Dimensional Fund Advisors
The surge in stock prices around the world in the first quarter serves as a reminder that predicting market trends can be a frustrating business. Six months ago, the outlook for stock prices appeared to be fading from grim to grimmer: Congressional leaders were wrangling unsuccessfully to craft a deficit reduction plan, Standard & Poor’s had removed its AAA rating on US Treasury obligations, and Greece appeared one step away from defaulting on its debt. Yet just when many investors least expected it, stocks staged a powerful rally: From the low for the year on October 3, the S&P 500 Index rebounded 28.1% through March 30 while the Russell 2000 Index jumped 36.2%. As the news excerpts below suggest, it is worth recalling the Wall Street adage that "bull markets climb a wall of worry."
- August 5, 2011—S&P downgrades US Treasury debt to AA+ from AAA; stocks plunge in the biggest selloff since 2008.
- September 3, 2011—Journalist: "The US economy slammed into a wall in August, failing to add new jobs for the first time in nearly a year."
- September 5, 2011—Gold reaches a record high of $1,895 per oz. (London Fix).
- September 19, 2011—Wall Street chief equity strategist: "I don’t think we’ve seen the lows for the year by any stretch. Things have to get much worse before they get better."
- September 23, 2011—Journalist: "The world economy once again stands on a precipice."
- September 26, 2011—Investor: "I don’t see anything changing in the next two or three years."
- October 1, 2011—Economist cover story: "Unless politicians act more boldly, the world economy will keep heading towards a black hole."
- October 3, 2011—US stock prices slump to their lows of the year: 1099.23 for the S&P 500 and 609.49 for the Russell 2000 Index.
- October 13, 2011—Census Bureau reports the weakest income growth over a ten-year period since records began in 1967.
- October 20, 2011—Col. Muammar el-Qaddafi killed by Libyan rebel forces.
- November 20, 2011—Consumer goods CEO: "Consumers everywhere continue to be cautious and hesitant to spend."
- November 21, 2011—US Congressional "supercommittee" fails to reach deficit reduction agreement.
- November 24, 2011—Market strategist: "Earnings growth is very quickly decelerating."
- November 28, 2011—Moody’s Investors Service warns that multiple countries could default on their debt.
- November 29, 2011—AMR Corp., parent of American Airlines, files for bankruptcy.
- December 10, 2011—Detroit’s mayor predicts the city will run out of cash by April 2012.
- January 6, 2012—Gasoline prices are at the highest point ever for a new year.
- January 18, 2012—World Bank: "Developed and developing-country growth rates could fall by as much or more than in 2008–09."
- January 18, 2012—Eastman Kodak files for bankruptcy.
- January 25, 2012—Report from Davos World Economic Forum: "Global elite fears renewed downturn."
- February 13, 2012—Journalist: "There is still plenty that could go wrong in Europe, while U.S. economic growth remains slow and corporate earnings are looking less and less robust."
- February 27, 2012—Money manager: "This is a business-as-usual overpriced market and you’ll get a zero return for seven years."
- March 2, 2012—Eurostat reports that Eurozone unemployment in January reached 10.7%, the highest in fifteen years.
- March 12, 2012—Strategist: "The stock market has effectively doubled since the March ‘09 low, and we’re still in redemption territory for equity funds."
- March 19, 2012—Journalist: "Expectations for earnings have been steadily scaled back this year, as the mood among companies has worsened
- E.S. Browning, "Downgrade Ignites a Global Selloff," Wall Street Journal, August 9, 2011.
- Sudeep Reddy, "Job Growth Grinds to a Halt," Wall Street Journal, September 3, 2011.
- Quotation from Adam Parker, chief US equity strategist Morgan Stanley. Jonathan Cheng, "Wall Street’s Optimism Fades," Wall Street Journal, September 19, 2011.
- Chris Giles, "Financial Institutions Stare into the Abyss," Financial Times, September 22, 2011.
- Tom Lauricella, "Pivot Point: Investors Lose Faith in Stocks," Wall Street Journal, September 26, 2011.
- "Be Afraid," Economist, October 1, 2011.
- Phil Izzo, "Bleak News for Americans’ Income," Wall Street Journal, October 13, 2011.
- Kareem Fahim, "Qaddafi, Seized by Foes, Meets a Violent End," New York Times, October 21, 2011.
- Quotation from Jim Skinner, chief executive of McDonald’s. Jeff Sommer, "From the Mouths of Executives, Little Comfort," New York Times, November 20, 2011.
