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2017 Predictions

By | 2017, Money Moxie, Newsletter | No Comments

Market movement since Election Day has been massive and investors see this as confirmation of just how good Republicans are going to be for the economy. How could so many investors be wrong? Actually, fairly easily.

Right or wrong, investors should be careful not to get carried away. There is a high amount of uncertainty and no way to know what the future will bring.

(1) Trump Rally
The big move in stocks in November and December has been an acceleration of the positive momentum already taking place in the economy. It has been characteristic of many presidential election years with a good economy.

It is completely normal to get excited, but don’t let it lead to overconfidence. Few things last forever and most years have their ups and downs.

It is not unusual to see inauguration day (Friday, January 20, 2017) mark a change for investors as they realize the new president does not have a magic wand.

(2) Dow 20K
The Dow stock index has been flirting with 20,000. It just could not quite get there in 2016. In 2017, I believe it will! And it will likely cross that mark many times.

The first time the Dow reached 10,000 came in March of 1999. Over the next 11 years, it crossed that level on 34 days until it surpassed it a final time in the summer of 2010.

It’s hard to fight gravity and it’s hard to turn a large ship. There is so much positive momentum right now that I expect it to continue. Unemployment is falling. Wages are rising. Confidence is climbing.

One unknown is the impact of policy changes on global trade, which may decline this year as the United States turns its focus inward.

(3) Fed Does Its Job
The Federal Reserve is likely to “take away the punch bowl just as the party is getting started.”

For two consecutive years I have accurately predicted that the Fed would be more cautious than its own forecast. This year, I am accepting the Fed’s forecast that it will raise rates 3 times in 2017.

Of course, no one knows with certainty because with each rate hike, I expect investors will become more concerned.

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2016 Review

By | 2017, Money Moxie, Newsletter | No Comments

“If you want to see the sunshine you have to weather the storm.” In its first 3 weeks, 2016 delivered investors more than a 10 percent loss–the worst start in 80 years. Our natural human instinct at such moments is to feel that it will continue, but predicting the markets is extremely difficult.

In a dramatic turnaround, the U.S. stock market rose in February and March–recording the best recovery in 83 years.

(1) Fed will move slowly. The Federal Reserve planned to raise rates 4 times in 2016. This aggressive forecast in combination with falling oil prices spooked investors. Then came the uncertainty of Brexit and the U.S. elections. By year end, the Fed raised rates just once (in December).

(2) Election years are not recession years. I expected the economy to grow and for the market to continue to rise as our bull market entered its 8th year.

This positive outlook proved beneficial in the early days of 2016 when the resolve of many investors was tested. The market turned positive and remained there for most of the year.

(3) United States grows and the dollar slows. A strong U.S. dollar is not as good as it sounds. Sure, it’s great for Americans traveling overseas, but it presents challenges for large U.S. companies and investors.

The year began with too much strength: From July 2014 to January 2016, our dollar rose against every major currency around the globe! It gained 20 percent versus the euro and 54 percent versus the Russian ruble!

Fortunately, the U.S. dollar spent 9 of the last 12 months below January 2016 levels. That gave investors more opportunity as we invested globally.

This international diversification helped a great deal until a great divide formed in November.

These investments have taken a break as U.S. stocks rose in November, but I believe the worldwide economy still looks positive and may offer benefits to investors again in 2017.

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Election Year Update on Markets

By | 2016, Money Moxie, Newsletter | No Comments

The bull market is seven years old. Global growth is anemic and corporate profits are no longer rising. These suggest that bad times are ahead, but I don’t believe it. I believe the U.S. consumer and the U.S. economy will continue to rise.

In January I made three predictions for the New Year. This month I would like to review these predictions with a special emphasis on the election—not only because I have been right (so far), but because each is helping the economy press forward.

Election Year

(1) The Fed will move slowly.
The Federal Reserve entered the year expecting to raise rates four times. In recognition of slow global economies, it now plans to encourage growth by keeping rates low. Moving rates up only twice this year could be better for stocks and bonds.

