; personal computer sales fell by 4 percent in 2012, and according to Citgroup, they are forecast to fall another 10 percent this year.

As recently as 2010, PC sales grew by 14 percent, a solid if unspectacular number. It remains to be seen if this industry will ever have another year that strong again.

Friday, June 21, 2013

The Market's Plunge

Fed chairman Ben Bernanke, at the conclusion of the Federal Reserve’s meeting on Wednesday, came out and basically said the Fed wasn’t changing any of its policies, either its near-zero interest rates or its asset purchases. Nevertheless, the S&P 500 and Dow Jones Industrial Average  just concluded their worst day of the year.
What happened? Bernanke simply alluded to the fact that the Fed’s bond buying was going to have to come to an end at some point. He even put a bit of a definition on it, saying that when unemployment reaches 7 percent, the economy would have improved enough to warrant a tapering of the asset buying. The unemployment rate is currently at 7.6 percent, and most projections have it falling to around 7.0 percent by the end of the year.
The Fed’s asset purchases have been a great boon to the bull market we’ve enjoyed over the past four years, so any tapering or ending of them is likely to have a dampening effect on stock prices. But investors should have known that the purchases were going to end at some point. The surprise here is mostly that the reaction has been so swift. After all, as Bernanke said, for the moment nothing has changed.

Thursday, June 20, 2013

Active Management in 401(k)s

A new study from the Vanguard Group has revealed that more and more 401(k) participants are turning to professional advice, and finding it can make a real difference in bolstering their retirement savings plan. Back in 2007, only 17 percent of Vanguard’s 401(k) account holders were invested in a professionally managed option. By 2012, that figure was up to more than a third. Vanguard expects half of all its 401(k) plan participants to be invested in such plans by 2017.
At the same time, though, participation in plans has stalled out or even dropped. The average deferral rate was 7.3 percent in 2007, but has dipped slightly to 7.0 percent now. You can probably blame the recession for that.

Maybe the more important figure adds in employer matches to 401(k) accounts. The average total contribution rate, counting both employer and employee contributions, is now 10.5 percent, meaning the average worker is getting just over 10 percent of his or her salary put away for retirement.

Wednesday, June 19, 2013

The Falling Cost of Health Care

Consumer inflation, as reported by the Labor Department, came in very low in the latest report yesterday – an increase of just 1.4 percent over the past 12 months. But maybe the most interesting aspect of that report was what’s been happening to health care costs. The price index for medical care — a figure that includes products, such as drugs and supplies, and services, such as doctor and hospital visits — fell 0.1% in May. The largest factor was a drop in prescription drug prices of 0.6 percent.

That is highly unusual, to say the least. Incredibly enough, the last time the medical costs index dropped for even a single month was way back in 1975, or nearly 40 years ago. 

Over the longer term, medical costs rose by 2.2 percent over the past 12 months, which slightly outpaced the overall inflation figure. Even so, that’s the lowest annual medical inflation we’ve seen since the 1970s.

Tuesday, June 18, 2013

Avoiding Bad Charities

We all would like to leave a legacy behind us, and it's cruel the way many charities prey on the goodwill of people, just to line their own pockets. Earlier this month, The Tampa Bay Times, in conjunction with the Center for Investigative Reporting, produced a list of America’s 50 Worst Charities, in order to help us stay away from some of the worst offenders.

The report said that America's worst charity is one called Kids Wish. Kids Wish claims to provide similar services to the Make a Wish Foundation, which grants wishes for terminally ill children, and plays off the similarity in the names. Kids Wish raised $18.6 million last year, much of it through telemarketing, and spent just $240,000 on the kids it was supposed to help. Make-a-Wish – which never uses telemarketers – raised just $3.1 million last year, but spent $1.8 million on helping children.

Nonprofits should be transparent about how they raise and spend their money. Before making a sizable donation to anyone, demand to see their financial accounts. And take pains to avoid any of the 50 Worst

Monday, June 17, 2013

The Outlook on Higher Interest Rates

The Federal Reserve has employed two primary weapons in its battle to bolster the economy in recent years. One has been its asset-buying programs, known collectively as quantitative easing. Since Fed chair Ben Bernanke announced back in late May that the end may be in sight for that program, the market has reacted badly, with the S&P 500 dropping 2.5 percent since then.

