An interesting thing often happens with investors when there is appreciation. As we pat ourselves on the back, we often confuse luck for intelligence. Earnest Hemingway put it like this, “Don’t confuse intellectual with intelligence.” When things go up we have a way of imagining we can all get to financial heaven. But it’s when the grits hit the pan that our moods turn somber and dark. Regret becomes the gift that keeps on giving. What I want you to do is make hay while the sun shines as you prepare for the downtimes. Such preparation will help you stay in the game, no matter who cheers or cries at the end of the match.
Stocks are up over 3% since we voted, led by industrials and financials, according to Yahoo Finance on November 29, 2016. From the same source let’s look at five other significant updates.
Consumer confidence enjoyed a surprising surge through November 15. The levels aren’t as high as they were prior to the 2007 recession, but consumer confidence is well above previous highs.
Home prices hit a new high with new data from the S&P CoreLogic Case-Shiller home price index. For some this is a sign that the 2006 housing bust has come to an end. Others see that the homeownership rate has dropped significantly while first-time buyers are having increased difficulty with financing thanks to higher interest rates and qualification standards. We’ll come back to this area.
Jobs were increased by 2.4 million new positions created in the past year ending October.
Wages rose by 3.1% per year, as inflation remains at 1.6% in a Glassdoor report. Glassdoor gathered the three month moving average data through November 21.
GDP increased by 3.2% annualized growth from the third quarter, ending in September.
Some Americans are feeling better about things since Donald Trump was elected. On the other hand, it may be of greater value to look at how the average consumer is behaving. According to a 2016 GOBankingRates survey reported on by CNBC on November 23, 2016, “Americans are falling short.” The data shows, “69% of us have less than $1,000 in their savings accounts and 34% have no savings at all.”
Millennials are in the same boat. “Young millennials” GOBankingRates describes as those between 18 and 24, 72% have less than $1,000 in savings, 31% have no savings at all, and 8% $10,000 set aside. “Older millennials,” between 25 and 34, 67% have less than $1,000 in savings, 33% have 0, and 15% have $10,000 or more. So you can see for yourself that some of us may believe happy days are here again, but few of us are prepared for the unforeseen or the unexpected.
I have suggested that you pay attention to earnings. I want you to gauge whether you are hearing more about earnings surprises or disappointments. On October 24, 2016, my friend, Charles Sizemore, CFA, put it this way, “I’d be very careful about drawing meaningful conclusions from any reports you read between now and Christmas. Because while Black Friday spending is a big deal for mall retailers, its overall effects on the economy are a lot smaller than you might think.” You see, a lot of what gets bought during the holiday shopping bonanza is fairly inexpensive and disposable. It’s often clothes, toys, and consumer products that may be used for a year or two and then get thrown away. The genuine economy superchargers are big ticket items which are often purchased on credit.
Sizemore says, “When you buy something on credit, you’re essentially spending tomorrow’s money today. So big-ticket items are like throwing gasoline on fire. But growth in this segment of the market has been tepid for a long time.”
The chart above tracks orders of consumer durable goods. Such items are expected to last three years or more. Things, like appliances, furniture, and large electronics. Growth was very strong and steady throughout the 1990s, fell off during the 2000-2002 slow down, and then reached new heights before 2008. The most interesting part is what happened next. After the economy came out of the freezer, durable goods enjoyed sunny days. Suddenly in 2012, durable goods orders flat-lined. Since that time they have been moving sideways. What gives?
It’s a one-two punch. In the good old days of the 2000s, the housing boom created massive demand for expensive appliances, furniture, and window dressings. As McMansion purchases have been sluggish since 2008, it follows that the purchases of consumer durables would be out of favor. But the bigger factor here is aging demographics. Next year Baby Boomers born between 1946-1964 range in age from 71 to 53. Thanks to the US Census Bureau we can see that the demand for nearly everything but health care becomes optional. They may replace a broken refrigerator, but few are furnishing huge homes these days. Many are instead downsizing as they give away furniture that is no longer wanted or needed.
In the meantime, the Millennials think differently than their parents. They have been slow to get high paying jobs, get married, buy homes (no matter how low interest rates might be), and start families. The Millennials who are starting families are often more fiscally conservative than their predecessors. Real fiscal conservatism is down-right admirable.
At the end of the day, there is no time for complacency. “Most individuals extrapolate past performance indefinitely into the future and become extremely complacent in managing for risk. What is important to remember is that for every ‘bull market’ there MUST be a ‘bear market,’” Lance Roberts at MarketWatch said on November 29, 2016. Roberts went on to say, “While ‘passive indexing’ sounds like a winning approach to ‘pace’ the markets during the late stages of an advance... it will also ‘pace’ just as well during the subsequent decline.”
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