Bob’s Journal for 2/13/20
Some Notable Events That Grabbed My Attention This Week
Morningstar’s mutual fund service finally started analyst coverage of WCM Focused International Growth (WCMRX).
The service is late to the party, and that’s common with many investment consultants, rating services and other investment aids. I’ve been recommending WCMRX off and on for years, and it’s been one of the top funds in its category during that time.
Morningstar has reported WCMRX’s data since the fund met the minimum size for reporting. But the first detailed analyst report and rating on the fund is dated December 23, 2019. Before that report, the service didn’t do anything that would direct investor attention to the fund. Investors had to sort through the data and find the fund on their own.
WCMRX managers have been delivering excellent returns to institutional investors since 2004 and formed their first fund in 2011. But many investors missed out on years of excellent returns unless they found the fund on their own or through Retirement Watch.
Many investors also missed out on the great early years of the DoubleLine funds after Jeffrey Gundlach left TCW and formed DoubleLine. Retirement Watch investors captured those returns.
Too often, investor services and consultants wait for a fund to establish a long record before directing investors to it. That makes things safer for the service. But it often costs investors years of solid, low-risk returns.
Optimism About Finances Soars
Usually I report only the headline numbers from the University of Michigan Consumer Sentiment survey. But the latest report merits a little more detail.
Part of the survey includes each respondent’s assessment of his or her personal finances compared to a year ago. In the first years following the financial crisis and again during the first years of the Trump administration, the answers were dramatically different based on age, education, political party and income.
Recently, however, more and more respondents are optimistic about their finances and believe their financial position is better than it was one year ago.
The overall measure of optimism about current personal finances is at its highest level since the record set in the late 1990s before the technology stock bubble burst. The current level is only a little below that record.
Again, this is true for all age groups and income levels. While older people and the top third of earners are more optimistic than other groups, all groups are at or near their highest levels of optimism.
This measure indicates retail spending should sustain its recent levels of growth for a while.
Beware of Last Decade’s Winners
As we closed 2019, there were a lot of reports listing the stocks and industries that had the highest returns over the last decade.
Most of those reports didn’t follow up on the results from past decades and caution investors about the dangers of investing in the previous decade’s winners.
More often than not, one decade’s winners, whether they are stocks or industries, do poorly in the next decade.
For example, in the 1970s the 10 highest-returning stocks from among the 200 largest public companies at the start of the decade had an average annual return of almost 15%. In the 1980s, most of those same stocks had negative returns and the group collectively had an annual average loss of 4.0%.
The same is true for each of the following decades. The top 10 performers of one decade had negative returns on average in the following decade. As I said, this result also applies to sectors. The best sectors of one decade usually falter the next decade.
That should be a cautionary note for investors who held some of the top stocks of the 2010s, especially the digital economy stocks that dominated the decade. If experience is consistent with the past, those stocks have some tough years ahead.
The Data
The Small Business Optimism Index of the National Federation of Independent Business (NFIB) surged in January to 104.3, up from 102.7 in December. The index has been rising as trade conflicts with China seem to decline. Also, small business owners are considerably more optimistic about the next six months than they were only a month ago.
Respondents to the survey continue to say their most important problem is the cost or quality of labor. The number of businesses reporting this problem is down from the record set in 2019, but it still is historically high. The small business leaders also say they expect to pay more for labor and will have a difficult time passing those costs on to customers.
The service sector keeps growing and at a little bit higher rate than last month, according to the latest surveys.
The PMI Services Index for January was 53.4, compared to 53.2 in December. The ISM Non-Manufacturing Index was 55.5 in January, compared to 55.0 in December.
Productivity was higher in the fourth quarter than in the third quarter. Productivity increased by 1.4%, which compares to a decline of 0.2% in the third quarter. Because of the rise in productivity, unit labor costs increased less in the fourth quarter. The fourth quarter increase was 1.4%, compared to a 2.5% jump in December.
The Consumer Price Index rose only 0.1% in January and is up 2.5% over 12 months. Excluding food and energy, the index rose 0.2% in January and is up 2.3% over 12 months.
New unemployment claims declined by 14,000 last week and increased by 2,000 in this week’s report. That brings the total to 205,000, which keeps the number of claims down near the record low in 2019.
The Employment Situation reports last Friday showed the labor market remained strong in January with an unexpectedly high 225,000 new jobs created. Only 145,000 jobs were created in December.
Solid wage gains have taken hold, and that should either reduce profit margins or increase inflation over the course of 2020.
Average hourly earnings over the last 12 months increased by 3.1% in January, compared to 2.9% in December. The monthly increase was 0.2% in January, compared to 0.1% in December.
The higher wages are bringing more people into the workforce. That caused the unemployment rate to increase.
The JOLTS (Job Openings and Labor Turnover Survey) report provides a more detailed look at the labor market but lags a month behind the Employment Situation reports.
The JOLTS for December shows a little weakening in the labor market. The report said job openings declined again. We now have the highest two-month decline in job openings since the JOLTS report began in 2001. The number of openings in December was about 500,000 fewer than economists expected.
Despite the reduction in job openings, there still are many more job openings than there are unemployed looking for work. Before January 2018, there never were more job openings than unemployed looking for work. But job openings have exceeded the unemployed every month since.
The Markets
The S&P 500 rose 1.37% for the week ended with Wednesday’s close. The Dow Jones Industrial Average gained 0.98%. The Russell 2000 increased 0.48%. The All-Country World Index (excluding U.S. stocks) added 0.96%. Emerging market equities increased 1.91%.
Long-term treasuries rose 0.96% for the week. Investment-grade bonds increased 0.38%. Treasury Inflation-Protected Securities (TIPS) added 0.35%. High-yield bonds gained 0.40%.
In the currency arena, the U.S. dollar increased 0.72%.
Energy-based commodities increased 0.90%. Broader-based commodities rose 0.57%. Gold gained 0.60%.
Bob’s News & Updates
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