But the other side of the approach is that the Fed has kept interest rates at near-zero levels in hopes of making money available for investment. If and when it eases up on that policy, the markets could react very favorably.

According to a study conducted by Bloomberg News, the Fed has raised interest rates four times in the past 30 years, and the S&P 500 has responded by rallying an average of 16 percent over the next two years. The most recent instance of the Fed hiking interest rates was back in 2004, after which the S&P rose by 11 percent over two years.

Friday, June 14, 2013

Dropping Fees for 401(k)s

Here's a little bit of good news for people depending on 401(k)s as a cornerstone of their retirement savings: The fees on such accounts continue to decline. The average expense ratios for 401(k) accounts dropped by 2 basis points in 2012, the third straight year in which they fell.

The average expenses for equity funds held in 401(k)s are now 0.63 percent, and the expenses for bond funds are 0.50 percent. The expenses for hybrid funds, which invest in both stocks and bonds, are naturally in between the two, at 0.50 percent.

It's worth noting that 401(k) participants tend to enjoy much lower expense ratios than other investors. In 2012, while 401(k) investors in equity mutual funds were paying that 0.63 percent expense ratio, the average expense ratio on a stock fund sold in the United States was more than twice that, at 1.40 percent.

Thursday, June 13, 2013

Going Macro

The Business Roundtable, an assemblage of CEOs at large American companies, had some gloomy news in a survey released yesterday. Although 78 percent of the respondents said they expected their company's sales to increase over the next six months, just 37 percent said they plan to increase their company's capital spending, and just 32 percent said they plan to expand their company's workforce.

Not coincidentally, the CEOs expect the American economy to continue to grow at an anemic pace. The same survey predicted that GDP would increase at a rate of 2.2 percent for 2013, which would match the rate of growth for 2012.

There was a piece of good macroeconomic news yesterday: The U.S. government announced that it was on track to post its lowest budget deficit in five years. The deficit for the first eight months of the current fiscal year - which started on October 1, 2012 - is down 26 percent from the year-earlier period.

Wednesday, June 12, 2013

Watching the Market's Volatility

In case you haven't noticed, the markets have gotten much choppier lately, with a lot more volatility than we saw in the first few months of this year. Out of the first seven trading days in June, through yesterday, the Dow Jones Industrial Average had moved up or down 100 points up or down at some point during the day on six of those days.

How unusual is that? Through the first 60 trading days of the year, the Dow had seen just 21 days with swings that big, or just about a third of the time. Clearly, something has been happening in June.

Does this portend more volatility in the long run? It might. The VIX index, which is designed to predict the market's volatility, has been inching upwards lately - but it's still not very high, at 16.79. The VIX has been below its long-term average of 20 for this entire year.

Tuesday, June 11, 2013

The Exclusivity of Financial Planning

Have you prepared a long-term financial plan for your household? If you do, you're in the minority. According to a Gallup survey, only 43 percent of Americans with annual incomes greater than $75,000 bother to do so. Only 35 percent of the people in that income bracket work with a certified financial planner or accountant to set up a financial plan.

One thing most upper-income Americans do is use a computer or online program to help manage their money. Among those with an income of more than $75,000, some 53 percent reported doing so. But only around a quarter of the people in lower income brackets said they did even that.

The planning activity that is similar for all income ranges is preparing a monthly budget. While 39 percent of upper-income people do that, 30 percent of those in the $30,000 to $74,999 range report doing so, and 32 percent in the bottom bracket.

Monday, June 10, 2013

Strength in Banking

One sector that has really been doing well in our economy this year has been the banking industry. In the first quarter of this year, FDIC-insured institutions had net income of more than $40 billion. That's an increase of 16 percent over the same period in 2012.

The banking sector's profits have now increased on a year-over-year basis for 15 straight quarters - that's nearly four years. Basically, since the market rebounded in early 2009, the banking industry has been gaining strength. It's widespread, too - half of the 7,000 banks with FDIC insurance reported their earnings had increased last quarter.

