Trade tensions escalated last week as the U.S. administration expanded tariffs on Chinese goods last week.However, you wouldn’t have known by watching the performance of various world stock market indices. Just four of the 25 national stock market indices tracked by Barron’s – Australia, Italy, Spain, and Mexico – moved lower.
However, if you look a little deeper into the performance of various market sectors, you discover an important fact: The market tide wasn’t lifting all stocks. It has been said a rising tide lifts all boats. When translated into stock-market speak, the saying becomes, ‘A rising market tide lifts all stocks.’ In other words, when the market moves higher, stocks tend to move higher, too. That wasn’t the case last week.
Barron’s reported investors have become more selective:
“We went from a market where everything moved largely together to one where sector fundamentals began to matter more than where the S&P 500 was going...At the sector level, it’s apparent that no one has been ignoring tariffs. While the S&P 500 has gained 1.7 percent over the past month of trading, industrials and materials have dropped 2.5 percent, while financials have slumped 2.9 percent, hit by a double whammy of trade fears and a flattening yield curve. Utilities and consumer staples have outperformed, gaining 8.1 percent and 3.5 percent, respectively.”
Utilities and Consumer Staples are considered to be non-cyclical or defensive sectors of the market because they are not highly correlated with the business cycle.
Defensive companies tend to perform consistently whether a country’s economy is expanding or in recession. For example, a household’s need for power, soap, and food doesn’t disappear during a recession. As a result, the revenues, earnings, and cash flows of defensive companies remain relatively stable in various economic conditions.
In addition, the share prices of these companies tend to be less susceptible to changing economic conditions. Defensive stocks tend to outperform the broader market during periods of recession and underperform it during periods of expansion.
Inflation has reached its highest level in the last highest in six years. After years of struggling to stay above 2 percent, the CPI is now approaching 3 percent. The price increase in June was actually weaker than expected but still enough to reach an intermediate-term high. U.S. consumer price index grew by 0.1 percent for the month of June, slightly below the 0.2 percent forecast. In the last year, the CPI has risen 2.9 percent, the largest gain since February 2012. Core CPI, index excluding food and energy, rose 0.2 percent in June, raising the annual Core CPI growth to 2.3 percent.
We expect inflationary pressure to continue. A tight labor market, trade tensions, and increasing input prices for producers will continue to affect inflation for months to come. The producer price index rose 0.3 percent in June, also reaching a six-year high in annualized growth. An increase in prices for producers could carry over to the consumer and would lead the Federal Reserve to raise rates at a quicker pace. This would increase borrowing rates for producers and consumers.
Key points for the week
- The U.S. consumer price index (CPI) annualized growth hit a six-year high.
- Producer prices continue to be affected by a tight labor market and trade tensions.
- Markets posted strong gains for the second straight week.
What are the biggest risks for retirement investors?
Recently, T. Rowe Price surveyed employers that offer defined contribution plans, like 401(k) plans, to their employees. T. Rowe Price asked plan sponsors to rank the risks they were most concerned about for the people who saved in the plan. The top concerns were:
42 percent = Longevity Risk. No one knows exactly how long they will live, which makes it difficult for plan participants (and anyone else planning for retirement) to be certain future retirees won’t outlive their savings. Longevity risk was among the top three risks listed by 95 percent of plan sponsors.
25 percent = Participant Behavioral Risk. “Left on their own, participants tend to take on either too much or too little risk by: failing to properly allocate and diversify their savings; overinvesting in company stock (or stable value/money market funds); neglecting to re-balance in response to market or life changes; and attempting to time the market,” explained T. Rowe Price.
14 percent = Downside Risk. This is the likelihood an investment will fall in price. For instance, stocks have higher return potential than Treasury bonds, and higher potential for loss. When planning for retirement, it’s important to balance the need for growth against the need to preserve assets.
- Rowe Price also calculated various benchmarks to easily estimate the target savings level needed based on age and income. Here are the multiplies of income needed for 55, 60 and 65-year old’s, which are also further broken down between singles and married couples/sole earners.
T. Rowe Price's calculations make several assumptions. A key one is that the savings will be big enough to last a retiree or retired couple 30 years. Another is that the savings are invested so they grow 7% a year on average. A third assumption is that the worker retires at age 65. A fourth is that he or she withdraws 4% in the first year of retirement. Annual withdrawals after that will be approximately in line with that but can vary, depending on circumstances.
If you are below the benchmark, you may need to increase your retirement plan contributions, invest more aggressively, delay retirement, reduce your retirement standard of living or a combination of these options.
If you would like to learn more about these retirement risks and strategies that may help overcome them, give us a call.
What are we reading?
Below are some articles we paid particularly close attention to this week. We encourage our readers to follow the links.
Doug Ferrigno lost his river home due to Hurricane Sandy in 2012. He was finally able to move back and received a call from the local police department. They had found his Jet Ski on someone’s front lawn six miles away. The Jet Ski didn’t have any scratches and the keys were still in the ignition. It started right up! For Ferrigno, this find provides closure for the last six years.
Mark Zuckerberg, co-founder of Facebook, recently passed Warren Buffet as the third richest person in the world. Most of Zuckerberg’s wealth is in Facebook stock, with he estimated net worth reaching $81.6 billion.
Amazon accounts for approximately ½ of all online retail sales. Their total share of all retail sales is only 5%. Amazon started out as an online bookstore but is fast approaching a point where people will spend more at Amazon.com than all other retailers combined.
"Do something for somebody every day for which you do not get paid."
~ Albert Schweitzer
“Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat.”
~ Sun Tzu, Chinese general and military strategist
"If you find it in your heart to care for somebody else, you will have succeeded."
~ Maya Angelou, poet
"Behold the turtle. He makes progress only when he sticks his neck out."
~ James Bryant Conant, Chemist & Educator
Links & Disclaimers
RJFS and SPC do not offer or provide legal or tax advice. Tax services and analysis are provided by the related firm, S&M through a separate engagement letter with clients. Portions of this newsletter were prepared by Carson Group Coaching. Carson Group Coaching is not affiliated with RJFS, SPC or S&M. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. This information is not intended as a solicitation of an offer to buy, hold or sell any security referred to herein. There is no assurance any of the trends mentioned will continue in the future. Any opinions are those of the author and not necessarily those of RJFS. Any expression of opinion is as of this date and is subject to change without notice.
Opinions expressed are not intended as investment advice or to predict future performance. Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Past performance does not guarantee future results. Investing involves risk, including loss of principal. Consult your financial professional before making any investment decision. Stock investing involves risk including loss of principal. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock companies maintained and reviewed by the editors of the Wall Street Journal. Please note direct investment in any index is not possible.
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