Are you a glass half full, or a glass half empty, kind of person?
Market Roundup
Assuming the former, you’re probably happy with the stock markets’ performance this week. That’s because the Dow Jones Industrial Average, Nasdaq Composite Index, and Standard & Poor’s 500 Index all hit a record high yesterday simultaneously.
Assuming the latter, you probably care about history. And you may be aware that the last time the major averages made records simultaneously was … December 31, 1999. Within a couple of months, the dot-com bubble burst, the economy slipped into recession, and the Nasdaq suffered the worst crash in history – one it didn’t recover from for a decade and a half.
Let’s take this analysis a step further, as the Financial Times does in this fascinating article. It notes that the S&P 500 has doubled since the 2000 peak, after accounting for dividends.
But if you take inflation into account, the return drops to 40%. That’s still respectable, just not eye-popping. What’s much more shocking is that plain-vanilla, boring, long-term Treasuries have TROUNCED the return on stocks.
As a matter of fact, the S&P 500 has underperformed a Bloomberg index that tracks long-term government bond returns by a whopping 50% … and done so with much less intervening volatility. We all remember how stocks crashed twice since 2000, while bonds just kept on trucking.
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| What’s more shocking is that boring, long-term Treasuries have TROUNCED the return on stocks. |
Even this year … and despite the six-week rotation we’ve seen out of “weak economy” plays and into “economic rebound” names … the iShares 20+ Year Treasury Bond ETF (TLT) is up almost 17%. That’s roughly twice the return of the SPDR S&P 500 ETF Trust (SPY).
Then there’s the whole question I posed earlier today: Is that multi-week sector rotation for real or not? The answer depends on what the underlying economy is doing, and the news today stunk.
Wholesale inflation, as measured by the Producer Price Index (PPI), dropped 0.4%. That was much worse than the 0.1% gain that was expected. Core PPI dropped 0.3%, compared with an expected 0.2% gain. Soooooo money printing isn’t spurring real economy inflation then?
Even more important, retail sales flat-lined in July. That was far worse than the 0.4% gain that was expected. Ex-auto sales fell 0.3%, compared with forecasts for a rise of 0.1%. And ex-auto, ex-gas sales dropped 0.1% against a forecasted 0.3% rise. In other words, this wasn’t a case of a few headline categories dragging down the number. There was noted weakness across the board.
We’re already seeing tightening lending standards in key sectors like commercial real estate and autos. We’re already seeing a slowdown in GDP driven by lousy business spending and investment. IF the consumer catches a real cold, it’s hard to see where growth will come from.
But hey, stocks hit a record yesterday. So is it time to party like it’s 1999? Place your bets! And if you’re interested in MY answers, you can get them in two places:
First, I’m hosting a critical online briefing called “Cracking the ‘T’ Code: The little-known chart pattern that could make you 5 times richer in 12 months or less.” It’s scheduled for Tuesday, August 16.
You’ll discover how you can go for gains of 234% … 270% … and up to 412% in as little as 14 days. You’ll get my outlook and forecasts for the rest of 2016 and 2017. And you’ll see how you can keep your wealth intact AND growing, in today’s crazy and chaotic world.
Registration is completely free. Just click this link to save your seat.
Second, I’m hopping on a plane to Canada just over a month from now to share my market forecasts in person at The MoneyShow Toronto. The event runs September 16-17 at the Metro Toronto Convention Centre.
I’m participating in a panel discussion, delivering a solo presentation, and taking as many questions as I can from investors like you. If you’re in the area, I’d love to meet up. The event is also completely free. Just register online by clicking here or calling 800-970-4355 and mentioning priority code “041484.”
Until next time,
Mike
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Do lower and lower interest rates encourage more saving versus borrowing and spending? That’s the question I posed earlier this week, and several of you weighed in with your take.
Reader Justin said that yes, the lack of interest earnings on savings are hitting his personal bottom line: “I’m having to spend principal instead of being able to live off the interest of savings. As such, I am doing a considerable amount of ‘belt tightening.’ Stock and bond valuations are so elevated, it is not ‘safe’ to establish long-term positions. Historically, when such lofty elevations were achieved, symmetric corrections followed.
“The only reason that valuations remain elevated is because of prolonged central bank activism. The problem is that these economic distortions induced by central bank activism have gone on for so long, that they have become the new-normal.”
