Are value stocks dead?

  1. Are value stocks dead?

    How is it that stock markets can continue to hit new highs when the world is facing so much uncertainty? From the toll of natural disasters to an increasing array of political populism and saber-rattling of North Korea, nothing has yet sent markets off course. The fact is that financial factors still matter more. But when we look past the broad averages and push a little deeper, we can see asset class diversion that puts a different story behind the numbers. We have been keeping track all year of the performance gap between growth and value stocks. The former is up more than 19% while the latter has only managed a 5% gain in 2017*. Why has growth done so well while value has not? There are several explanations for the difference and there is something we can do about it. A small part stems from value’s strong performance in 2016 when it was up over 18% vs 7% for growth. Some of this is simply mean reversion. A more meaningful explanation derives from economic growth. Growth typically does better when economic growth is modest, while value typically does better when economic expectations are generally rising. Our economy is still growing at about the same 2% average we have seen since 2008, a bit of a letdown from higher expectations held at year-end. Investors put a premium on companies that can generate above average growth in any environment, which explains why technology is the only sector to exceed the overall returns from growth benchmarks. This…

  2. Finally.

    The Fed continues to un-amaze. If predictability is the key to a strong economy and strong markets, there is nothing to worry about. On the other hand, if gridlocked politicians, North Korea, miscellaneous hurricanes and a wild-card president are relevant to the economy, well, perhaps attention should be paid. Janet Yellen indicated that a rate hike, probably .25%, will come to pass in December with more to follow next year. She also said that the Fed will begin unwinding its balance sheet now, initially by not purchasing new securities as old ones mature. This will remove $10 billion a month from the balance sheet in the near term, gradually increasing to $50 billion a month within 12 months. Depending on how closely this plan is followed, returning to pre-2008 levels would take something over ten years, although we don’t know what the final level will be. A lot can happen in ten years. We are almost ten years removed from the problems that led to low interest rates and quantitative easing in the first place. The beginning of World War II to the beginning of the Cold War took less time. The smart phone is just ten years old. Within ten years of President John F. Kennedy telling the country we had the resources and talents necessary to land an astronaut on the moon, we did just that. Perhaps all will go smoothly for the Fed and the economy, but it probably will not. An asset reduction plan has never been tried by any Central…

  3. Time to drop the inflation target

    Low inflation is becoming a problem for Janet Yellen and the Federal Reserve. We could be forgiven for thinking low and steady inflation in a growing economy was a good thing. But it wasn’t supposed to be this way. Forecast models used at the Fed rely in part on something called the Phillips curve. Created by A.W.H. Phillips through his study of wage inflation and unemployment in the United Kingdom from 1861 to 1957, the curve was said to reflect a consistent inverse relationship. When unemployment was high, wages only increased slowly; when unemployment was low, wages rose rapidly. Fed forecasts have consistently predicted that, as our unemployment rates moved downward over the last several years, wage growth would accelerate, allowing them to reverse the significant easing implemented after 2008. Once we crossed the level they felt represented full employment, currently 4.6%, wage growth would accelerate. Problem is, wage growth has only grown slowly the entire way. Even with a 4.4% unemployment rate (it crossed 4.6% in March), wage growth is unchanged and inflation has actually declined. This isn’t what the models predicted. Furthermore, since that target was created in 2012, inflation has resisted 2% for most of the past five years. There are some economists claiming that the Phillips curve is all but dead. Some critics believe the 2% target was too high in the first place, that various global factors have had the effect of permanently lowering the long term trend of inflation. In any case, the Fed is approaching a fork in…

  4. Retirement Success Needs a Good Plan

    Benjamin Franklin is supposed to have once said, “If you fail to plan, you are planning to fail.” When we want to get from here to there, leaving success to chance is a fool’s errand. The path to a successful retirement is long and winding. Creating a plan for your family is critical to anticipate and prepare for change, to measure your progress, and clarify roles and responsibilities. According to the Department of Labor, fewer than half of Americans have calculated, let alone simply thought about, how much they need for retirement. In 2014, 30% of private industry workers with access to a defined contribution plan (such as a 401k), did not participate. Keep in mind that the average American spends 20 years in retirement, which means many spend much more time. They also suggest the following sensible steps, click here to find out more: 1. Start saving and keep saving. You should save for retirement with your first paycheck and continue to your last. Some experts recommend saving as much as 15 percent of each paycheck — after tax. 2. Figure out your retirement needs. Think about what you want to do. 3. Contribute to your employers retirement savings plan, as much as possible 4. Do you have a pension plan? Learn about it. 5. Consider basic investment principals such as inflation, diversification, compounding and the like. Educate yourself. 6. Don’t touch your retirement savings for anything other than retirement. 7. If your employer doesn’t offer a plan, ask them to start one. Be…