Dear Clients and Friends:
We are always seeking ways to enhance the value DV Financial provides. During our client meetings we try to identify common and consistent areas of concern. Over the past couple years we have been asked with increasing regularity about strategies to help maximize social security benefits.
How and when to begin drawing social security benefits is one of the most important decisions many people make concerning retirement. A wrong choice, unless it corrected within a year, continues for life.
We recently purchased new technology which mathematically calculates every strategy for drawing social security benefits and suggests which strategies you should consider. It even shows the “cross-over” points between strategies. All we need for this analysis are recent social security statements and 15 minutes of your time[i].
If you are over age 55 and not yet drawing social security benefits we want to help. Because we are so passionate about the importance of making an informed decision, there will be no charge or fee for a social security consultation. Please feel free to share this offer with anyone you feel could benefit.
Records are about to be broken
Our current bull market began in 2009. Other bull markets have outperformed, but this current economic expansion is poised to become the longest running expansion since WWII[ii]. As measured by the S&P 500, we expect it will become the longest on record.
According to the National Bureau of Economic Research, the official arbiter of recessions and economic expansions, the current expansion began in July 2009. It has run exactly 10 years, or 120 months, matching the 1990s expansion–see Table 1.
While the economic recovery is entering record length territory, it has not been as strong as past expansions according to data from the St. Louis Federal Reserve. In the 1990’s expansion, starting in the second quarter of 1996, U.S. gross domestic product (GDP) exceeded an annualized pace of 3% for 14 of 15 quarters. It exceeded 4% in 9 of those 14 quarters[iii].Source: NBER thru June 2019
Economic booms and long-running expansions can encourage risky behavior. People forget the lessons learned in prior recessions and overextend themselves. Consumers can take on too much debt. Businesses may over-invest and build out too much capacity. We saw euphoria take hold in stock market speculation in the late 1990s and we also watched it create a housing bubble at the beginning of this century.
The lazy pace of today’s economic environment may actually be blessing. Slow and steady has prevented speculative excesses from building up in much of the economy. In other words, the mistaken realization that the good times will last forever has not taken hold in today’s economic environment.
Where are we today?
Right now, inflation is low, the Fed is signaling a possible rate cut, and credit conditions are relatively easy. For the most part, speculative excesses aren’t building to dangerous levels. Even though stock prices are near record highs, valuations remain well below levels seen in the late forward P/E levels of the 1990s. Our current lower interest rates also lend support to richer valuations.
Of course, market volatility will persist. While stocks have a long-term upward bias, the upward march has never been and never will be a straight line higher. Your financial plan is designed to keep you grounded during the periods when volatility encourages you to react to the markets. Such emotional decisions are rarely profitable.
Current economic risks
The Conference Board’s Leading Economic Index is not signaling a contraction before the end of the year. However, a protracted trade war would have a short-term negative impact on the global and U.S. economies, business confidence, and business spending. Exports account for almost 14% of U.S. GDP[iv]. While exports have grown over the last 20 years, we have never experienced a U.S. recession caused by global weakness.
Trade barriers with China are unlikely to tip the economy into a recession by itself. Per the U.S. Bureau of Economic Analysis and U.S. Census data, total exports to China account for just under 1% of U.S. GDP. Even with higher tariffs, exports to China won’t grind to a halt and erase 1% of GDP.
What’s difficult to model is the impact on business confidence and business spending, which in turn could slow hiring, pressuring consumer confidence and consumer spending. We are in uncharted territory. There isn’t a modern historical precedent to construct a credible model which has led to the heightened uncertainty we’ve seen among investors.
Is a recession inevitable?
The U.S. has long been in a repeating pattern of economic expansion followed by economic contraction, but the pattern does not necessarily need to repeat indefinitely. Earlier in June, the Wall Street Journal highlighted, “Australia is enjoying its 28th straight year of growth. Canada, the U.K., Spain and Sweden had expansions that reached 15 years and beyond between the early 1990s and 2008. Without the Sept. 11, 2001 terrorist attacks, the U.S. might have, too.”
