With headlines like “Stocks hit all time high”, “Breaking Records: Dow and S&P 500”, or “It Looks Like The Economy is About To Roar”, you might expect to see a remarkable chart showing lots of growth.
But not this time. Far from it.
After a stellar 2013, the US stock market has limped into 2014. Perhaps the media is grasping at straws in an effort to keep viewers engaged. Those headlines sure make things look great. But the charts tell a different story.
While the stock market continues to remain orderly, there have been some recent changes. The prices of many of the momentum stocks, which are long on promise and short on earnings, are down 50% or more so far this year. The iron law of valuation always wins. Fortunately, the stock prices of large traditional companies are holding (keeping many stock index returns slightly positive for the year). This could be a return of rationality, which bodes well going forward. While the valuation of the broad market is still rich, it is still well below previous extremes. It looks like it is headed higher.
Recent numbers on the state of the economy are mixed at best. The early report on first quarter GDP came in flat. The unemployment rate has improved substantially, but this is due to a decline in the U.S. labor-force participation rate. The stock market advance continues without much support from the economic fundamentals. Perhaps stock investors are looking ahead, optimistic about what they anticipate. For example, new technologies in natural gas production are boosting the oil & gas industry. These technologies are increasing domestic supplies, dramatically lowering energy costs and therefore potentially igniting a domestic manufacturing renaissance. Other technologies, too numerous to itemize, are also changing the world for the better. Innovations have become commonplace and, in past, solutions from seemingly nowhere have solved the challenges we faced. Why not this time, again.
Then there are bonds. Last year the interest rate on the 10-year Treasury spiked to 3% at year-end from an epic low of 1.75%. This left the Bloomberg U.S. Treasury Bond Index with a loss of 3.4% and the Barclays U.S. Treasury Inflation Protected Securities Index with a loss of 8.6%. So far this year, the interest rate of the 10-year Treasury has dropped back down to about 2.6%, resulting in higher year-to-date bond prices. The Bloomberg U.S. Treasury Bond Index is up about 2.6% and Barclays U.S. Treasury Inflation Protected Securities Index is up almost 3.8% this year. This is not something that normally happens in an improving economy. Rates should be going up and bond prices down; especially with the Fed’s Quantitative Easing bond buying program pulling back. However, rates are so far stable to down and bond prices are up. Perhaps higher bond prices are the result of the shortage caused by the years of the Fed’s bond buying. Or perhaps it is because our bonds look attractive relative to those globally. U.S. Treasuries are still seen by the world as a safe haven. Therefore, bonds look attractive for now despite interest rates remaining near historic lows.
The markets remain orderly. However, as always, participate with caution.
About 12-13 years ago, no one could turn on the TV or read an article about current events that did not talk about an energy shortage.
Fear was gripping the nation that one day soon the world would run out of oil. Charts were posted showing that at current consumption levels, we had 50 years or so of oil left . China and India with their surging economies and rising middle class were going to create such demand on this “limited” resource that it would cripple growth in this country. OPEC was adjusting the pricing of oil in part for political purposes. We were in a sense held hostage.
And the government’s solution to all of these problems at first was: Soybeans?!
It was during this time that I saw someone speak on this topic and his prophetic words rang true years later. He said “We will never run out of oil. There is plenty of it in the ground but it is just too expensive to extract right now. As the price climbs and technology improves, supply will start to increase. Between us and Canada, we could be energy independent.”
Look at where we’ve come in such a short period of time. Technology advancements have opened up oil reserves that were impossible to access only a few years before. It has been a long time since an OPEC meeting made news. We are expected to be energy independent in just a few short years.
So why were we so fearful and afraid?
As Matt Ridly of WSJ notes, static limits do not factor innovation. “Ecologists can’t seem to see that when whale oil starts to run out, petroleum is discovered, or that when farm yields flatten, fertilizer comes along, or that when glass fiber is invented, demand for copper falls.”
This phenomenon deals with all sorts of resources: Natural gas, gold, phosphorus, silicon, forests, water, food, and dozens of others. One case after another exemplifies human innovation solving epic problems.
Perhaps Julian Simons is correct that the ultimate resource is the human mind.
Last fall, I completed a series of energy efficiency upgrades to my home – most significantly I added insulation to the attic. I’ve been curious to see if the touted claims of energy savings were reflective of my actual experience. It may be too soon to tell, but my initial results are quite promising.
My first step was to calculate how much colder this winter was compared to last winter. I found a website that could help me calculate Heating Degree Days. It’s the difference between the cold outside temperature and the desired indoor temperature. The chart below shows the cumulative heating degrees needed to reach my desired indoor temperature. In total, this past winter was about 12% colder than the winter before based on these calculations.
If I were to have done nothing to the house, I would expect my energy usage to have increased by 12% or more since more heat loss occurs the colder it is outside.
After comparing the fuel purchased during the winter and adjusted for what was in the tank at the start and end of the season, I discovered that I used exactly the same amount of oil per month as I did the year before, not 12% more.
If my assumptions are correct and the insulation reduced my heating expenses by 12%, then I would recoup my investment in less than 2 years. That beats the rules of thumb I’ve seen of 5 years.
This gives me a warm feeling.
I’m glad to see the concern for an over reliance on backtesting investment strategies is starting to make itself known. Good article here in Barrons.
Here are a few pointers we follow when evaluating new ETFs that have launched:
1) Look for simplicity. Any strategy that appears to be vague or confusing raises flags for us.
2) Watch the charts. It’s extremely rare that we would recommend an ETF without a 6-12 month track record. We want to understand some of the risk and volatility factors of the actual ETF and compare that to the backtested results.
3) Understand the manager. We dig deep to understand the manager or the shop behind the ETF and look at their track record.
4) We look elsewhere to confirm our thoughts. Morningstar and etf.com can offer a lot of insight on new strategies.
One of the most frequently asked questions regarding retirement income deals with the withdrawal rate. “ How much can I take out?”. Below is the best chart I’ve seen that illustrates the damage that can be done if a retiree takes out more than 4% per year.
Disclaimer: * Hypothetical value of assets held in a tax-deferred account after adjusting for monthly withdrawals and performance. Initial investment of $500,000 invested in a portfolio of 50% stocks, 40% bonds, and 10% short-term investments. Hypothetical illustration uses historical monthly performance from January 1972 through the most recent year from Ibbotson Associates: stocks, bonds, and short-term investments are represented by the S&P 500® Index, U.S. intermediate-term government bond, and U.S. 30-day T-Bills, respectively. Initial withdrawal amount based on 1/12 of applicable withdrawal rate multiplied by $500,000. Withdrawals are inflation adjusted. Subsequent