(2) Election years are not recession years.
Investors fear uncertainty, and election years have experienced greater fluctuations than other years. The stock market typically begins the year a little slower and then recovers before spring. Summer slowdowns occur most years, but in election years they come earlier.

Regardless of which party has a candidate in the lead, stocks typically improve as the election gets nearer. In fact, many investors are tempted to stay away until after Election Day. This simple strategy would have only delivered lost opportunity in most election years. The greatest gains actually occur in the months leading up to the election. By the way, keep an eye on the market in September and October, because a strong stock market preceding the election also appears to favor the incumbents and their parties.
I do not expect the current rally that began in February to continue without disruption. From February 11, 2016, through the end of March 2016, the S&P 500 rallied 12.6 percent. If it continued at that rate for the rest of the year, we would have a whopping 150 percent return. The market will slow down and election year history suggests this will take place in April.

Since 1927, the U.S. stock market has been positive in election years 80 percent of the time. Remember, there are no guarantees. An election year had not had a bear market loss of -20 percent anytime in the last 50 years, then came the worst presidential-election year. In 2008 the Dow lost over 38 percent. The best election year was in 1996 when the Dow gained 26 percent. Since 1900, the average has been a positive 7.3 percent.

I don’t recommend sticking our heads in the sand or placing our investment dollars on the sideline. Staying invested for the long-run is a critical part of a solid strategy.

(3) The United States will grow and the dollar will slow.
The 500 companies in the S&P 500 index receive roughly half of all their sales from overseas. So, when the dollar rises by 30 percent like it did in 2014 and 2015, it really depresses profits and makes stocks look less attractive.

The good news is that this trend has slowed down and maybe even reversed. The U.S. dollar declined in value by 4 percent in the first quarter of 2016. I view this as a positive, since we are coming off such lofty highs. The changing value of the dollar should improve U.S. growth in 2016.

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When Will Stocks Go Higher?

By | 2016, Money Moxie, Newsletter | No Comments

Stocks got off to a rough start in January and February as investors began to fear another recession. At the same time, consumers continued to keep the U.S. economy moving in the right direction. This divergence caused us to ask, which one is right? Are things getting better or worse? If the market is going to improve how strong will it be? Below is a list of what I think we need for stocks to move to new highs. Feel free to check the boxes if they become a reality.

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(1) Oil prices stabilize.
Investors need a dose of reality: low oil prices are good for the economy. Falling oil prices often follow, but do not lead to, recessions. What we need is for prices to stop declining so rapidly.

Oil is falling because the global supply is much
greater than demand. Even at these low prices, producers need to pump oil for cash. Fortunately, the decline is slowing. This is because demand and supply are getting close to a balanced level.

Global oil demand is at 96.5 million barrels/day and growing at 1.5%. Global supply is at 96.9 million barrels/day and is currently falling at a rate of -0.5%. This does not mean prices will move significantly higher, but they may stop falling.

With sanctions lifted, Iran could boost supply by 4 million barrels/day. Demand won’t grow fast enough to balance that much oil for a few years.

So, get used to low oil prices. They may be with us for a while–probably until several indebted producers cease oil production. At that point, oil prices could rise a little, fear over corporate debt should ease, and stocks will be more likely to climb.

(2) Political frontrunners emerge.
Who will be the next President of the United States? Investors are uncomfortable with this uncertainty, but they don’t have to wait until Election Day to feel better. With each election primary, the uncertainty diminishes.

(3) The Fed acknowledges global volatility.
What happened to “data dependence”? With its December rate hike the Federal Reserve announced that it intends to slowly raise rates in 2016 and 2017. It defined slowly as four rate hikes of 25 basis points each.

Rather than applaud transparency, investors have questioned the Fed’s determination.

Globally, central banks are doing the opposite: dropping rates to levels below zero in order to encourage risk taking, economic growth, and job creation.

