Bob’s Journal for 12/14

It is Time for 2024 Investment Predictions

We’re near the end of the year, so most investment firms are rolling out their market predictions for 2024.

Most of the predictions are predictable. The bulk of the analysts estimate the stock indexes will rise by an amount near the long-term average.

The long-term average total return for the major stock indexes in the United States is around 10%. Almost all the stock forecasts will be in the 7% to 10% range. Very few will be outside that range, and only one or two of those will deviate by much.

That’s a safe play by the analysts because straying far from the consensus view and long-term average can make clients and potential clients uneasy. But it is unlikely the predictions will turn out to be accurate.

While the long-term total return of the stock indexes is around 10%, there are few years when the indexes earn that total return.

Instead, the long-term average return is made up of a lot of years with returns that varied considerably from the average. Most years, the return is either well above or well below the average.

For example, in each of the last 10 years, the total return of the Vanguard 500 Index fund (VFINX) was: 32.18%, 13.51%, 1.25%, 11.82%, 21.67%, -4.52%, 31.33%, 18.25%, 28.53%, -18.23% and 21.65%.

The economic and investment forecasts for the next calendar year can be entertaining. But it is not a good idea to use them in your investment and financial planning.

Elderly Bear the Cost of Inflation

The costs of an inflation spike are borne more by the elderly than the rest of the population.

At least that recently was the case in Europe, according to a study of the 2021-2022 inflation spike. There are several reasons inflation is likely to hurt the elderly more than others.

They’re no longer working and have lower life expectancy, so they have less time to make up for inflationary losses by earning more money or benefiting from future compounding of income and gains.

Older people also tend to own their homes, so they directly and immediately bear more of the burden of higher heating costs and other housing-related price increases than many renters do.

In most countries, older people are less likely to have debt. They don’t reap the benefit of paying debts with money that has had its purchasing power reduced. Instead, older people are more likely to be lenders, investing in fixed-income assets to earn income with low risk. So, they’re repaid with currency that’s depreciated.

In fact, the study found that many younger people actually benefit from inflation. Younger people are more likely to have debts, which they can pay back in depreciated currency.

Younger people are more likely to benefit from future promotions and job hopping that increase their incomes. Older people, on the other hand, often have topped out in their jobs or retired.

While the rate of inflation might decline dramatically, most of the price increases that occurred during the surge aren’t reversed. Instead, there’s a permanent increase in the base cost of living. The cost of living continues to increase from that higher base, only at a lower rate than during the surge.

Because of reduced ability to increase their incomes, the elderly are less likely than younger people to see their incomes catch up with inflation.

Treasury Bonds are Moving Stock Prices

Many investors mistakenly believe that correlations between the prices of investments are fixed. That’s a dangerous view.

It is generally believed that a diversified portfolio is one that holds stocks and bonds. It is considered diversified, because the prevailing view is that stocks and bonds rise and fall at different times. In other words, they aren’t highly correlated with each other.

In fact, the correlation between stocks and bonds changes over time. There have been long periods when stocks and bonds were highly correlated, and other periods when they had low correlations.

More confusing for investors is that the correlations can change quickly for the short term.

Take a look at 2023 through the end of November.

For the first 11 months of the year, the yield on the 10-year treasury bond and the return of the S&P 500 had a correlation of 0.5165. A 1.0 would mean the two were perfectly correlated. A 0.0 would mean there’s no correlation at all. So, they had what’s considered a moderately positive correlation for the year.

But the relationship shifted from September through November, according to SIFMA.

In those months, changes in the 10-year treasury yield were the main driver of the stock indexes. When the yield began rising rapidly in August, the S&P 500 declined. When the yield began declining in late October, the S&P 500 soared.

The correlation between the 10-year yield and the S&P 500 from September through November was negative 0.8315. Since bond prices rise when interest rates decline (and vice versa), stocks and bonds rose and fell together from September through November. A portfolio of U.S. stocks and bonds provided almost no diversification benefits.

That’s why other assets, in addition to U.S. stocks and bonds, are needed to have a diversified portfolio. You need assets that do well in different economic environments.

The Data

The Consumer Price Index (CPI) increased 0.1% in November after being unchanged in October. Over 12 months, the CPI rose 3.1% through November. It was up 3.2% through October.

The core CPI, which excludes food and energy, increased 0.3% in November following a 0.2% rise in October. Over 12 months, the core CPI increased 4.0% through both November and October.

The Consumer Sentiment Index from the University of Michigan was 69.4 in mid-November, up from 61.3 at the end of October. The mid-November reading is the highest since August.

The improvement in sentiment occurred largely because inflationary expectations fell to their lowest levels since March 2021.

Despite the improvement, the index remains below levels that prevailed before the pandemic.

The Producer Price Index (PPI) was unchanged in November. It declined 0.4% in October. Over 12 months, the PPI is up 0.9% through November, after being up 1.2% through October.

The core PPI, which excludes food and energy, was unchanged in both November and October. It was up 2.0% for the 12 months ending in November and 2.3% for the 12 months through October.

Small business owners haven’t changed their views much. The Small Business Optimism Index from the National Federation of Independent Business (NFIB) was 90.6 in November, falling from 90.7 in October.

November marks the fourth consecutive month the index declined, though it fell only 0.1 points each of the last three months. Business owners remain concerned about unfilled job openings and inflation.

Consumer credit outstanding in October increased at an annual rate of 1.2%.

Revolving credit (mostly credit cards) increased at an annual rate of 2.7%. Nonrevolving credit (mostly vehicle and student loans) rose at a 0.7% annual rate.

Payrolls increased by 199,000 in November, according to last week’s Employment Reports. Jobs had increased by 150,000 in October.

About 83% of the job growth in November was in three sectors: health, government and leisure and hospitality. Another big chunk of the job growth was due to auto workers returning from strikes.

The unemployment rate declined to 3.7% from 3.9%.

Average hourly earnings increased by 0.4% in November, up from 0.2% in October. Over 12 months, average hourly earnings increased 4.0% through both November and October.

New unemployment claims increased by 1,000 to 220,000 in the latest week.

Continuing claims, which lag a week behind new claims, decreased to 1.861 million from 1.925 million. The previous week’s level was a two-year high for continuing claims.

The Markets

The S&P 500 rose 1.64% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 1.24%. The Russell 2000 increased 1.42%. The All-Country World Index (excluding U.S. stocks) added 1.10%. Emerging market equities advanced 0.54%.

Long-term treasuries gained 0.01% for the week. Investment-grade bonds increased 0.38%. Treasury Inflation-Protected Securities (TIPS) lost 0.37%. High-yield bonds gained 0.14%.

On the currency front, the U.S. dollar declined 0.07%.

Energy-based commodities fell 3.52%. Broader-based commodities lost 3.56%. Gold declined 1.96%.

Bob’s News & Updates

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