Reader Joan reported a similar impact on her personal finances, saying: “Of course these rates are hurting me. I have complained about it for years now. I am 84 years old and trying to live on zero interest rates on retirement savings. This is of course impossible, and has caused me to deplete assets as well as cut spending dramatically. I am part of the middle class that has disappeared.”
As for Reader Stu, he sees all kinds of distortions arising out of ultra-low interest rates: “You’re right, Mike — the race to lower (and negative) interest rates has had unintended consequences. Hopefully those people who have been forced to save more have bought precious metal instruments, especially quality junior gold/silver stocks.
“There are bubbles everywhere — be it car loans, student loans, mortgages, lines of credit, government debt and so on. I’m expecting everything to start blowing up before the U.S. election in November. We’ll see what happens.”
As for his finances, Reader David B. said: “I have paid down to where I have no debt and I’m accumulating funds in my retirement and brokerage accounts. I expect there to be a market correction at which time I will invest a larger percentage of my funds in the market again. With people like me doing this, why would a business borrow to expand if people aren’t willing to buy?”
In response, Reader Gordon said: “They are borrowing only to buy back their own stock, shrink the stock base, and make earnings look good. The CEO laughs all the way to the bank, and front-line workers get the paring-down ax.”
Finally, Reader Dave H. highlighted one of the additional paradoxes of ultra-low rates: They make paying off previous debts one of the best “investments” out there. His take:
“The lack of opportunities to earn interest means the next best step in personal finance and home budgeting is to pay off debt. I have a 3.375% mortgage, which is the lowest interest rate I pay. That means paying off debt carrying even that low a rate (not to mention credit card rates) offers a better return than Treasury bonds and other savings vehicles. Another example of ‘collateral damage’ caused by a clueless and trapped Fed.”
Thanks for sharing these great observations. The list of distortions from NIRP/ZIRP is long indeed, not just on the value of assets like stocks but on personal finance decisions like those Dave H., Justin, and Joan highlighted. We’ll have to see if the U.S. can ever get out of this trap – but nothing I’ve seen to date is encouraging on that front.
Any other comments you’d like to make that I haven’t covered yet? Then don’t hold them in. Join the discussion here at our website.
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China’s economy may be downshifting again after a stimulus-driven surge in recent months. Industrial production rose just 6% year-over-year in July, missing forecasts, while so-called fixed-asset investments on things like factories and buildings rose 8.1%, also missing forecasts Lending activity plunged massively between June and July – with one measure of broad credit growth falling to 487.9 billion from 1.63 trillion.
Meanwhile, in Europe, Italian GDP flat-lined in the second quarter – missing expectations for a gain of 0.2%. But German GDP rose 0.4%, beating forecasts for a rise of 0.2%.
You have to love the oil market, and its reactions to fake OPEC headlines. Crude oil jumped more than 4% yesterday after a Saudi energy official said his country might do something to support prices. But we’ve seen the same thing happen approximately 100 times in the past couple of years.
It never happens, of course. Each OPEC informal discussion and formal meeting ends in failure. In fact, oil production is surging in former market pariah Iran, and it just hit an all-time high in Saudi Arabia. But anyone short oil gets a kick in the pants each time.
How impressive is Michael Phelps’ Olympic medals record? Well, he now has 22 gold medals and 26 medals overall. Thirteen of those golds were individual medals, rather than those he earned as part of a swimming relay team.
According to the New York Times, that has now pushed him past Leonidas of Rhodes – who won his 12 individual gold medals back in 152 B.C. Now THAT’S a record to stand the test of time!
On the economic front, what do you think of the latest data? Should we be worried about a Chinese slowdown, or the mixed news coming out of Europe?
What about oil? Will OPEC ever cut production again, and help to bolster prices? Any thoughts on Phelps’ storied swimming career, the fantastic performance of the U.S. gymnastics team, or anything else going on at the Rio Olympics? Let me hear about them in the comment section below this weekend.
Until next time,
Mike Larson
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
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Enjoy your every end of day comments and also your Safe Money Report articles
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Why aren’t your retiree readers more diversified? Haven’t 35 years of declining interest rates convinced them to have at least 50% of financial assets in high quality, dividend paying stocks?Maintenance of income is as important a financial objective as preservation of principal.
I wonder if it will it take another 2,000 years to see Michael Phelps’ record broken, given that the Olympic Movement will still be around then.