(4) Evidence of consumer spending increases.
Will consumers continue to hold up this economy? The U.S. consumer represents 70% of the U.S. economy. China, on the other hand, represents approximately 2% of direct trade with the United States. That means that the consumer is 35 times more important.

Consumers are stronger than any time in the last 25 years. They are pocketing roughly $1,000 a year in energy savings. In 2015, spending increased 3% while purchases rose for autos (+5.8%) and homes (+7.5%).

With all of the good news about the consumer, the main concern is if these numbers are peaking. I think not. Unemployment is low (4.9%). Job postings are high (5.4 million). Wages and salaries increased by a reasonable and healthy level (+2.9%).

The final bit of good news on the consumer is that their debt-to-income levels are near their lowest point since the government started tracking them in 1981. That means there is still room for this 70% of the economy
to grow.

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Investing in 2016 The Fed and Election Years

By | 2016, Money Moxie, Viewpoint | No Comments

January MarketPoint_Page_1

(1) Historically, when rates rise they rise sharply, but “this time will be different.” This phrase raises a red flag. However, I see no need for the Federal Reserve to increase rates quickly. Our economy is growing slowly and inflation is near zero.

Oil and food are unlikely to keep dropping in 2016 like they did in 2015. So, inflation may rise. (Without food and energy inflation is currently 2 percent.)

The Fed stated it may raise rates 4 times this year, but I am not convinced it will do that many.

Normally, rate hikes would be negative for bonds, but U.S. bonds are still paying attractive dividends compared to others overseas.

(2) Election years are not recession years. The economy will expand as the recovery in the United States enters its 8th year. The next slowdown is coming and no one knows when. However, I don’t see convincing data for its arrival in 2016.

Election years usually start positive, slow down in the summer, and then rally in autumn–similar to most years. However, the rally in the fall does not typically begin after election day like many investors believe. It usually begins before the uncertainty is over–catching many off guard that are waiting. The average for a presidential election year is 9 percent.

(3) United States grows and the dollar slows. Global diversification should help investors in 2016, but the United States will continue to be a financial leader. Global returns will hinge on the U.S. dollar.

Since July 2014, our dollar has risen in value against every major currency around the globe! It gained 20 percent versus the euro and 54 percent versus the Russian ruble!

Why the big move? In all the world, our economy is one of the best and we are the only ones raising rates. Both of these make our dollar more attractive to global investors.

With so many countries lowering rates to stimulate growth, it is possible their economies will strengthen and the dollar’s rise will slow. Overall, this would be good news. It would likely help those that have diversified globally.

market graph

Does 2015 offer any clues as to what 2016 will bring? In 2015, the S&P 500 finished within 1 percent of where it started. This has only happened in 4 previous years (1947, 1948, 1978, 2011). What happened following those respective years? In 3 out of 4, the market was up more than 10 percent. The outlier was 1947. It was followed by another low return year and then came the double digit. Of course, there are no guarantees.

History does firmly support the value of diversification and investing over the long run.

 

*Research by SFS. Data from Federal Reserve Bank of St. Louis. Investing involves risk, including potential loss of principal. The S&P 500, S&P 600, and Dow Jones Global are indexes considered to represent major areas of stock markets. One cannot invest directly in an index. Diversification does not guarantee positive results. Past performance does not guarantee future results. The opinions and forecasts expressed are those of the author and may not actually come to pass. This information is subject to change at any time, based upon changing conditions. This is not a recommendation to purchase any type of investment.

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Stocks Finish Their Worst Year Since 2008

By | 2016, Money Moxie | No Comments

“It’s tough to make predictions, especially about the future.” One cannot argue with these words from Yogi Berra, who passed away September 22, 2015. After all, conditions in the world change much more frequently than people would like. With that said, let’s review my predictions for 2015 and discuss what changed last year.

