The Fed, The Stock Market & What To Do Now
FORECASTS & TRENDS E-LETTER
IN THIS ISSUE:
1. Fed Leaves Interest Rates Unchanged Again
2. But Will Inflation Really Moderate?
3. Stocks – Stuck In A Long-Term Sideways Pattern?
4. Bad News For Millions Of Baby Boomers
5. A Wall Street Myth About To Be Shattered?
6. Avoiding Big Losses Is The Key, Maybe It’s Time You Join Us
7. The Bottom Line For Your Investments
Fed Leaves Interest Rates Unchanged Again
For the last 2-3 months, the media has warned us that inflation is rising and that the Federal Reserve was very likely going to raise short-term interest rates soon. I have argued, on the other hand, that the Fed would leave interest rates unchanged – probably for the rest of this year, at least – due to the ongoing housing/credit crunch and the sluggish economy.
Despite media warnings of a hike, the Fed Open Market Committee (FOMC) met last week and once again voted 10-1 to leave the Federal Funds rate unchanged at 2%. In its policy statement released along with the announcement of the decision, the Fed noted the following:
Fed watchers carefully parse the words in these policy statements. The key in the latest policy statement is the underlined text above. In the prior policy statement on June 25, the Fed basically said it had no clear idea how high inflation might go. However, in the August 5 statement above, the Fed indicates it expects inflation to moderate later this year. I would speculate that the Fed’s revised view on inflation may have been somewhat influenced by the latest drop in oil prices.
Some financial pundits had, at the least, expected that the latest FOMC vote on policy would be closer than 10-1 as it was on June 25. Yet the lone dissenter remained Richard W. Fisher, president of the Federal Reserve Bank of Dallas. All of the other FOMC members, including Chairman Bernanke, appear more concerned with the credit crunch and the sluggish economy than the latest inflation numbers.
But Will Inflation Really Moderate?
The government’s latest report on GDP for the 2Q showed the economy growing at a +1.9% annual rate. That same report cited consumer inflation having risen 4.2% (annual rate) in the 2Q versus 3.5% in the 1Q. However, the core rate of consumer inflation (minus food and energy) was only 2.2%, unchanged from the 1Q.
The Consumer Price Index rose 1.0% in June, slightly above pre-report estimates, as compared to a rise of 0.6% in May. The CPI core rate rose 0.3% in June, up slightly from 0.2% in May. Year over year, the headline CPI rose 5.0% in the 12 months ended June. The core rate rose 2.4% over the same period. This is still above the presumed Fed target for core inflation of 2% or less, but not dramatically so.
Obviously, consumer spending is one of the major drivers in inflation rates. Personal consumption expenditures rose 1.5% in the 2Q as compared to 0.9% in the 1Q. Some analysts attributed the rise in 2Q spending to the government rebate checks; however, the rebate checks were not all mailed by the end of June, so they were only partly a factor. The rebate checks should also help boost 3Q consumer spending, at least marginally, which argues that the inflation rate is likely to stay on the high side a bit longer.
On the positive side, most commodity prices have plunged over the last two months, after many set all-time record highs earlier this year. Corn, which peaked around $7.75 per bushel earlier this year, has now plunged to below $5.00. Wheat has plunged from around $12.50 per bushel to near $6.00. Rice is down sharply as well. And we all know that oil and gasoline prices have declined recently as well.
Barring any major weather problems as we head into the harvest season, and assuming we don’t have any killer hurricanes in the Gulf, I could see commodity prices continuing to drift lower over the next several months. Thus, the Fed may be proven correct in projecting that inflation will moderate later this year.
Finally, the latest report on 2Q GDP which showed the economy growing at a 1.9% annual rate has put to rest much of the talk that we are already in a recession. What remains to be seen is whether or not still-high gas and energy prices will put a serious dent in consumer spending nationally in the current quarter and/or the 4Q.
Analysts at Wachovia Economics Group now estimate that GDP will rise 2.2% in the 3Q and 1.2% in the 4Q. I tend to think those numbers may be a bit optimistic, unless oil prices drop below $100 per barrel, but we’ll see.
