Schwartz Financial Weekly Commentary 12/9/13

The Markets

If every piece of positive news was a petal, then you might say the American economy was in bloom last week. Moving into the holiday season, consumer confidence was at a five-month high.

 

Early in the week, manufacturing showed improvement. On Thursday, the U.S. Commerce Department unfurled the news the American economy grew faster than expected during the third quarter of 2013. The next day, it was reported the unemployment rate was at the lowest level since 2008. Hourly earnings increased, as did the length of the work week. Participation in the work force improved slightly, although it remains at historical lows.

 

There are sound reasons to expect America’s resurgence will continue into 2014, according to The Economist. They reported America’s progress was due, in part, to:

 

• Policymakers in the U.S. providing direct government support for failing companies and creating liquid capital markets that helped companies recover after the financial crisis.
• Companies benefitting from an increase in domestic energy production. Often the fuel comes from unconventional sources.
• American businesses leading the way in social media. They are expected to blaze the trail when finding ways to profit from Big Data and developing a sharing economy.

 

There was good news in other parts of the world, too. A global trade agreement – the first major deal in 20 years – was reached that could simplify customs procedures and speed up the flow of goods across the world. CNN Money hailed it as the most significant multilateral trade pact since the World Trade Organization was founded. The agreement has the potential to reduce trade costs by as much as 15 percent, saving developing nations about $445 billion each year, and boost the global economy.

 

Despite the good economic news, U.S. stock markets slumped through Thursday of last week largely because of investors’ concerns that positive economic news would encourage the Federal Reserve to end quantitative easing sooner rather than later. Those concerns seemed to dissipate with the release of positive employment numbers on Friday and markets surged higher.

 

Data as of 12/6/13	1-Week	Y-T-D	1-Year	3-Year	5-Year	10-Year
Standard & Poor's 500 (Domestic Stocks)	0.0%	26.6%	27.7%	13.9%	14.7%	5.4%
10-year Treasury Note (Yield Only)	2.9	NA	1.6	2.9	2.7	4.3
Gold (per ounce)	-1.6	-27.2	-27.2	-4.5	10.0	11.8
DJ-UBS Commodity Index	0.9	-9.8	-12.0	-6.7	2.7	-0.7
DJ Equity All REIT TR Index	0.8	2.9	5.5	10.5	17.4	8.9

Notes: S&P 500, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

 

Let’s take a stroll down memory lane… In a recent issue, The Economist pointed out during March 2009 the prospects for American companies were pretty sketchy:

 

“…The Dow Jones Industrial Average closed below 6,627, a 53% decline from its all-time high less than two years earlier. The number of American firms in the global top ten by market capitalization was on its way down from six to three, and America’s share of the top 50 companies from 50% to 40%. Once regarded even in Communist China as the business model for the world, corporate America had lost its crown.”

 

Oh, the difference just a few years can make! According to an November 18, 2013 article on Economist.com, If we look ahead to 2014, American firms are expected to comprise the majority of the global top ten (when measured by market value) and make up almost two-thirds of the top 50 companies in the world. It’s not all that surprising when you consider the fact, as a headline in Forbes announced, corporate profits are at an all-time record peak making up almost 70 percent of U.S. gross domestic product.

 

That may have something to do with the way Americans are spending their money. Citing an expert from Bank of America Merrill Lynch, Barron’s reported:

 

“U.S. import growth has shrunk from 11% to less than 1% between 2010 and 2013, while job growth has repaired from a negative 1.7% to 1.6%... Domestically produced energy now accounts for 87% of what we consume, up from 70% five years ago, and the share of vehicles sold here that are manufactured stateside has risen from 63% to 73%… We're also spending more on domestic goods and services... Nearly 40,000 Americans turn 65 every week, and aging boomers tend to steer more of their disposable income toward services like medical care, accommodation, and recreation that are typically made in America.”

 

Perhaps what Alexis de Tocqueville, French historian and political thinker, said about America still holds true, “The greatness of America lies not in being more enlightened than any other nation, but rather in her ability to repair her faults.”

 

Weekly Focus – Think About It

 

“When even one American who has done nothing wrong is forced by fear to shut his mind and close his mouth, then all Americans are in peril.”

--Harry S. Truman, American President

Value vs. Growth Investing (12/06/13)

Name	1-Week	YTD	4-Week	13-Week	1-Year	3-Year	5-Year
US Market	-0.01	29.70	2.11	9.52	31.26	16.37	19.09
Large Cap	-0.03	28.56	2.14	9.66	29.62	16.39	17.45
Large Core	-0.13	32.40	1.57	9.62	33.40	18.22	17.96
Large Growth	0.07	28.48	2.98	11.29	28.78	16.36	21.18
Large Value	-0.05	25.32	1.82	7.97	27.21	14.63	13.51
Mid Cap	0.28	32.32	1.78	8.86	35.03	16.32	23.38
Mid Core	0.30	29.09	1.52	9.34	31.08	16.96	24.30
Mid Growth	0.27	29.47	1.95	7.03	32.26	14.06	23.38
Mid Value	0.29	38.61	1.87	10.27	41.95	17.89	22.37
Small Cap	-0.56	34.10	2.76	10.13	37.95	16.03	23.86
Small Core	-0.38	33.26	3.20	10.73	37.15	14.96	23.74
Small Growth	-0.93	37.76	2.39	8.84	42.15	16.80	24.57
Small Value	-0.34	31.46	2.73	10.98	34.73	16.37	23.24
US Core	-0.06	31.72	1.68	9.64	33.13	17.76	19.59
US Growth	0.03	29.23	2.73	10.22	30.26	15.94	21.89
US Value	0.00	28.41	1.90	8.67	30.67	15.41	15.93

 ©2004 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) is not warranted to be accurate, complete or timely. Morningstar is not responsible for any damages or losses arising from any use of this information and has not granted its consent to be considered or deemed an “expert” under the Securities Act of 1933. Past performance is no guarantee of future results.  Indices are unmanaged and while these indices can be invested in directly, this is neither a recommendation nor an offer to purchase.  This can only be done by prospectus and should be on the recommendation of a licensed professional.

