state of mich

Double Trouble

May 29, 2008 by  


By Bob Wood, MMNS

Those of us who seek the reality of what’s truly happening with the U.S. economy and stock market know well that the raging debate between the Bulls and Bears has become mighty frustrating for many investors wondering what to do with their investing dollars. A look at the historic performance chart for the S&P 500 will shine some light on their dilemma.

That index sits today at about the same level as it did in November.of 2006! For those who bought the bullish case and remained invested in the domestic stock market since then, results are not so good. It’s not just that they haven’t made money on domestic stocks in the past 18 months, but, also during that time, the value of the dollar has fallen. And the costs of living have risen dramatically!

Over the past year, the price of oil has doubled, and many food commodities costs have jumped even faster. Even those investors who were lucky enough to match the return of the S&P 500 over this period have still garnered obvious losses in real terms, after inflation.

This scenario gets even worse when we look at a longer time period, say for the more than eight years beginning at the start of this decade. Today, the S&P 500 stands at a point under 1,400 after peaking early in the year 2000 at over 1,500. Since most investors tend not to outperform benchmark indexes over longer time frames, in nominal terms, most S&P 500 investors have incurred small losses.

Of course, in real terms – meaning after inflation, their losses are far larger. This bit of research is a clear indicator that these are not normal times for stock holders. We are led to believe that, typically, the average bear market lasts for about a year to a year and a half. But here we are, eight years into a market that has, for too many investors, only offered losses.

Isn’t this an obvious sign that we are ensconced in the worst market environment for investors — a secular bear market? What I find truly amazing, however, is how few investors, even after seeing this historical data, will believe it! I don’t know what more they need as a compelling case for avoiding the domestic stock market, but this one zooms right by too many.

I have been filling this space with similar information for nearly four years now. Yet I wonder how many of you still have money — maybe the majority of your investment assets — in home markets? What more do you need to be convinced that this is the worst time to allocate your precious savings into what has been one of the worst-performing major markets on the planet for the past few years?

I’ll bet I can guess why many of you are still heavily invested in domestic markets. We find no shortage of hopeful “experts” in the financial media calling a “bottom” in this or that sector of the economy or in the stock markets, and that hopeful talk works for many investors. Some in the media still fill their air time talking about the “just right” Goldilocks environment, and I am steadily amazed at the number of investors who accept that rationale as sufficient for domestic allocation of their savings!

Well, I believe that Goldilocks has been pronounced dead, and nothing remains to bolster the argument that our economy will resume its growth path higher any time soon. Much of my reasoning is based on how slow the economy has been growing, notwithstanding reported GDP growth over the past couple years — statistical manipulations rather than the stark facts issued by those trusted government bureaus.

If you’d like to do a bit of easy analysis, look at the twin threats emerging in our economy today. By now, you all know that the housing market is in big trouble. Contrary to what we’re promised by government and financial experts, this important sector of our economy is not ready to rebound any time soon. Since consumer spending has been powered, by no small degree, to cashing out equity and refinancing homes over the past few years, that spending source has dried up.

We also know that the average American consumer does not have sufficient income to allow for savings, especially after spending as we have over the past few years. A recent article posted on “Yahoo Finance,” reported that consumers have adjusted to the lack of “cash-out” capability in their home equities. Now, 25% of those with retirement accounts – such as 401(k)s — are taking premature distributions from those savings accounts! Does that look like sustainable growth to you?

So where will economic growth come from — if not the consumer? Adding to this hurdle is the rising price of energy. This dilemma spells double trouble for consumers with gas prices now reaching the $4.00/gallon and with the huge drain also affecting small businesses and industries like the airlines, which are already in big trouble.

Should the price of energy remain high for any length of time, spending in the U.S. is in real trouble, sending even more consumer dollars to foreign coffers. High energy costs are boosting inflation, now estimated to be as high as 10% by economic analysts previously mentioned in this column.
In short, this double trouble for the American consumer will make rising corporate profits difficult to produce, and earnings would need to rise significantly to justify today’s stock market valuations.

State and local governments are under enormous strain, too, as they try to provide services with lower tax revenues. They face declining revenues from many homes entering foreclosure, property taxes going unpaid, slower new development, and tax revolts by homeowners demanding lower property taxes to reflect the falling values of their homes.

Combine those falling revenues with the increased costs for operating school buses, police cars and fire trucks — and keeping the lights on at many large public buildings (like schools). Where will the revenue for increased spending come from?

Bullish promoters in the financial media prefer simply to wave away the threats to our economy, relying on baseless platitudes like “Things always get better” and “You must buy stocks when things look bad, or you’ll miss the best opportunities to profit.” They assure us that high gas prices will be the cure for — high gas prices, inflation will fall and all will be well again.

If that’s all the encouragement you need to bolster your courage and keep your money invested in the domestic stock market, I’m thinking “Too bad for you!”. Yes, the bullish promoters have assured us all along that the price of oil would fall from whatever new record level it had reached in preceding days or weeks. So far, they’ve been dead wrong! And investors who followed their nonsense are paying the price, in lost opportunity to find better markets around the world and in lost time. Eight years is a long time for those in their prime savings years to make no money.

Since secular bear markets tend to run about as long as the preceding secular bull market, this bear market may have another 10 years to go. With the tanking housing market plus the rapidly rising costs of food and energy adding to the drag of an over-valued stock market (as seen in the S&P 500), I see little reason for most investors in the domestic markets to expect anything better than minimizing their losses.

I will say it again, and, this time, I hope it does some good: looking seriously at international markets, allocating some of your savings into commodities like gold and energy, and avoiding a market with major, obvious threats to its underlying economy are absolute musts. Ignore this advice at your peril.

Have a great week.
Bob

Bob Wood ChFC, CLU Yusuf Kadiwala. Registered Investment Advisors, KMA, Inc., invest@muslimobserver.com.

 

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