Stocks – Stuck In A Long-Term Sideways Pattern?
The recent sharp declines in US stock prices have caused many analysts and investors alike to rethink their forecasts for market returns going forward. If we look back to late 1999 and 2000 when many believe the last bull market ended, I could argue that the stock market has simply been in a broad trading range since then, particularly when we note that the recent top in the S&P 500 (right hand side of the chart below) occurred at roughly the same level as the top in early 2000.
I hesitate to point this out, but the US stock markets have experienced some very long sideways periods over the last century or so. The good folks at Rydex Funds put together the chart below which shows the performance of the Dow Jones Industrial Average from 1896 to 2007. Rydex illustrates that there have been three extremely long sideways periods in the market, lasting 18 years (1906-1923), 26 years (1929-1954) and 17 years (1966-1982), respectively. These extended periods of sideways movement are often referred to as “secular” bear markets.
[If you click on the chart above, a new browser window will display the full-sized chart. You can click on the image to zoom in closer for more detail; a second click will zoom back out.]
Rydex also notes that the current sideways market has lasted since early 2000, with an unstated suggestion that we may have several more years to go in this difficult market. I don’t propose to know what the stock markets will do over the next 5-10 years.
Bad News For Millions Of Baby Boomers
So-called Baby Boomers are those apprx. 78 million Americans born between 1946 and 1964, most all of whom will retire between now and 2029. The first Baby Boomer, born one second after midnight on January 1, 1946, took early retirement (age 62) in February of this year and began to collect her Social Security benefits.
Estimates vary, but reportedly about 10 million Baby Boomers will retire over the next five years alone. An estimated 3.2 million Baby Boomers will turn 62 this year and 65 in 2011. Various studies conclude that most Baby Boomers have not saved nearly enough for their retirement. That comes as no surprise, since our national savings rate has been negative for the last two years.
Unfortunately, many Baby Boomers are hoping for another late 1990s stock market boom to propel them to where they need to be to fund their retirement – at the age they wish to retire and in the lifestyle they wish to afford. They may be sadly disappointed! And this doesn’t begin to consider the fact that we are living longer than ever before.
So what will the Baby Boomers do to fund their retirement if the stock market doesn’t cooperate with a big bull market over the next five years (or longer)? Simple: they will have to work longer to make up for their lack of saving and investment. The government has already raised the Social Security retirement age to 67 for those Americans born after 1959, and sooner or later the government will almost certainly have to raise the retirement age yet again.
A Wall Street Myth About To Be Shattered?
For decades, Wall Street has preached the buy-and-hold mantra (read: never get out of the market). They continue to warn that if you get out during the downtrends to minimize losses, you are likely to miss the uptrends. Therefore, you should stay fully invested at all times, take a long-term view, and be prepared to ride out some nasty bear markets and big losses along the way.
As the buy-and-hold strategy increasingly came under fire after the last couple of bear markets, Wall Street simply repackaged and renamed the buy-and-hold strategy and called it “asset allocation.” Sounds much better, doesn’t it? Asset allocation implies that you spread your investments over several asset classes (stocks, bonds, etc.). But the strategy is still the same: you buy and hold, and subject yourself to large losses whenever the asset classes hit a bear market.
Now, let’s reasonably assume that millions of Baby Boomers are behind the curve in saving for their retirement, and that they need the stock market to boom over the next five years or longer to bail them out. Next, let’s also assume that most of these Baby Boomers are also invested in the traditional buy-and-hold strategy that Wall Street has preached for years.
So what happens if the stock markets (and the bond markets for that matter) essentially go sideways, or only deliver single digit annual returns, over the next five years or longer? I think it is safe to say that there will be a revolt. Add in a recession, if we get one, and “revolt” could be putting it mildly! Baby Boomers could reject Wall Street’s buy-and-hold mantra in a stampede.
