Bob’s Journal for 11/9

Know the Factors That Generated Recent Stock Market Returns

Investors know they earn money when stock prices rise. But they don’t always know why prices rose and what that portends for future returns.

A new analysis breaks down the sources of total shareholder returns and determines how much each source contributed to the total. You should read the entire analysis, but here are some highlights.

The drivers of shareholder returns are dividends, dividend reinvestment and price appreciation. Indeed, price appreciation is driven by a combination of the growth in earnings per share and the change in the price/earnings multiple.

From 2012 through 2021, the S&P 500 had an annual return of 16.6%. That’s well above the long-term average of around 10%.

During that period, the increase in net income per share of the S&P 500 contributed 7.4 percentage points to the total return.

The price-earnings multiple increased during the period. That rise accounted for 6.9 percentage points of the total return. So, the growth in earnings per share and the price/earnings multiple together amounted to an annualized 14.3% return.

That means dividends accounted for only 2.0 percentage points of the total annual return and the dividend reinvestment contribution was only 0.3 percentage points.

Another way to look at it is that earnings per share growth accounted for 44.5% of the total return during the period. The increase in the price/earnings multiple accounted for 41.6% of the return.

Dividends and dividend reinvestment combined accounted for only 13.9% of the total shareholder return.

The analysis counters other studies that conclude, over the long term, dividends account for a significant percentage of total shareholder return.

More important to most investors is that an increase in the price/earnings multiple accounted for 41.6% of the total return.

To achieve total returns over the next 10 years that match the returns over the study period, investors have to believe that the price/earnings multiple will increase again as much as it did from 2012 to 2021.

With stock valuations now near all-time highs, another significant increase in the price/earnings multiple is unlikely.

That means we should anticipate lower returns from stocks during the next 10 years, even if earnings grow as rapidly as they did during the study period.

Inflation Remains the #1 Retirement Plan Oversight

In the first edition of my book, “The New Rules of Retirement” (Wiley; 2004), I said that not accounting for inflation is the biggest mistake in most retirement plans. It was true then, and it’s true now.

Many people thought the annual inflation rate of 2% or so that existed for most of the first part of the 2000s was insignificant. They overlooked its compounding effects over a retirement that lasts 15, 20, or 30 years, and sometimes longer. A retiree can easily lose 25% or more of purchasing power over the years.

What is more insidious is the inflationary surge of 2021 and 2022. Many people assume the Fed will bring inflation back to its target soon, and we’ll be back to a low inflation rate.

Assuming that happens, the lower inflation rate will begin at a much higher base than before the surge. The inflationary surge of 2021 and 2022 is a permanent reduction in a retiree’s purchasing power. Future inflation, even at a low rate, will make the purchasing power reduction worse.

For example, a pound of bacon costs 21% more than it did in 2020. Coffee is about 33% more expensive. A gallon of gas costs roughly 72% more. Prices of most services have surged even more.

Absent a deflation that brings prices near their 2019 levels, retirees need to reconfigure their finances to recognize what is likely a permanent bump in the base cost of most goods and services.

Intuit Closes Mint Personal Finance App

Mint, one of the first online personal finance apps, will be discontinued as of Jan. 1. Mint joins a long line of personal finance apps that have come and gone.

Like most of the other personal finance apps, Mint is a budgeting and financial tracking tool. Its basic features are free, but a subscription is required to use all the features. Users can download transactions from their financial accounts and generate data on spending, saving, investing and develop a budget.

Founded in 2006 and once boasting more than 20 million users, Mint recently reported it has 3.6 million monthly active users. Intuit will fold Mint users into its Credit Karma website.

It is no surprise that Mint joins many other personal finance apps in folding. Like the others, Mint at times had trouble linking with all users’ financial accounts and maintaining security.

More importantly, most of the personal finance apps have limited features. Few people will pay to develop a record of their personal spending and savings.

The personal finance apps that have a lot of users usually are integrated into other businesses and websites. The sponsors of the sites offer personal finance apps to attract consumers to their sites.

Then, the sites encourage the consumers to use the other services, such as investing, banking, insurance and loans. The providers make profits from the other services and lose money on the personal finance apps.

Credit Karma is but one example of that. Many banks offer online budgeting and spending tools as a part of their services, hoping to attract and retain customers.

Consumers do appear willing to pay for personal finance apps that do more than track spending and cash flow. These apps analyze the data and point out areas of spending that can be cut, set savings targets and help users meet them, identify unused subscriptions and automate some transactions.

It appears that compiling data isn’t something for which most consumers are willing to pay. But they will pay for advice and recommendations that improve their bottom lines.

The Data

Factory orders increased 2.8% in September after rising 1% in August. But after excluding the volatile transportation sector, orders increased only 0.8% in September and 1.5% in August.

When defense orders are excluded, orders increased 3.2% in September and 0.8% in August.

Payrolls increased by 150,000 in October, following a 297,000 increase in September.

Over the previous 12 months, the average monthly increase in payrolls was 258,000. Economists estimate jobs need to increase by 70,000 to 100,000 each month to keep pace with the growth of the labor force.

Average hourly earnings increased 0.2% in October and 0.3% in September. Over 12 months, average hourly earnings rose 4.1% through October, down from 4.3% through September.

The PMI Services Index increased to 50.6 in October from 50.1 in September. The PMI Composite Index for the economy was 50.7 in October, up from 50.2 in September.

Nonfarm productivity increased at a 4.7% annualized rate in the third quarter, up from a 3.6% rate in the second quarter. The third quarter marks the highest productivity increase since the third quarter of 2020.

Hourly compensation increased at a 3.9% annualized rate in the third quarter.

Because productivity increased more than compensation, unit labor costs declined by an annualized rate of 0.8% in the third quarter after increasing at a 3.2% rate in the second quarter.

The decline in unit labor costs was the first since the fourth quarter of 2022. Also, over 12 months, unit labor costs increased 1.9%, the lowest rate since the second quarter of 2021.

Consumer credit outstanding increased at a 2.2% annualized rate in September, but August’s credit outstanding was revised below the initial estimate to a 3.8% drop from July’s level.

Revolving credit (mostly credit cards) increased at a 2.9% annualized rate in September. Nonrevolving credit (mostly vehicle and student loans) increased at a 2.4% annualized rate.

New unemployment claims increased by 5,000 to 217,000 in the latest week. That’s the highest level in almost two months.

Continuing claims, which lag a week behind new claims, decreased to 1.818 million from 1.783 million. That’s the highest level since April.

The Markets

The S&P 500 rose 4.48% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 3.35%. The Russell 2000 increased 4.36%. The All-Country World Index (excluding U.S. stocks) added 3.86%. Emerging market equities advanced 5.45%.

Long-term treasuries gained 5.71% for the week. Investment-grade bonds increased 3.41%. Treasury Inflation-Protected Securities (TIPS) added 1.85%. High-yield bonds gained 2.68%.

On the currency front, the U.S. dollar declined 0.97%.

Energy-based commodities lost 2.68%. Broader-based commodities fell 1.49%. Gold declined 0.85%.

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.