 

Office Notes:

 

The One Word that ALL Pre-Retirees Should Prepare for:

The word is …

INFLATION

It’s a scary term that conjures up images of German children stacking useless money in the 1920s, or national governments going broke.  But inflation isn’t just a word for economic textbooks.  It’s something every retiree and pre-retiree should know.

To put it simply, inflation is the rate at which prices for goods and services go up, while the value of currency goes down.  For example, let’s say the inflation rate is at 4%.  At such a rate, a candy bar that costs $1 will cost $1.04 in a year.

Doesn’t sound like a big deal, does it?  Unfortunately, retirement costs a lot more than even the most expensive of candy bars, and it lasts a lot longer, too.  As a result, the impact of inflation can hit harder.  Here’s another way to look at it:

Inflation = 4%
One dollar today	In five years will be worth…	In ten years…	In twenty…
$1.00	$0.82	$0.68	$0.46

So if you retire at age 65, and inflation remains at 4%, the value of your dollar will decrease by more than half in twenty years.  Living until you are 85 has become commonplace nowadays, so this concept isn’t just academic.

Here’s one final way to look at the impact of inflation.  Let’s imagine that you retire at 65 with $100,000 in annual retirement income.  If inflation were to remain at 4%, then the value of your $100,000 would shrink to less than $50,000 in 20 years.  In essence, that means you’ll be living on half of your expected income by the age of 85.  When you think about all the costs that come with retirement (living expenses, medical expenses, spending on leisure) then the thought of living on half your income should be sobering indeed.

Many retirees make the mistake of forgetting to calculate for inflation when they plan for retirement, but it’s something you have to consider.  It’s why sticking all your money into a savings account just isn’t enough.  It’s why proper investing is so crucial—it’s the best way for your money to grow in a way that outpaces inflation.

Keep in mind that I said proper investing is crucial.  There are many ways to invest that, while useful, can also be negatively impacted by inflation.  For example, take bonds.  When you buy a bond, you basically loan money to an entity (either corporate or governmental) for a specific period of time.  During that time, the entity pays you back at a fixed interest rate.  When the term has ended, you then receive back the initial amount you invested to do with as you please.  Bonds can be a good way to generate consistent income for yourself, but again, you have to factor in inflation.  When inflation rises, so too do interest rates.  When interest rates rise, the value of bonds decreases.  So if inflation rises during the term you hold a bond, then the price of your bond will fall.

Actually, fixed income investments in general can be negatively affected by inflation.  As you may know, these types of investments pay a steady stream of money in interest, and then return a predetermined amount to you upon maturity.  But with inflation, the value of that money can diminish every year.  Let’s say your investment pays out a 5% annual return.  But if we stick with the same rate of inflation as before, 4%, then your “real” return is only 1%.  So while you may have a certain return “on paper,” the “real” return on your investment could be substantially lower than you thought.  That makes it much harder to buy the goods and services you need.

The point of all this isn’t to scare you away from bonds, or fixed income investments, or saving for retirement.  The point is that inflation should take its place at the top of your list of things to prepare for.  If you plan ahead, there are ways to protect yourself from a drop in purchasing power. By truly diversifying your portfolio, you can choose investments that act as “hedges” against inflation … which can make all the difference.

You’ve worked hard to earn your money, with the expectation that one day you can retire and truly enjoy it.  Don’t fall short of that expectation.  You owe it to yourself to see your earnings grow rather than diminish.  So if you have questions about how to guard against inflation, or would like to discuss your options, please give me a call at 215-886-2122.  I’d be happy to talk with you.

 

 

Regards,

,

Michael L. Schwartz, RFC®, CWS®, CFS

 

P.S.  Please feel free to forward this commentary to family, friends, or colleagues.  If you would like us to add them to the list, please reply to this email with their email address and we will ask for their permission to be added. 

 

Michael L. Schwartz, RFC®, CWS®, CFS, offers securities and advisory services through Independent Financial Group, LLC., A Registered Broker/Dealer,  Member FINRA-SIPC. 

 

This information is provided for informational purposes only and is not a solicitation or recommendation that any particular investor should purchase or sell any security. The information contained herein is obtained from sources believed to be reliable but its accuracy or completeness is not guaranteed.  Any opinions expressed herein are subject to change without notice.  An Index is a composite of securities that provides a performance benchmark.  Returns are presented for illustrative purposes only and are not intended to project the performance of any specific investment.  Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly.  Past performance is not a guarantee of future results.

 

* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

 

* The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices. 

 

* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

 

* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.

 

* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.

 

* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.

 

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

 

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

 

* Past performance does not guarantee future results.

 

* You cannot invest directly in an index.

 

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