Bob’s Journal for 8/24/23

Long-Term Returns Are Driven by Very Few Stocks

Treasury bills earn higher returns than most stocks, according to a recent update and expansion of a classic study.

A group of economists led by Hendrik Bessembinder of Arizona State University surveyed returns of 64,000 global stocks from January 1990 to December 2020.

The research found that over the long term, most stocks lose money or have lower returns than safe treasury bills.

The study concluded that 55.2% of U.S. stocks and 57.4% of non-U.S. stocks earned lower compound returns over the period than one-month U.S. Treasury bills. A previous study by Bessembinder covering only U.S. stocks concluded that more than half the stocks underperformed treasury bills over the long term.

But that doesn’t mean treasury bills are a better long-term investment than stocks, if the right investment strategy is used. The long-term returns of the broad stock market and the stock indexes handily exceed the returns of treasury bills.

That’s because the returns of a few stocks are so significant that they enable the stock indexes to generate higher returns than treasury bills, though the majority of stocks underperform.

Global stock markets generated net wealth creation of $75.7 trillion over the period studied. The five top-performing global stocks accounted for 10.3% of that wealth creation, though they were only 0.008% of the total number of stocks. (The five top stocks were Apple, Microsoft, Amazon, Alphabet and Tencent.)

The top 159 stocks (0.25% of the total stocks) accounted for half of the total wealth creation, and the top 1,526 stocks (2.39% of the total) accounted for all the net wealth creation during the period.

There are a number of lessons investors might draw from the data, say the authors.

An investor might conclude that investing in a broad index is the best approach, because the index will benefit from the few stocks that generate outsized returns and will return more than treasury bills.

A different investor could conclude that the best approach is to avoid the majority of stocks and focus on the relatively few companies that are top performers. Of course, it is difficult to identify those performers in advance, and the study offers no hints on how to do so.

The authors identified other lessons that could be drawn, such as using an investment strategy that focuses on a shorter-time frame instead of investing for the long term.

Utility Stocks Suddenly Aren’t So Safe

Utility stocks usually are labeled as “defensive” positions. They’re also called safe, stodgy and reliable investments.

All that seems to be changing.

For example, the ETF Vanguard Utilities (VPU) is down 8.07% in the last four weeks and 16.45% over the last 12 months. Some individual utility stocks are down much more.

Several factors now are working against utility investors.

Investors are concerned about climate change and related regulation. Utilities are investing significant amounts in nontraditional forms of energy production, such as wind and solar. Some are doing this voluntarily while others are required to do so. The payoff from those investments is unclear.

Wildfires and other disasters also are harming utility stocks. In both California and Hawaii, major wildfires have been blamed on actions or inactions of utility companies. The utilities have been or are likely to be required to pay substantial amounts for the damage caused by the wildfires.

Other utilities are likely to have to invest significant sums to adjust their equipment to prevent wildfires or other disasters in their jurisdictions.

Rising interest rates also are hurting utility stocks.

Many people buy utility stocks for their high yields. The stocks compete for investment dollars with other income-paying investments. Utility stocks become less attractive, and their prices decline, when interest rates rise.

Utility stocks could be in for a long, difficult winter.

Estate and Gift Tax Exemptions Could Soar Again in 2024

Each year some key parts of the estate and gift tax code are indexed for inflation. The IRS won’t announce the official changes until sometime in the fall, but the private sector is making estimates based on the inflation data to date.

For 2023, the lifetime estate and gift tax exemption is $12.920 million per person.

In 2024, the exemption is likely to increase by $740,000 to $13.660 million, according to a write-up by attorney Peter Tucci in the Leimberg Estate Planning Newsletter.

Tucci estimates that the exemption is likely to increase another $500,000 for 2025.

The estimates should be in the ballpark, but the final numbers are likely to be a little different because they’ll be based on additional inflation data issued by the Department of Labor this summer.

The annual gift tax exclusion is $17,000 in 2023. Tucci estimates it will increase to $18,000 in 2024 and perhaps $19,000 in 2025. (The exclusion is increased only in $1,000 increments.)

These estimates can be helpful for those doing multi-year estate planning. As I’ve written in Retirement Watch, many people should be putting together multi-year estate plans because under current law the lifetime estate and gift tax exemption will be cut in half automatically after 2025 if Congress doesn’t agree to something else.

The Data

The economy still is growing, but the rate of growth slowed in the first half of August, according to the mid-month flash indexes from PMI.

The PMI Flash Manufacturing Index declined to 47 in mid-August from 49 at the end of July.

The PMI Flash Services Index fell to 51 in mid-August from 52.3 at the end of July.

The PMI Flash Composite Index for the economy was 50.4 in mid-August, down from 52 at the end of July.

The Philadelphia Fed Manufacturing Index was 12 in August, up from negative 13.5 in July. The last month the index was in positive territory was August 2022, and August 2023 is its highest level since April 2022.

The Richmond Fed Manufacturing Index improved to negative 7 in August from negative 9 in July.

The Leading Economic Indicators from The Conference Board declined again in July by 0.4% after declining 0.7% in June. The index is down 4.0% over six months.

July is the sixteenth consecutive month the index has declined. Based on the index, The Conference Board forecasts a “short and shallow recession” sometime in the fourth quarter of 2023 and first quarter of 2024.

Existing home sales declined 2.2% in July after declining 3.3% in June. The number of sales in July was the lowest since January 2023.

Over 12 months, existing home sales were down 16.6%.

The median sale price of an existing home increased 1.9% over the last 12 months to $406,700. July is the fourth month in the history of the report that the median sale price exceeded $400,000.

New home sales increased 4.4% in July after declining 2.8% in June. June was the first month of negative sales growth since February and only the second negative month in the last year.

New unemployment claims declined by 11,000 to 239,000 in the latest week. The previous week’s claims were revised higher to a seven-week high.

Continuing claims, which lag a week behind new claims, increased to 1.716 million from 1.684 million.

The Markets

The S&P 500 lost 1.07% for the week ended with Tuesday’s close. The Dow Jones Industrial Average fell 1.76%. The Russell 2000 declined 2.29%. The All-Country World Index (excluding U.S. stocks) decreased 1.30%. Emerging market equities retreated 1.31%.

Long-term treasuries lost 1.43% for the week. Investment-grade bonds fell 0.63%. Treasury Inflation-Protected Securities (TIPS) declined 0.25%. High-yield bonds retreated 0.63%.

On the currency front, the U.S. dollar rose 0.56%.

Energy-based commodities increased 0.28%. Broader-based commodities rose 0.33%. Gold declined 0.25%.

Bob’s News & Updates

My latest book is “Retirement Watch: The Essential Guide to Retiring in the 2020s.” Learn more and order by clicking here and here. You can be among the first to write a review.

My previous book, “Where’s My Money: Secrets to Getting the Most out of Your Social Security,” is receiving 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.

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