Why? Because Baby Boomers no longer have 20-30 years to hold on as Wall Street suggests. Retirement for most will come much sooner, for many in the next 5-10 years. And if the stock markets continue to go sideways, or even marginally higher, over the next several years, Baby Boomers are going to become increasingly restless, to say the least.
Avoiding Big Losses Is The Key
My advice over the last 30 years has been consistent: avoid the big losses. In my view, you don’t have the luxury of simply riding out bear markets and hoping you won’t bail out near the bottom as so many investors do. The following “Breakeven Table” illustrates just how hard it is to come back from large losses.
I have consistently argued for “active management” strategies that can move you to cash (money market) or hedge long positions during bear markets and/or major downward market corrections, as a part of your overall portfolio.
The financial media decided some years ago to vilify active management strategies that can take you to cash from time to time as “market timing,” and assured the investment public that market timing is impossible. Making matters worse, there were some market scandals in recent years that were deemed as ‘market timing’ or ‘late trading,’ when indeed they were nothing close or similar to traditional market timing, which simply seeks to take you out of the market and into the safety of cash, or hedge long positions, during major market downturns.
I have made a successful business out of promoting alternative investment strategies, including traditional market timing. We spend a lot of money each year seeking out active managers that have been successful in protecting clients from significant stock market downturns. Granted, there are many active money managers that have not been successful, but there are those who have admirable performance records.
The money managers I recommend in general: 1) have matched or exceeded stock market returns over time; but more importantly, 2) have limited losses during down market periods. This can be a WIN-WIN combination. Of course, past performance does not guarantee future results. The problem is, most investors don’t know how to find these successful money managers.
Maybe It’s Time You Join Us
This E-Letter goes out to apprx. one million presumably high net worth subscribers each and every week. I don’t mind admitting that this E-Letter has been the largest source of new clients over the five-plus years I have written it. Still I wonder why more of my readers haven’t come onboard with Halbert Wealth Management. I have some thoughts on why, in order.
The Bottom Line:
I realize that many of my clients and readers are already retired. But this week’s message is primarily intended for those of you who are approaching retirement in the next 5-10 years. Many of you in this position have not yet saved enough to be comfortable in retirement. The stock market outlook may not be favorable for your retirement needs over the next several years, at least based on my best sources.
Maybe it’s time to consider some active management strategies, and some alternative investments, that have historically limited losses during market downturns, and have met or exceeded market rates of return over time. Think about it. (As always, past performance does not guarantee future results.)
I understand that you may have concerns because Halbert Wealth Management is in Austin, Texas and you live somewhere else. But keep in mind that this is the greatest age of global communications in the history of the world. We have the Internet after all. As noted above, I have never met most of my clients all across America, yet we get along just fine.
How is that? #1: If you are one of my clients, you have access to me personally - I am happy to talk to clients as needed. #2: My experienced Investment Consultants (and all of my other employees) are on salary – no commissions – so they have your best interest at heart.
And one more thing. Be assured that I have my own money invested in every program, every fund and every manager we currently recommend. I don’t expect anyone to invest in something that I don’t also have my own money invested in. You have my word on that.
At the end of the day, maybe you should consider becoming one of my clients and allocating some of your portfolio to the active management strategies and professionally managed programs I recommend, even if you live hundreds or thousands of miles away.
But more importantly, you need to think about whether your traditional buy-and-hold investments are going to get you to where you need to be in the next 5-10 years. What if the stock markets are in one of those long sideways periods as illustrated in the chart above?
Maybe you need to consider a change. Are you really comfortable about funding your retirement? If not, consider what we have to offer. You can access certain of the money managers I recommend for as little as $25,000-$50,000. That way, you can start off small and add to it when you’re comfortable.
For more information, call one of my experienced Investment Consultants at 800-348-3601. You may also contact us via e-mail at email@example.com, or you can visit our website at www.halbertwealth.com to learn about the types of investment programs we offer.
Wishing you profits,
Gary D. Halbert
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Forecasts & Trends E-Letter is published by ProFutures, Inc. Gary D. Halbert is the president and CEO of ProFutures, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, ProFutures, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.