The Rise in Investor Confidence

Since the Nov. 8 election, a surge of optimism has been reported in many surveys. We’ve seen it in the household surveys as well as the small business and manufacturing business surveys.

I experienced that surge of optimism firsthand at the MoneyShow Orlando last week. The crowd seemed larger than last year. (Show sponsors reported a 20% increase.) People were more positive and responsive than at last year’s conference. The exhibit hall seemed to have a lot more exhibitors, and the ones I talked to were satisfied with both the size of the crowd and the response of attendees.

The question most people asked was how they should change their finances to reflect the changes in Washington.

As I’ve pointed out since the election, it’s not a good idea to position your portfolio based on forecasts or on the latest news. We saw stocks surge in the month immediately after the election and then flatten for more than a month. In the last couple of weeks, stocks hit record highs again while bonds tumbled.

With all the focus on the headlines from Washington, many people haven’t noticed that emerging market stocks and European stocks have handily outperformed U.S. stocks during this period. These investments declined in the weeks immediately following the election. But the fundamentals eventually prevailed, and we’ve seen strong returns in funds such as Price Latin America and WCM Focused International Growth. Each fund is a current holding in our Retirement Watch portfolios.

That’s why we ignore forecasts and short-term news. Instead, we have a process that ensures we focus on the things that really matter to the markets. We also try to maintain some balance and diversification in our portfolios so we don’t depend on one economic or policy outcome. Above all, we want a margin of safety in each investment.

The Data

Inflation took a big jump after rising slowly for the last year. The Consumer Price Index (CPI) rose 0.6% for January to mark the highest monthly increase since February 2013. Over 12 months, the CPI is up 2.5%, the highest level since March 2012. Even after excluding food and energy, the CPI still rose sharply over one month and 12 months.

Likewise, Producer Prices rose 0.6% for January and 1.6% over 12 months. After excluding food and energy, the numbers are 0.4% and 1.2%.

Retail sales finally are reflecting the recent surge in consumer confidence. December’s number was revised higher from 0.6% to 1.0%. January’s sales increased 0.4%, well above expectations. Also, after subtracting autos, sales for the month still increased 0.8%. Even after excluding autos and gasoline, sales for the month increased 0.7%. That’s a strong number, because a jump in gas prices had the potential to distort the headline number. Overall, the report is a strong one.

Manufacturing reported mixed, but generally positive, news. Industrial Production declined 0.3% in the headline number, but that’s misleading. Utility production declined significantly because of weather conditions. The manufacturing component of the report rose only 0.2%. But after excluding automobiles, which had a 2.9% decline, other manufacturing rose 0.5%.

The surveys of the regional Federal Reserve banks continue to paint a more positive picture of manufacturing than the Industrial Production numbers.

For example, this week the Empire State Manufacturing Survey increased to 18.7 from 6.5. That’s the strongest number in two-and-one-half years. Almost all elements of the survey were very positive.

Even more impressive was the Philadelphia Fed Business Outlook Survey. It soared to 43.3 from 23.6. That’s the strongest number since January 1984. Most components of the survey also were very positive.

The Small Business Optimism Index from the NFIB rose 0.1 to 105.9. That’s the highest level since December 2004. The index surged in the two months after the election. Business owners expect sales to increase and plan to hire more people, increase wages and invest in their businesses.

Consumer Sentiment, as measured by the University of Michigan, declined to 95.7 from 98.5 but still remains at a very high level. It is the sixth highest reading of this economic recovery. The survey continues to show a partisan disparity. Self-identified Republicans have expectations near record highs while Democrats have expectations near record lows.

Sentiment among home builders still is high but dropped a bit. The Housing Market Index from NAHB fell to 65 from 67. While down, the index still is strong, with a reading of 50 indicating no growth. The big disappointment in the report is a drop in traffic at new homes to 46 after reaching an 11-year high of 52 in January.

This decline also is represented in Housing Starts, which declined 2.6%. But single-family home starts rose 1.9% while apartment starts held down the headline number by declining 10.2%. Over 12 months, single-family home starts are up 6.2%, while apartments are up 19.8%.

New unemployment claims rose 5,000. That’s only a slight increase from last week’s number, which was among the lowest in 50 years.

The Markets

The negative political news out of Washington didn’t hurt the stock indexes. The S&P 500 gained 2.47% for the week ended with Wednesday’s close. The Dow Jones Industrial Average rose 2.92% and is back above 20,000. The Russell 2000 soared 3.38%. The All-Country World Index rose 1.85%. Emerging market stocks returned 2.18%.

Long-term treasury bonds lost 2.49%. Investment-grade bonds fell 0.85%. Treasury Inflation-Protected Securities (TIPS) declined 0.39%. High-yield bonds rose 0.22%.

The dollar rose 0.89%.

Energy-based commodities gained 0.78%. Broad-based commodities gained 0.76%. (Copper has been soaring lately.) Gold dropped 1.42%.

Bob’s News & Updates

My latest book, the revised edition of “The New Rules of Retirement”, was a big hit at the MoneyShow Orlando and continues to generate high ratings on Amazon.com.