At the beginning of the second quarter, there was a lot of optimism about the future of the economy, especially later this year. It was reflected in stock prices as the markets climbed during April and May. However, the markets during the month of June had their worst performance in over 75 years being down about 10.2% as measured by the Dow. Other indexes fell as well. For the quarter, the Dow Industrials were down 6.85%, the S&P 500 was a negative 2.73%, and the NASDAQ was up 0.6%. The international arena had its own pain with EAFE down 2.25%. Since the markets hit a high last October, we have seen the Dow decline 19.9%, while the S&P is down 18.3% and the NASDAQ is down 20%. A bear market is “officially” proclaimed when the markets decline at least 20% from their high. We “officially” reached that level in the NASDAQ earlier this year and the Dow and S&P 500 may reach it soon. There have been six such instances over the past 47 years. Seasoned investors know intellectually that this is a natural part of the investing matrix and that historically the markets have always recovered and gone on to reach new heights, but it is an agonizing and annoying process. The “average” bear market lasts 14 months and takes the market down 31%. Having said that, the mildest was 21% (early 1990s) and the worst was 45% (1970s). The last bear market was led by the high flying tech stocks and this one is being led by financials and housing. At the start of the last bear market, the PE ratio for the S&P was in the 30s and this market before the fall was only in the teens. Although nothing is guaranteed, it is unlikely that we will see anything like the markets at the beginning of the decade. During times like this, it is important to remain disciplined and to not panic. Many investors will do just that and while they may avoid some of the future pain, should it occur, they will also likely miss a good portion of the upswing when it occurs. Timing the markets simply does not work in the long run as an investor must be right twice: when to get out and when to get back in. These markets have a habit of changing attitudes and as we once heard it said the bear market steals from the uninformed and gives to the informed investor. During these times, portfolios need to be carefully evaluated, but if you have a solid asset allocation, then remaining disciplined is generally an investor’s best course of action. Just as the markets made a big downward movement during June, at some point they will make a big movement in a positive direction. Rest assured that we are working hard to protect what each of our investors have and will be closely monitoring and assessing portfolios in light of the current circumstances.
Almost all of Wall Street and much of Main Street expected the Federal Reserve Board to leave interest rates alone at its meeting last week and that is exactly what happened. The Fed is having to do a delicate balancing act of trying to stimulate growth in our “icky” economy while at the same time not stoking the fires of inflation, especially as a result of rising energy prices. Raising interest rates at this point would likely be a devastating blow to the housing industry and to many of the financial companies that are still reeling from the credit problems of the past 12 months. For a month the Fed has been talking about the need to fight inflation, and while there was not an expectation that rates would be raised at this meeting, there is an expectation that this could happen by the end of the year. As we have learned, it’s hard to predict the direction the Fed will take at any given time. Although they left the door open to lower interest rates if needed, that door is only slightly ajar.
For the first time in history, the life expectancy of an infant born in the U.S. leapt past 78 years. While this is something to cheer about, there are 30 other countries whose infants have longer life expectancies. Japan has the longest at 83 years for children born in 2006. The leap in the expectancy rates in the U.S. was four months over the previous expectancy, which is extraordinary. On a long-term basis the increasing life expectancy is due to the ability of new medicines helping to fight many of the largest medical conditions that lead to death; especially cancer, diabetes, heart disease, and accidents. Of particular note was the mild flu season of 2006 that did not kill many young people or older adults.
Longevity has jumped dramatically over the past 110 years. As you do your financial planning, a major concern is out-living your financial resources. The good news on the longevity front may be bad news for many who failed to save or save adequately during their working years. (Source: World Health Organization and the National Center for Health Statistics)
Recently, Senator John McCain came out with a proposal to allow drilling in many places around the United States which, up to this point, has been restricted or not allowed at all. It gave us pause to think about ways to conserve gasoline. Another proposal which has been put on the table again by several different candidates is to eliminate the federal tax on gasoline – at least during the summer months. Obviously, this would drop the price, but from a conservation standpoint, it would likely encourage people to drive more which would increase demand and thus perhaps make prices rise even higher than they are today. We could take a chapter from our past and go back to driving at a maximum speed of 55 miles per hour – remember those days? Of course, few people actually kept to that speed limit, but it was in force for a long time. It is estimated that consumption would drop 1.4 billion gallons annually and would knock 5¢ off the price of a gallon of gasoline…hardly enough to get anyone’s attention, but it would nonetheless drop prices. Let’s really walk down “Nostalgia Lane”. When 55 miles per hour became the speed limit on all federal highways (1974), gasoline prices had increased to an unheard of level of 53¢ per gallon! My oh my, how times have changed! (Source: Kipplinger June 13, 2008)
Although we have shared this idea several times previously, now seems a good time to bring it up again. Many teens or young adults who are still in college are working this summer. Usually, they want to use their earnings to buy all of the things that are important to them now, and certainly saving money for their retirement is not high on their list. However, a parent or a grandparent can make a payment into a Roth IRA of the lesser of 100% of the child’s earnings or $5,000. This gift can be significant by the time a child reaches retirement at age 65. Take the teenager who tucks away $5,000 per year from age 16 through 22, when they graduate from college. This would be a total of $35,000. Let’s further assume that the IRA account earns an average of 8%. Obviously, there is no guarantee and this is for illustrative purposes only. At age 65, this would be worth $1.3 million. Even at a 3% rate of inflation, it works out to be almost $310,000 tax-free in today’s dollars. Not a bad replacement for “summer spending money”.
According to a study done by Price Waterhouse Coopers, medical costs, which had been astronomical for several years and then which seemed to have settled down, may be headed back up. The prediction of the survey is that medical costs will increase 9.9% in 2008 and then increase 9.6% in 2009. Businesses can look for significant double-digit increases in premiums as hospitals have continued to replace older buildings with more modern ones, including those with more rooms, something that patients/consumers are demanding. It will take a great deal of leadership at the national level to come to grips with these increasing costs, particularly as the Baby Boomers head into retirement and drive up the costs for Medicare, Medicaid, etc.
The darling of Wall Street for the last few years has been the Chinese stock market. All we seemed to read about last year was its almost doubling in price, as the Chinese Shanghai Stock Index rose 97% in 2007. While everyone knows that the stock markets around the world are down for the year, it may come as a surprise to learn that the Chinese Shanghai Stock Index had fallen 46% year-to-date as of June 20th. That means that in 2007 a $10,000 investment would have grown to $19,700, and that same investment would have a current value of $10,638. Oops! What happened to those “great” returns? (Source: BTN Research)
Throughout life, we often begin to take things for granted, believing that these “things” have just always been a part of our history. Notwithstanding the cell phones we use today, it’s hard to believe that the first telephone was put in use only about 120 years ago. My how far we’ve come! This year we will celebrate the 50th anniversary of a micro computer chip – yes – Jack Kilby first showed off his micro chip back in 1958. This first micro chip represented one transistor and was about the size of a normal paper clip…hardly what we would call “micro” by today’s standards, but in 1958 it was considered to be an enormous feat. Since then, everything keeps getting smaller and faster. Where would we be without Kilby’s invention? As exciting as it is to think about how far we’ve come in only 50 years, it’s even more exciting to think about what lies ahead over the next 50 years through innovation and American ingenuity.
As always, we encourage you to give us a call if you would like to discuss anything further. We will visit again soon.
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