Jobs, jobs, and more jobs. On Thursday, the U.S. Labor Department reported Unemployment data (this is released weekly) called “Initial Jobless Claims”. This report tracks how many new people have filed for unemployment benefits in the previous week. It is a good gauge of the U.S. job market. For instance, when less people file for unemployment benefits, more people have jobs, and vice versa. The important detail: Thursday’s weekly number was low, very low. In fact, Initial Jobless Claims were the lowest since 1973.
And, more jobs means stronger consumer spending – an important part of our “Heat Map” keeping its thumb on the pulse.
The financial crisis of 2008 and 2009 gave rise to Dodd Frank and other government legislation to prevent a similar occurrence initiated by a failure of a large financial institution(s). The overall theme was termed “too big to fail”. We think the efforts have fallen short. The financial system continues to have concentrations of risk. One example: 91% of all bank owned derivatives were held by just 4 banks at the end of 2015 according to the Comptroller of the Currency. The total value of Derivatives is very large. If one of the 4 banks encounters severe financial problems, we have little doubt, the U.S. Government will again be forced to step in to bail it out.
We ran across two apparently unrelated articles involving Russia. But, we suspect a connection exists.
In a potentially far reaching disclosure, a giant leak of “offshore” financial records, hacked from a Panama law firm, exposed a global array of crime and corruption. Millions of documents show heads of state, criminals, and celebrities using secret hideaways in tax havens. Among the 140 politicians and public officials from around the world mentioned in the documents is a dotted line connection to Russian President Vladimir Putin.
In another development, Russia just got yet another security service. Recently, Russian President Vladimir Putin ordered the creation of a Russian “national guard”. Officially, the new National Guard will combat terrorism and organized crime and will take over riot and SWAT duties from the Interior Ministry’s troops. But more than law enforcement or security concerns, the surprise announcement signals that the Putin administration is worried about instability.
Russia holds an important role in the world’s geopolitical web. For this reason we will monitor future developments closely.
With U.S. stocks surging this past week and breaking into the black for 2016, remember: What you expect the stock market to do next is shaped largely by what it just did.
Earlier this year, when stocks lost 5% in January and were down 10.5% at their worst, individual investors were the most pessimistic they had been since 1987 according to AAII’s bullishness index.
And if history is any guide, the mood of investors is already lifting in lockstep with stock prices. The more stocks go up and the faster they rise, the more likely you become to expect more of the same. And when they go down, your expectations fall with them. Investors are often told not to get caught up in other people’s emotions — but it’s at least as important not to get swept away by your own.
You can ask yourself one of the key questions: What are the odds of a one-day crash of at least 12% in the U.S. stock market over the next six months?
You probably answered at least 10% — even though that is roughly 10 times the likely chance of a disastrous daily crash in the coming six months, based on the historical record. (The 87 years from 1929 through 2015 consisted of 174 six-month periods. But, with only two single-day crashes of at least 12% over that span, such declines occurred in just over 1% of the half-year periods.)
What’s more you probably would have put higher odds on an imminent crash back in January than you would now. Or, would have six months or a year ago. That is partly because a sharp recent drop makes future declines seem more probable, and partly because the news media uses words like “crash” much more often after the market falls sharply.
Words charged with negative emotion not only darken your view of the future, but they may make you feel that riskier investments have place in your portfolio. No wonder the great analyst Benjamin Graham wrote in his book “The Intelligent Investor,” after which this column is named: “The investor’s chief problem — and even his worst enemy — is likely to be himself.”
BOTTOM LINE: use a system to keep your emotions in check: like the “Heat Map” which follows.
Presidential politics is the buzz for the media. But, we have yet to hear one interview question of any of the presidential candidates address the biggest challenge for the incoming President: “How will you tackle the huge deficit for Social Security, Medicare other mandatory spending programs?”
The reason this is the key challenge is the size of the mandatory spending. For example, during the next 10 years, mandatory spending is projected to exceed $33 trillion whereas discretionary spending (e.g. defense, education, and environmental budgets) will total only $13 trillion.
Life is full of surprises. Consider this: 60% of current retirees retired sooner than they had expected, 7% retired later than expected and only 33% retired at the age that they had anticipated (Click here for details.)
ACTION NEEDED: Work with your advisor to develop a plan and run “what if” scenarios to stress test your situation for whatever life brings your way.
The price of gasoline has dropped 50% in the last 2 years. The average nationwide price of gasoline was $1.728 a gallon on Friday 2/26/16. Two years ago (2/26/14), the average nationwide price of gasoline was $3.432 a gallon. (For more information, visit http://fuelgaugereport.aaa.com/news/).
For consumers, Gasoline price reductions are like tax cuts. They both stimulate the economy according to most economists.
Is the U.S. ECONOMY pausing before a growth spurt? Or, is the U.S. ECONOMY pausing before a recession? The answer is debated each day in the U.S. stock market. Hence, the volatility.
Here is the argument for the first scenario (a pause before a growth spurt): Employment gains and the tight labor market are already driving up wages and salaries. That, along with savings from the lower gasoline prices, is boosting consumer spending, which is encouraging capital investment, which is causing businesses to hire, which, in turn, is driving employment gains. The cycle has also begun to include the housing sector. Employment gains make it possible for more people to form households, which spurs demand for apartment buildings and detached homes, which, in turn, leads to greater gains in employment. With faster top-line growth, corporate profits can also rise.
IF RECESSION IS AROUND the corner, it will result in a first in U.S. modern economic history. Each of the past six recessions has been preceded by a spike in crude prices, often called an “oil shock.” The logic is straightforward: Businesses and consumers suffer financial shock when this essential commodity suddenly becomes more costly. No modern economic recession was preceded by an oil price crash.
More likely than not, the U.S. Economy is pausing before a growth spurt. Using history as a guide this growth spurt will become more apparent in July, August, and September. Investors are advised stay the course to permit the market to work through this period of uncertainty.
Liz Ann Sonders, Charles Schwab & Co’s Senior Vice President and Chief Investment Strategist (meaning: she is the “big cheese” for giving investment and economic analyis) recently wrote an enlightening article which contradicts the doom and gloom, follow the herd mentality we hear from the new media. Her important points are, in summary:
Recent U.S. employment data has renewed the possibility of further Federal Reserve short-term interest rate increases (not decreases as the media would have you believe).
The stock market appears reasonably valued, and higher valuations are unlikely without a return to positive earnings growth.
Some market participants have said low oil prices are sending a recessionary signal, but recessions historically have been preceded by oil price spikes, not crashes(as the media would have you believe).
Recent legislation made permanent the provision for individuals age 70 ½ and older to be allowed to make tax-free distributions of any of their required minimum distribution or up to $100,000 from individual retirement accounts (IRAs) to a qualified charitable organization. These types of IRA distributions are being referred to as “Qualified Charitable Distributions” or “QCD”.
As this money is not included in taxable income, it is not included in charitable contributions if you itemize deductions for income tax purposes. For some people, you may have the same bottom line tax result by using the QCD or making the contribution from personal funds. For others, especially those who do not itemize, it could help you save taxes. For some people, the QCD could reduce the portion of Social Security which is taxed on Form 1040. Finally, the QCD could help higher income Medicare participants to reduce the additional premium for Medicare Part B or prescription drug coverage.
If you feel this may apply to your tax situation or need more information, please contact us as soon as possible. If you do not contact us, we will assume that we can proceed with the required minimum distribution withdrawal as currently scheduled.
