Bob’s Journal for 9/15/22

Some Notable Events That Grabbed My Attention This Week

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Queen Elizabeth’s Markets and Economy

The passing of Queen Elizabeth II last week prompted a review of economic and market performance during her long reign.

In the United States, there were 13 bear markets in the S&P 500, according to Bespoke Investment Group, which defined a bear market as a 20% or greater decline from a market high that wasn’t interrupted by a 20% or greater gain. There was one bear market of more than 50% and another of more than 48%. There were five other bear markets with declines of 33% or more.

There were 11 recessions in the United States during Elizabeth’s reign.

But the bear markets and recessions barely show up on the long-term charts. From the beginning to the end of Elizabeth’s time on the throne, the S&P 500 increased more than 16,000% before dividends. That’s a 7.6% annualized return. Including dividends, the annualized return was more than 10%.

The Work Ahead for the Fed

The Federal Reserve has taken only the first steps to bring inflation back to its target level of 2%.

The markets have been fairly optimistic, indicating investors believe the inflation rate will be brought back to the target level without triggering a recession or much of a decline in corporate earnings.

But that’s not likely to be the case, according to a paper from several economists recently published by the Brookings Institution.

The researchers say most economists mistakenly look at either the headline Consumer Price Index (CPI) or the core CPI, which excludes food and energy prices.

They believe a better gauge is the median CPI. The median CPI filters out the short-term volatility of food and energy. But, unlike the core CPI, median CPI also filters out short-term volatility in the prices of other goods and services. For example, prices of vehicles and some other goods and services fluctuated quite a bit in recent years for reasons unrelated to general price inflation.

Using median CPI and their models of the economy, the economists forecast that unemployment will have to rise much higher than the 4.1% rate projected by the Fed before inflation returns to the target rate.

Under their most pessimistic scenario, the authors say the core CPI will be 8.8% if unemployment stays at 4.1%. To reach the Fed’s inflation target in 2024, unemployment will have to average 6.5% in 2023 and 2024 under moderate scenarios.

If this analysis is correct, the markets have been too optimistic. Stocks are priced for little or no decline in economic activity, while inflation returns to pre-pandemic levels. It looks to me that there’s little or no margin of safety in today’s stock prices.

Ponzi Schemes and Other Frauds Still Thrive

Many people assumed that after the publicity in 2008 about Bernard Madoff’s historic Ponzi scheme, people would be more aware and avoid falling for such schemes.

Unfortunately, that hasn’t been the case.

The good news is that the number of Ponzi schemes identified by authorities declined in 2021 to only 34. That’s the lowest number since 2008 and a 26% decline from 2020, according to data cited in Investment News. But that decline might have been due mainly to decreased activity because of the pandemic.

More recent headlines indicate people still are falling for Ponzi schemes and other established frauds.

Just a few weeks ago, “the Mother Theresa of Florida” was indicted by federal authorities for running a $194 million Ponzi scam that duped 15,400 investors.

In the first half of 2022, federal and state authorities filed at least 17 court complaints involving Ponzi schemes and related scams, according to the website www.ponziblog.com.

One twist about recent cases involving Ponzi scams is that the victims often seek to recover their losses from individuals or institutions with substantial resources, such as banks or brokers that processed routine transactions. The plaintiffs allege that the institutions facilitated the scams.

Learn more about the latest scams that have been uncovered by doing a web search for “ponzi schemes 2022.”

While suing a bank or broker might recover some losses, there’s no reason for people to fall prey to these scams. Be sure your funds are held in custody by an independent third-party bank or broker, you know how the money is invested and can see that in account statements and transaction reporting, and the returns reported are realistic.

The Data

The Consumer Price Index (CPI) increased 0.1% in August from July. Excluding food and energy, the core CPI increased 0.6% for the month, twice July’s increase.

Over 12 months, the CPI increased 8.3% as of August. That’s lower than the 8.5% increase in July and the 9.1% increase in June. The 12-month increase as of June was the highest in 40 years.

The core CPI increased 6.3% over 12 months as of August. That’s higher than the 5.9% 12-month rate reported in both July and June.

Higher prices for food and other goods and services more than offset the decline in gasoline prices, pushing the core CPI higher.

Grocery prices increased 0.7% in August, and food served at dining establishments increased 0.9%. Over 12 months, grocery prices increased 13.5%, the highest rate since March 1979.

The Producer Price Index (PPI) declined 0.1% in August from July. That follows a 0.4% decline in July from June. Prices of energy and most other commodities declined while prices of services increased.

The core PPI, excluding food and energy, increased 0.4% in August from July, which follows a 0.3% increase in July.

The PPI increased 8.70 over the last 12 months, as of August, which is lower than the 9.8% 12-month increase reported as of July.

Over 12 months, the core PPI increased 7.3% as of August, down from the 7.6% 12-month increase as of July.

Optimism among small business owners increased a little in August. The NFIB Small Business Optimism Index rose to 91.8 from 89.9 in July.

Declining inflation expectations were the major factor. In August, 29% of owners reported that inflation was their most important problem. That’s eight percentage points lower than in July, which was the highest level since the fourth quarter of 1979.

Consumer credit use increased at an annual rate of 6.2% in July. Revolving credit balances (primarily credit cards) increased at an annual rate of 11.6%, while nonrevolving credit balances (primarily student and vehicle loans) increased at a 4.4% annual rate.

New unemployment claims declined by 6,000 to 222,000 in the latest week. That’s the lowest number of weekly new claims since May.

Continuing claims increased to 1.473 million from 1.437 million.

The Markets

The S&P 500 rose 0.48% for the week ended with Tuesday’s close. The Dow Jones Industrial Average dipped 0.27%. The Russell 2000 increased 2.20%. The All-Country World Index (excluding U.S. stocks) added 1.06%, while emerging market equities climbed 0.16%.

Long-term treasuries increased 0.19% for the week. Investment-grade bonds rose 0.19%. Treasury Inflation-Protected Securities (TIPS) fell 0.67%, while high-yield bonds gained 0.30%.

On the currency front, the U.S. dollar declined 0.30%.

Energy-based commodities increased 1.57%. Broader-based commodities rose 3.02%. Gold added 0.15%.

Bob’s News & Updates

My next book will be “Retirement Watch: The Essential Guide to Retiring in the 2020s.” The official publication date is Jan. 3, 2023. You can make a pre-publication order or learn more about the book by clicking here and here, respectively.

My latest book is “Where’s My Money: Secrets to Getting the Most out of Your Social Security.” It has received mostly five-star reviews on Amazon for telling you clearly what your benefit options are in different situations and how to determine the best choice for you. You can find it on Amazon.com or Regnery.com.

The number of regular viewers for my Retirement Watch Spotlight Series continues to increase. You should sign up because I make in-depth presentations of key retirement finance topics. You can watch these online seminars from the comfort of your home or office at times you choose. To learn more about my new Spotlight Series, click here.

A recent five-star review of my book, “The New Rules of Retirement” on Amazon.com said, “A complete retirement guide! One of the best books on this topic!” Click for more details about the revised edition of “The New Rules of Retirement.”

If you’re interested in my books, check my Amazon.com author’s page.

I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.