January MarketPoint_Page_2_A

(1) Oil prices will remain near their lows until a major supplier cuts production.
No major supplier cut production and oil prices did end the year lower–lower than any reasonable forecast would have stated. We began the year at $53.45 and finished at $37.53 per barrel. That’s a 74% drop from $145 in 2008.

This is great news for U.S. consumers! It’s hard to remember the last time a stop at the gas station was so cheap!

January MarketPoint_Page_2_B

(2) Job growth and wage growth will continue. Our economy averaged 220,000 new jobs per month, which is over 2.6 million added in 2015. Unemployment continued its steady decline as it fell from 5.7 to 5 percent.*

This tighter labor market should increase wages, but the increase last year in income was just 2 percent–positive, but not as strong as I thought it would be.

(3) The Federal Reserve will be more patient with rates than most investors expect. The consensus view 12 months ago was that the Fed would raise rates in June. It turned out to be December and it was just a quarter of one percent.

January MarketPoint_Page_2_C

(4) Increased volatility will continue in 2015. The S&P 500 rose 3.5 percent, fell over 12 percent, rose almost 13 percent, and then finished down for the year. The S&P 500 rose or fell at least 1 percent twice as many days compared with 2014. December, one of the best months historically, was negative by more than 3 percent.

(5) The world will not pull the United States into recession. Our economic growth rate is 2.2 percent and it appears that the U.S. economy has helped lift those of other nations around the globe.

 

*Research by SFS. Data from Federal Reserve Bank of St. Louis. Investing involves risk, including potential loss of principal. The S&P 500, S&P 600, and Dow Jones Global are indexes considered to represent major areas of stock markets. One cannot invest directly in an index. Diversification does not guarantee positive results. Past performance does not guarantee future results. The opinions and forecasts expressed are those of the author and may not actually come to pass. This information is subject to change at any time, based upon changing conditions. This is not a recommendation to purchase any type of investment.

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Rising Rates Will Impact: Your Income Your Spending Your Investments

By | 2015, Money Moxie, Newsletter | No Comments

Federal Reserve (Fed) members are making plans to raise interest rates and it is going to affect your wallet! Individuals do not borrow from the Fed, so you may be wondering how it could impact you. The Fed’s rate increase will start economic ripples that are going to hit your income, your spending, and your investments.

The Fed
The Fed was established by Congress and signed into law by President Woodrow Wilson on December 23, 1913. It has two objectives: seek maximum employment and maintain stable prices. (It is a highly sophisticated organization with over 300 Ph.D. economists.)

In simpler terms, the Fed is less like a surgical tool and more like a hammer. A hammer is blunt and its impact can be powerful. It doesn’t perform a lot of functions, but it is extremely useful for the right problems.

The Fed has power to perform a limited number of actions. It can strike hard and fast because it does not need congressional approval and its officials are not elected. The Fed is not focused on individuals as its actions have worldwide implications.

Why the Fed Changes Rates
The purpose of changing rates is to influence decisions that will help control unemployment and inflation.

In a slow economy: If spending decreases then companies become less profitable and may choose to layoff workers, which will further decrease spending and profitability. The Fed will try to reverse the cycle by lowering rates. When the Fed rate changes, other rates follow. This may encourage spending as it makes it cheaper to borrow for education, cars, homes, etc.

In a healthy economy: When the economy is thriving and the job market is good there is a lot of pressure on companies to raise wages. Confident consumers will spend more even if prices rise a little. When prices increase beyond a “healthy rate” of around two percent, the Fed gets worried. It may raise rates to decrease borrowing and spending.

Rates will Rise
Rates have been low since 2008 when the Fed brought short-term rates down near zero percent. Those who were able to borrow benefited from low interest rates. Right now the Fed is not worried about price inflation, but it does want to get rates back up to “normal.”

bag of money

Your Spending
The result will be higher rates when you take out a mortgage or get a loan for a new car. Anything with a variable rate, like some credit cards, will probably see an increase. Debt is going to get more expensive. Paying debt off and living within your means will be important.