- Jonathan Cheng and Brendan Conway, "Panel’s Failure Sinks Stocks," Wall Street Journal, November 21, 2011.
- Quotation from David Rosenberg, chief market strategist, Gluskin Sheff & Associates. Tom Petruno, "Wall Street Gets Cautious on Earnings," Los Angeles Times, November 24, 2011.
- Brendan Conway and Steven Russolillo, "No Year-End Stock Surge in Sight," Wall Street Journal, November 26, 2011.
- Liz Alderman and Stephen Castle, "Dire Warnings Are Building on European Debt Crisis," New York Times, November 29, 2011.
- "Nowhere to Run—The Motor City Flirts with Fiscal Disaster," Economist, December 10, 2011.
- Ronald D. White, "Gas Prices Ring in 2012 at a High," Los Angeles Times, January 6, 2012.
- Chris Giles, "World Bank Warns on the Risk of Global Economic Meltdown," Financial Times, January 18, 2012.
- Chris Giles, "Pessimism Hangs in Mountain Air," Financial Times, January 25, 2012.
- Tom Lauricella and Jonathan Cheng, "Too Late to Jump Aboard?" Wall Street Journal, February 13, 2012.
- Ajay Makan, "S&P 500 at Post-Crisis Peak but Investors Remain Wary," Financial Times, February 25, 2012.
- Quotation from Jeremy Grantham, chief investment strategist, GMO. Leslie P. Norton, "Not So fast: Coping with Slow Growth," Barron’s, February 27, 2012.
- Brian Blackstone, "Poor Economic Data Slam Europe," Wall Street Journal, March 2, 2012.
- Quotation from Liz Ann Sonders, chief investment strategist, Charles Schwab. Nikolaj Gammeltoft, Inyoun Hwang, and Whitney Kisling, "The Bull Turns Three. Where’s the Party?"
- BusinessWeek, March 12, 2012.
- Ajay Makan, "Wall Street Braces For Hit to Soaring Markets," Financial Times, March 19, 2012.
Death and taxes may be the only two things that are certain in life. Although death is inevitable, preparing for it can be difficult. Making decisions too soon or too late can diminish or even eliminate some available planning options.
Timing uncertainty can make it difficult to determine how to maximize Social Security benefits, both for individuals and married couples. Most people know that the longer one waits to take Social Security, the larger the benefit will be. Even with this knowledge, roughly 80 percent of Americans claim Social Security payments before they reach the maximum payout at the age of 70, and approximately half of all eligible Americans start Social Security at age 62, when payments are first available but also the smallest. To avoid leaving money on the table – potentially a six-figure decision- it makes sense to consider multiple strategies.
Health and longevity are two very important factors when attempting to maximize benefits. If living into your 80s is a distinct possibility,it is wise to consider delaying benefits in order to receive a larger monthly check (despite receiving the checks for fewer years). For married couples expecting at least one spouse to live past 80, it is likely advantageous for at least one spouse to wait until age 70 to commence Social Security payments. Under the current set of rules, this simple timing strategy allows the surviving spouse to continue to receive the larger of the two Social Security checks even if it was originally the deceased’s benefit.
Social Security benefits also have an annual cost of living increase. By delaying the start of your benefit, you increase the basis from which future upward adjustments will be calculated.
It is crucial to incorporate your own individual circumstances when thinking about any maximization strategy, as some situations could warrant taking Social Security early. SYM can review your specific situation and ascertain how Social Security best coordinates with your portfolio and long-term planning objectives.
The average life expectancy at birth within the Organization for Economic Cooperation and Development’s 36 member countries, of which the United States is a constituent, is 80.1 years. The United States life expectancy was 78.7 years at the time of the study. Health at a Glance 2013: OECD Indicators, OECD Publishing, p. 25.
A recent article appearing in the Financial Times caught our eye—or perhaps we should say ear. At first glance it was unremarkable—just one among dozens of recent think pieces suggesting that investors were losing interest in stocks as markets around the world continued to stagnate.
But the tone of the article sounded remarkably familiar. We dug out our copy of the "Death of Equities" article appearing in BusinessWeekon August 13, 1979, to have a fresh look. Similar? You be the judge:
"This 'death of equity' can no longer be seen as something a stock market rally—however strong—will check. It has persisted for more than ten years through market rallies, business cycles, recession, recoveries, and booms."