For the year, through Friday, the S&P 500 has been very strong, showing an increase of 12.3 percent. But the financial sector within the S&P has been even stronger, rising by 21.3 percent.

Friday, June 7, 2013

The New Normal

This morning's jobs report fit squarely into the "new normal" we've seen in recent months, with the economy adding 175,000 new jobs in May. Over the past 12 months, the economy has added an average of 172,000 jobs per month, so we were right on that mark in May. Nevertheless, the headline unemployment figure ticked up to 7.6 percent.

One thing that has helped that headline number in recent months is that the number of jobs added in prior months has been frequently revised upward. That didn't happen with May's report. The jobs figure for March was revised upward from 138,000 to 142,000, but April's notched down from 165,000 to 149,000. That's a net loss from the previous two months of 12,000 jobs.

The strongest industries in this morning's report were professional and business services, which added 57,000 jobs in May; food services and drinking places, which added 38,000; and retail trade, which added 28,000. The biggest job-losing category was the federal government, which dropped 14,000 jobs.

Thursday, June 6, 2013

Two Sides of the Coin

Two halves of the economy appear to be moving in different directions, according to some economic indicators that have come out this week. While the manufacturing sector shows signs of struggling, the service sector is signaling growth ahead.

Let's do the bad news first: The Institute for Supply Management's factory index shrank in May, and is now down to its lowest level since June 2009. It was the third straight month in which that figure declined. The number dropped from 50.7 to 49, which troubling in a measure where 50 represents the dividing line between growth and decline.

But the services part of the economy continues to grow. According to the ISM's non-manufacturing index, growth in the service industries picked up speed in May. Using the same scale as the manufacturing index, the service index is now at 53.7.

Wednesday, June 5, 2013

Tuesday's Gone

All good things must come to an end: After posting gains for 20 consecutive Tuesdays, a streak running back to January 8th, the Dow Jones Industrial Average finally lost ground yesterday, breaking the string. The Dow finished the day down 76 points, or 0.5 percent.

The five-month-long run was, needless to say, a record for Tuesdays, at least going back to 1900. While the Tuesday streak lasted, the Dow rose by more than 1900 points - and a full 83 percent of those gains had come on Tuesdays. Mondays, by contrast, have actually been negative on the whole for 2013.

The 20-day winning streak isn't a record, though. Schaeffer's Investment Research did uncover one longer weekday streak: There was a string of 24 straight gains on Wednesdays back in 1968.

Tuesday, June 4, 2013

Carmakers Pick Up Speed

The American automaking business appears to be taking a couple of steps forward this week. U.S. consumers bought 1.4 million vehicles in the month of May, which was up 8 percent from the year-earlier period. They've also hired more than 14,000 workers so far this year, and the Center for Automotive Research projects that the car industry will add 35,000 jobs in 2013.

Pickup trucks look like the strongest category right now. General Motors and Chrysler both posted 20 percent gains in sales of full-size pickups for the month. The Ford F-Series pickup, which is the best-selling vehicle in America right now, reached a six-year high by moving more than 70,000 trucks in May.

In a measure of how far things have come, General Motors - which went into bankruptcy in 2009 - will be returning to the S&P 500 index on Thursday. GM will be replacing Heinz, which is going private after being bought up in part by Warren Buffett.

Monday, June 3, 2013

Stock Prices May Be Getting Pricey

Is this stock market getting overpriced? By some measures, it may be getting a little pricey. The most common measure used for stocks is price-to-earnings ratio, of course, and that has been creeping up lately. The S&P now trades at 14.4 times its expected earnings, up from 13.5 earlier in the year. The current P/E ratio is the highest it's been since 2010.

Then again, the P/E ratio for the S&P 500 was significantly higher in 2010. At the beginning of that year, it ticked over 17. And of course, the market was just at the beginning of a multi-year bull run that has continued to this day.

Within that narrow band of movement, between 13 and 17, it's likely that the P/E ratio doesn't serve as a strong indicator either way. You can see that fact in evidence by looking at the price-to-earnings ratios from 2007, just before the market began plunging. At that point, P/E ratios gave no indication that the market was headed for a fall.