I wish all of my devoted readers (hi, Mom!) a Happy New Year with much success and happiness. This edition’s timing coincides with the Working Women’s Survival Show. It is my life’s mission to help women survive and thrive in the investing jungle.
I believe that when women have a voice, options, information and a community in which to learn, they are better able to make smart decisions with their money, thus creating a lifetime of financial confidence.
Education is critical as it should be remembered that all good things often do come to an end. Financially speaking, some of these endings can be disastrous to your long-term financial objectives. A practical investment process will likely serve you well in good and bad markets. Everyone approaches this differently, though; please develop yours guided by information. I suggest beginning with having a strong understanding of your willingness to handle market fluctuations as well as what lifestyle you would like to achieve.
In developing your investment strategy, educate yourself and consider the end results. This insight will help you derive your own opinion on the economy, investment opportunities, and what you think is an appropriate manner to proceed. Albert Einstein said “know where to find information and how to use it---that is the secret to success.” As a starting point, let’s review some data and where to find it. These data points are not all-encompassing, rather a starting point in your journey towards your investing Ph.D.
Some topics we previously discussed were the yield curve and inversion, market historical performance and correlations, demographics, credit card debt, and current events.
The yield curve is the difference between the interest rates on short term United States government bonds and longer term United States government bonds. Typically in a healthy economy, the rates on long term bonds will be higher than short term bonds. The extra yield (aka interest) is to compensate for the risk that economic growth will likely cause an increase in prices (aka inflation).
New York Federal Reserve President John Williams said the yield curve inversion is “a powerful sign of recessions.” According to research from the Federal Reserve Bank of San Francisco, every recession of the past 60 years has been preceded by an inverted yield curve.
The week starting December 3rd, 2018, the short end of the Treasury yield curve inverted (2-5 year and 3-5 year) for the first time since 2007. The U.S. Department of the Treasury’s website is a great resource to find the various terms along with their yields. This can be viewed at https://www.treasury.gov/ resource-center/data-chart-center/interestrates/ Pages/TextView.aspx?data=yield.
The chart below shows the 10 Year Treasury Constant Maturity minus 2 Year Treasury Constant Maturity as of 12/3/18. It’s produced by the Federal Reserve Bank of St. Louis and can be viewed at https://fred.stlouisfed. org/graph/fredgraph.png?g=mjHn.
(Shaded areas indicate U.S. recessions; Source: Federal Reserve Bank of St. Louis) I believe it vital to be aware of the market’s historical performance to manage volatility. According to BTN Research, since the end of World War II (1945), the S&P 500 has suffered 3 bear markets that sustained losses of at least 40%. These bear markets are:
• 48% drop in 1973-1974
• 49% drop in 2000-2002
• 57% drop in 2007-2009
Understanding how different investments move in relation to each other can be valuable. The names for these movements are called correlation. Correlations can range between – 1 to 1. A perfect positive correlation means that the correlation coefficient is exactly 1. This implies that as one security moves, either up or down, the other security moves in lockstep, in the same direction. A perfect negative correlation means that two assets move in opposite directions, while a zero correlation implies no relationship at all.
A common investment allocation is 60% in stocks (S&P 500 Index) & 40% in bonds (Bloomberg Barclays U.S. Aggregate Bond Index). According to Bradley Krom, Associate Director of Research at WisdomTree, investors have been lulled into a sense of complacency with this allocation. Mr. Krom states this allocation “may feel like they’re diversified between stocks and bonds, the fact is that their portfolio remains dangerously exposed to equity market returns.” Mr. Krom shows that, as of 9/30/18, the current rolling 12 month correlation between 60/40 and the S&P 500 Index is at 0.99.1
Consumer spending is vital part of the American economy; and thus a large contributor to Gross Domestic Product (GDP). Though it varies by year, the Personal Consumption Expenditures (aka consumer spending) accounts for approximately 70% of the U.S. economy. Monitoring the underlying drivers of spending can be helpful as you consider the probabilities of future outcomes.
It has become common to purchase items using credit cards. If fully paid off when the bill is due, it can be an efficient way of purchasing items. The problem becomes when those statements are not paid off in full. According to the Federal Reserve, as of August 2018, credit card debt in the U.S. debt peaked at $1.02 Trillion in May 2008 before falling off during the global real estate crisis. It eventually hit a low of $832 Billion in April 2011. However, credit card debt has now climbed all the way back to a record level of $1.04 Trillion.
It has been said that demographics is destiny. This seems logical to me as people near, enter and mature into their retirement years. As this occurs, people tend to spend less than they did in their 20s & 30s. According to Social Security, 15% of the US population was at least age 65 in 2017. By the year 2030, 20% of the population will be at least age 65. Over that 13 year period, the number of Americans at least age 65 is projected to increase by +44% while the overall US population is forecasted to increase just +11%.
A current event that may have economic and political implications is the United Kingdom’s scheduled exit of the European Union (EU) on Friday 3/29/19 after 46 years of membership. The “Brexit” decision was put in motion with a 6/23/16 vote. After the UK’s exit, the EU will be comprised of 27 nations. This is just one of many geopolitical tensions between the U.S. and its international partners.
I hope this article provides a strong foundation in your journey developing a thoughtful investment process. Education is powerful and work towards creating a lifetime of financial confidence.
If you are concerned for your financial future, email me at JAMES.KNAPP@ LPL.COM or view more educational resources at www.KnappAdvisory.com.
Thank you for reading, James C. Knapp, AIF®
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The Standard & Poor’s 500 (S&P 500) is an index of 500 stocks seen as a leading indicator of U.S. equities and a reflection of the performance of the large cap universe, made up of companies selected by economists.
The Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollardenominated, fixed rate taxable fixed income.