Your Income
The labor market is improving. Many companies have announced plans to raise wages for workers, but the expected improvement has not yet hit. It’s coming!

briefcase

Wage growth was just around 2 percent in the last year and the Fed believes the country is headed towards 3.5 percent. This is good news for workers and it gives the Fed confidence to slowly raise rates to normal. However, if wage growth is too high the Fed will become uncomfortable and will really drop the hammer down—acting quickly, with force just to make sure prices don’t get out of control.

Your Investments
Back in 2013, Ben Bernanke, then Chairman of the Fed, suggested the Fed might end (taper) its stimulus. The stock and bond markets went crazy! The event even has a name: “The Taper Tantrum!” In the end, the Fed continued its stimulus.

The Fed is unlikely to catch investors by surprise when it finally does raise rates. Its members have been quite open about its plans and the economy is able to withstand a very gradual rise in rates.

percentage

Investors should expect more volatility, but in spite of the choppiness, the returns should still be positive. That’s what we have seen in the past.

Prepare Your Personal Economy
Make sure you are saving some income for rainy days even if it means cutting back on a little spending. Make sure the risk you are taking in your investments matches your ability and willingness to handle it. Finally, align your portfolios for the future.

Will the Fed hike rates in September? Will it be just 0.25 percent? How long will the Fed wait to make its next move and will it go too far too fast? The answers will be “data dependent,” a phrase the Fed members have been using lately. It will depend on U.S. economic growth, wage growth, and price inflation.

A gradual economic improvement will allow time to digest the news and act slowly—waiting months between each rate increase to see the impact. There are no signs of overheating for now. If that changes, the Fed is not going to sit idle. It would have to act. After all, to a hammer, everything looks like a nail.

 

*Research by SFS. Data from public sources. This is not a recommendation to purchase any type of investment. Investing involves risk, including potential loss of principal. The S&P 500 index is often considered to represent the U.S. market. One cannot invest directly in an index. Past performance does not guarantee future results. The opinions and forecasts expressed are those of the author and may not actually come to pass. This information is subject to change at any time, based on market and other conditions, and should not be construed as a recommendation of any specific security or investment plan.

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Powerful Performance

By | 2014, Money Moxie, Newsletter, Viewpoint | No Comments

Economic growth in the United States was slow last year as the federal government dropped one potential bomb after another. However, none of these exploded and U.S. stocks had their best year since 1997. With all this positive momentum would it be too much to ask for an encore?

In January we escaped a close call with the fiscal cliff. Then came sequestration. By May, Ben Bernanke had dropped another bomb: tapering. Before the end of 2013 we endured a government shutdown.

Duds

Interest rates shot up last year with fear the Federal Reserve (Fed) would slow its bond-buying program. In 2014, this action is slated to become a reality.

Each month the Fed plans to slow its purchases by $10 billion. As it does, let’s keep in mind that any purchase is extra stimulus to the economy. The Fed is still flooding the economy with money. Some may compare this to pushing on a string, but the last few years have helped validate the phrase “Don’t fight the Fed!”

As the Fed becomes less involved as a driver of economic growth we may see more ups and downs in the stock market. In all likelihood, the coming year will be more volatile than last year.
When the next drop comes, let’s keep in mind that it is perfectly normal even in a healthy market to have some hiccups. A fall of 10 percent in stock markets occurs on average about once a year. These drops can even be healthy for long-term growth.

According to the Wall Street Journal, strategists believed the economy would slowly improve and the market would rise 8.2 percent in 2013. It rose 30.
This year, the economy is expected to grow faster, but predictions for stocks are more moderate.

The driving forces of growth should be similar. Domestic energy production is still rising. The housing recovery is underway. Employment is improving. Wages are expected to rise and changes in consumer spending are trending in a positive direction.

Improving economic growth does not necessarily mean more stellar stock returns. Sometimes the two can be out of sync as investors look to the future for something to get excited about. Nevertheless, stocks and the economy are closely related and the economy is still heading in the right direction for now.

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