I think OPEC is caught in the “classic” between a rock and a hard spot. If they cut production and prices rise to the $65 to $70 level, that will bring the U.S. frackers back on board. Their lead time to bring on new production is short, only a few months. I believe that will put a lid on oil prices for quite a while. Warms my heart to see OPEC being squeezed.
Mike, Please Google Executive Order 12631 and read it carefully. Via EO 12631, the Federal Gov’t today completely controls all financial markets and has unlimited funds at its command to do so. This is not a conspiracy theory. Since the 2008 market meltdowns the Fed. Gov’t, via EO12631 has little by little taken control of all financial markets.There is no longer any such thing as free markets in our capitalistic society today. Actual market fundamentals are all irrelevant. The upside of this Government control is that the markets will never again crash. All markets will continue to trade only within ranges the Fed. Gov’t permits and will remain stable, give or take whatever upside or downside the Fed. Gov’t desires in order to simulate an appearance of free markets.
Consumer spending has dropped. Major retailers and restaurant chains are planning closures in large numbers. If the consumer is what has been propping up the economy, this is a warning sign. Tax revenues have dropped, as income levels are not generating the anticipated tax revenue. Savings rates are up. Cornered animals can sense and sometimes sense danger ahead.
Mike
Been 100% on the sidelines in equity since March 2013. Waiting for the big one to hit. The big companies have been laying off employees to increase their cash flow and big investors like Buffett has been selling to increase his equity to do pretty much what I am waiting for, the opportunity of my life. People just are not spending. You want to put your money into the best stocks, put it in health insurance companies. Premiums will increase as much as 25% next year. Don’t be concerned about who becomes president, it will have the same impact on the economy and the stock market adversely. I think the bottom will happen shortly after the election or towards the middle of the first quarter in 2017.
If Trump is elected, I feel we will be at war with Iran and it will result in WW3. If Clinton is elected, our military will become much more degraded, especially if the house and senate majority leadership changes.
Time will tell
Mike,
As there is no marginally safe area to collect income in this market, I have been fully invested in stocks until a couple of months ago, and have systemically been going to “Useless” cash.
I have been early before and expect my patience will be tested. Ultimately it will be right to have dry powder when future bargains arise.
Low interest rates hurt the older generation, as they worry about running out of money before they die. However, their increased savings are at least partly due to the fact that they already have most everything they need, excepting consumables. And they have a variety of options to survive, not least of which is social security. Younger folks, however, are hugely benefitted by low interest rates, as they build homes and families, pay back loans, etc.
By the way, today I bought a preferred stock that yields 8.7% and has a beta of 0.05. And there’s plenty of other stable stocks that yield 5+%. So how about some emphasis on that, and stop whining how it’s impossible to get yield.
Mike, just returned from Toronto so I will miss the chance to see you. But you should remind your readers that the exchange rate (it takes about $0.77 to buy one C$) means Canada is on sale at a 23 percent discount.
Hi Mike: As an Engineer I can tell you that the glass is not half full and the glass is not half empty; the glass is twice as big as it needs to be. Have a safe trip to Toronto and Cheers along the way.
Will
Beware of the Chinese Bear
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“Doubts about the reliability of China’s official data are now the rule rather than the exception,” Bloomberg Briefs explains. “The latest eyebrow-raising incident: The sudden suspension of the Minxin Index – an attention-grabbing monthly release that showed small businesses already in recession.” Unquote.
Well if you are going to print money Willy nilly then you have to pay the piper (feds). It’s amazing all these years how the general public don’t realize the value of money is deluted by quantative easing and it is basically a hidden tax which is two fold. One being the reduction of the buying power of the dollar due to the inflation created by more money in the pool. Two the taxpayer has to pay this printed promise back for this fake note to the feds.
They will soon be knocking on the doors of all who live in this country. It’s called a recession. Nothing and no one can stop. That’s why it’s called quantitative easing as it is just a brake before the collision with the inevitable.
I can’t comment about the Olympics because I don’t watch them. The only events I like are ping pong and field. Neither of these get much play.
Speaking of Germany, I read that Deutsche Bank is down 56% in the last year, and down 84% since it’s high in 2007. It’s director said in Feb., that it was in fine shape. Do you believe him?
By the way, the IMF singled out DB as the “most important contributor to international financial stability”.
The principle problem in relation to road space reflects the tragedy of the commons once road tax is paid, everyone has access the road network at all times. In the short term the supply of road space is relatively spaced.