Financial Times, 2012:
"Stocks have not been so far out of favor for half a century. Many declare the 'cult of the equity' dead."
"Individuals who are not gobbling up hard assets are flocking to money market funds to nail down high rates, or into municipal bonds to escape heavy taxes on inflated incomes."
Financial Times, 2012:
"The pressure to cut equity exposure is being felt across the savings industry. … In the US, inflows to bond funds have exceeded equity inflows every year since 2007, with outright net redemptions from equity funds in each of the past five years."
"Few corporations can find buyers for their stocks, forcing them to add debt to a point where balance sheets seem permanently out of whack."
Financial Times, 2012:
"With equity financing expensive, many companies are opting to raise debt instead, or to retire equity."
"We have entered a new financial age. The old rules no longer apply." —Quotation attributed to Alan B. Coleman, dean of business school, Southern Methodist University
Financial Times, 2012:
"The rules of the game have changed." —Quotation attributed to Andreas Utermann, Allianz Insurance
"Today, the old attitude of buying solid stocks as a cornerstone for one's life savings and retirement has simply disappeared."
Financial Times, 2012:
"Few people doubt, however, that the old cult of the equity—which steered long-term savers into loading their portfolios
with shares—has died."
When the first "Death of Equities" article appeared, the S&P 500 had underperformed one-month Treasury bills on a total return basis for the fourteen-year period ending July 31, 1979 (107.0% vs. 119.6%, respectively). Was buying stocks in August 1979 a smart contrarian strategy? Yes, but only if one had the patience to stick it out for years. Imagine the frustration of an investor who had been counseled to "stay the course" in response to the "Death of Equities" article appearing in August 1979. Stocks did well for a while, jumping over 27% from August 13, 1979, to March 25, 1981, when the S&P 500 hit an all-time high of 137.11.
But by July 31, 1982, stocks had given back all their gains, and the S&P 500 was almost exactly where it had been nearly three years earlier. As of July 31, the S&P 500 had extended its underperformance relative to one-month Treasury bills to seventeen years (total return of 150.5% vs. 213.6%).
Imagine this same investor arriving at her financial advisor's office on Friday, August 13, 1982, with a three-year-old copy of BusinessWeekunder her arm. Stocks had drifted lower in the preceding weeks, and the S&P 500 had closed the previous day at 102.42. "You told me three years ago to stay the course, and I did," she might have remarked to her advisor. "It hasn't worked. Obviously, the world has changed, and it's time I changed too. Enough is enough."
We suspect even the most capable advisor would have faced a big challenge in seeking to persuade this investor to maintain a significant equity allocation. For many investors, seventeen years is not the long term, it's an eternity.
Superstitions aside, stocks rose that day, with the S&P 500 advancing 1.4%. It wasn't obvious at the time, but August 13, 1982, marked the first day of what would turn out to be one of the longest and strongest bull markets in US history. The S&P 500 was 16% higher by the end of the month and went on to quadruple over the subsequent decade. The table below shows data for the S&P 500 on a price-only basis. With dividends reinvested, the return would be materially enhanced.
"Death of Equities" Anniversary
August 12, 1983
August 12, 1987
August 12, 1992
August 12, 2002
(Almost) 30th Anniversary
June 19, 2012
One of the authors of the FTarticle, John Authers, is familiar with the BusinessWeek article and wary of making pronouncements that might look equally foolish ten or twenty years hence. In a follow-up article appearing several days after the first, he appealed for divine assistance in his forecasting effort: "O Lord, save me from becoming a contrarian indicator." Nevertheless, after revisiting his arguments he remained persuaded that the climate for equities was too hostile to be appealing.
We should not use this discussion to make an argument that stocks are sure to provide investors with appealing returns if they just wait long enough. If stocks are genuinely risky (which certainly seems to be the case) there is no time period—even measured in decades—over which we can be assured of receiving a positive result. Nor should we seize on every pundit's forecast as a reliable contrarian indicator. With dozens of self-appointed experts making predictions, some of them are going to be right. Perhaps even John Authers.
The notion that risk and return are related is so simple and so widely acknowledged that it hardly seems worth arguing about. But these articles (and others of their ilk) offer compelling evidence that applying this principle year-in and year-out is a challenge that few investors can meet, and explains why so many fail to achieve all the returns that markets have to offer.
Dimensional Fund Advisors
Last week the Dow broke 17,000. Even the small-cap index, the Russell 2000, notched a new high, illustrating the breadth of this healthy bull market. The NASDAQ, believe it or not, is less than 15 percent away from the record set in the crazy dot-com era market of 2000. Yet valuations are not even close to the extremes of those days.