If trade tensions begin to subside and if the fruits of deregulation and corporate tax reform kick in, we could see economic growth well into 2020 and beyond.
The problem is, we often don’t know in advance when the economy suddenly alters it’s course.
The Fed to the rescue
Rising major market indexes for much of the year can be traced to positive U.S.-China trade headlines, a successful pivot by the Fed, and general economic growth at home.
We witnessed a modest pullback in May after trade negotiations with China hit a snag. The threat of tariffs against Mexico added to the uncertain mood until June 4th, when Fed Chief Jerome Powell signaled the Fed would consider cutting interest rates to counter any negative economic headwinds. While Powell is not promising to deliver any rate cuts, the CME Group set the odds of a rate cut at the July 31st meeting at 100%[v].
Lower interest rates are a tailwind for equity valuations. When rates are low, stocks face less competition from interest-bearing assets. However, the correlation between interest rates and stock valuation does not exist in a vacuum. Economic growth is also a major influence on stock prices. In 2001 and 2008 lowering interest rates failed to stem the outflow out from stocks as economic growth faltered. Conversely, rising rates between late 2015 and September 2018 didn’t squash the bull market either. During the mid-1980s, mid-1990s, and late 1990s, it was both the rate cuts by the Fed coupled with economic growth which fueled market gains.
It’s not a coincidence that bear markets coincide with recessions and the bulls are inspired by economic expansions. Ultimately, steady economic growth has historically been an important ingredient for stock market gains.
Recognize what you can control. You can’t control the stock market, you can’t control headlines, and timing the market isn’t a realistic tool. But together, we can control your investment portfolio. Your portfolio is a blend of your time horizon, risk tolerance, and financial goals. There is always risk when investing, but we tailor our recommendations with your specific financial goals in mind.
If you’re unsure or have questions, let’s have a conversation. That’s what we’re here for.
Please feel free to reach out to us by email or call (515) 255-3354. We especially enjoy when you share our value with others and consider it the highest form of complement. If you know of others who seek answers to calm their financial nerves, we would appreciate the introduction.
Thank you for the opportunity to serve as your financial advisor.
Art Dinkin, CFP®
This newsletter contains general information that may not be suitable for everyone. The information contained herein should not be construed as personalized investment advice. Past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this newsletter will come to pass. Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security. Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices do not account for any fees, commissions or other expenses that would be incurred. Returns do not include reinvested dividends. The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 actively traded “blue chip” stocks, primarily industrials, but includes financials and other service-oriented companies. The components, which change from time to time, represent between 15% and 20% of the market value of NYSE stocks. The Nasdaq Composite Index is a market-capitalization weighted index of the more than 3,000 common equities listed on the Nasdaq stock exchange. The types of securities in the index include American depositary receipts, common stocks, real estate investment trusts (REITs) and tracking stocks. The index includes all Nasdaq listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds (ETFs) or debentures. The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is a market value weighted index with each stock's weight in the index proportionate to its market value. The Russell 2000 Index is an unmanaged index that measures the performance of the small-cap segment of the U.S. equity universe. The MSCI All Country World Index ex USA Investable Market Index (IMI) captures large, mid and small cap representation across 22 of 23 Developed Markets (DM) countries (excluding the United States) and 23 Emerging Markets (EM) countries*. With 6,062 constituents, the index covers approximately 99% of the global equity opportunity set outside the US. The MSCI Emerging Markets Index is a float-adjusted market capitalization index that consists of indices in 21 emerging economies: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey. Barclays Aggregate Bond Index includes U.S. government, corporate, and mortgage-backed securities with maturities of at least one year. [i] Not associated with or endorsed by the Social Security Administration or any other government agency. The Retirement Analysis gives estimates based on your actual Social Security earnings record. Please keep in mind that these are just estimates. We can’t provide your actual benefit amount until you apply for benefits, and that amount may differ from the estimates provided. [ii] St. Louis Federal Reserve, Yahoo Finance, LPL Research [iii] St Louis Federal Reserve [iv] U.S. Bureau of Economic Analysis [v] As of June 28, 2019 – probabilities subject to change