Even though new highs are bullish, the commentary in much of the news media we see and hear treats these records as a matter of great concern instead of a reason to celebrate the renewed vigor in our economy.
While we feel there will be additional gains over the coming years, we also know it is inevitable that every market has regular pullbacks and consolidations. Since the market made its lows in March 2009, it has had nine corrections ranging from 6 percent to almost 22 percent.
If corrections are a normal part of any market cycle, why do we fear them? We should simply accept them as an unavoidable aspect of long-term equity growth. Instead of approaching these events with trepidation, commit to preparing for the inevitable by charting a path with your advisory team that you can sustain through the good times and the pullbacks. The alternative is an emotional reaction to sell after the fact -- and that is never good for long-term portfolios.
Forecasting the timing of a stock market correction is difficult if not impossible. Even so, people constantly try to do so by picking the exact points at which to jump in and out of investments. Few, if any, are consistently successful, and that is before considering trading costs and taxes.
A trader, whose definition of “long term” is the week ahead, is concerned about an imminent drop of 5 percent to 15 percent. They try to avoid scares by trading within their portfolio, despite data showing that the average person loses 2 to 4 percent per year in so doing. Investors approach the same inevitability very differently. Anyone with a longer-term time horizon should view a correction as a normal course of events. If they happen to have excess cash flow, the market dip is a chance to put additional dollars to work. If certain sectors fare worse than others, SYM’s rebalancing discipline will trigger trades to sell higher and buy lower. In general, investors’ changes are more incremental than are traders’, and investors act on time-tested ways to make lemonade out of lemons.
Less is more when it comes to adjusting a well-thought-out plan.
If you have not already heard reference to the “fiscal cliff” you probably soon will. We feel it is important for our clients to have knowledge of what this refers to and how SYM Financial is approaching this potential economic event.
The fiscal cliff refers to a number of specific tax cuts and benefits due to expire by the end of this year and early next year. The tax cuts and benefits pertaining to the fiscal cliff are as follows: late in 2012 the debt limit is expected to be reached, on 12/31/12 the Bush tax cuts expire along with the extended unemployment insurance benefit, the payroll tax holiday and the alternative minimum tax patch “AMT”. In January of 2013 the “sequester” occurs which is a series of across the board spending and budget cuts. Also, the Medicare tax will increase in January of 2013. The United States’ economy could shrink as much as 4 percentage points by some estimates in the first half of 2013 if Congress fails to address the expiration of $600 billion worth of tax breaks and jobless benefits by the end of this year.
The consequences of no action or endlessly delayed action could likely have investors, consumers and business owners adjust their behavior in advance of this significant economic timing of events.
One of our respected fund managers has been monitoring the use of the term “fiscal cliff” in news stories under the premise that negative news can create a vicious cycle in the media:
As promised we have been monitoring the use of the term "Fiscal Cliff" to see if it reaches the level that could be termed obsessive. It appears we are well on our way to such an outcome, with the week ending August 3rd seeing a record 512 mentions.
To put this in perspective, use of the term "debt ceiling" topped out 4182 articles on week ending July 29th 2011, while the term "LIBOR" popped up in over 1000 articles in October 2008 and 993 articles on the week ending July 20th (interest has since rapidly receded to 534 articles).
A level of 512 articles suggests that this has become a major topic of conversation but not yet a truly dominant one. On the other hand we still have three months to go to the election and over four months until the "cliff face" will actually have been reached. We would therefore expect substantially higher readings in the weeks ahead.
As investors, we will always have a “wall of worry” to climb. There is no “safe” time to invest. It is possible that economic growth could surprise us and begin to make a dent in our debt issues. Higher taxes might not be the impediment. We’ve had significantly higher income tax rates in the past that did not impair economic growth. We have increased both Social Security and Medicare taxes in the past. We by no means intend to trivialize the issue of the fiscal cliff in the US as this could likely be a key ingredient for volatility in the markets this fall.
We currently have a stock market valued at low levels based on historical data. Investors worldwide have moved significant amounts to bonds resulting in very low yields. It is possible that much of what many investors fear, Europe and our fiscal cliff, has been mostly discounted by the equity and bond markets.
All of these current worries are real and should be seriously considered by investors with investment time frames of less than five years since volatility in prices is a given in any long term investment program.