1. Top Twenty Five GDP Quarters Since 2000 (Calculated Risk)
Let's start this update examining the GDP numbers for Q2 released July 27, 2018. As much as we appreciate any positive GDP number greater than 3%, the blogger Bill McBride writing for Calculated Risk posted the chart below to put the most recent GDP measurement in perspective since the beginning of the century.
Click on the chart to enlarge.
Source: Calculated Risk Blog
Bill writes: "Q2 2018 is the eleventh best quarter for real annualized GDP since Q1 2000. Note: unrounded, Q2 2018 was at 4.06%, just behind Q4 2004 at 4.07%." The solid results will make the second half of 2018 much more difficult for growth to continue accelerating.
2. It's Official: 8 Straight Quarters of GDP Accelerating (Hedgeye)
The Macro Team at Hedgeye wrote: "As you can see in the chart below, this is the longest streak of U.S. #GrowthAccelerating in history. U.S. GDP has now accelerated (on a year-over-year basis) for eight straight quarters. Remember, it's the slope of the line that matters in macro. This is not where you start to get bullish on growth."
Source: Hedgeye
3. How Hard is it to Become a 401(k) Millionaire? (A Wealth of Common Sense)
Ben Carlson writes: "In Fidelity’s defined contribution plan, there are roughly 157,000 people who have saved at least $1 million in their 401(k). There are another 148,000 people who have saved $1 million or more in an IRA. That’s only 1% or so of Fidelity’s total retirement plan participants."
If you were able to max out a 401(k), this chart shows how much you would need to save to reach 1 million dollars in your 401(k) at various starting ages. Please note how low your required return is if you start by age 30 or younger. Hence if you really wanted to help someone (maybe your kids or a relative) get ahead, gift them enough money in their twenties to allow them to max out their workplace retirement 401k/403b accounts. Alternatively if your kids don't have access to a 401(k) when they start working, set up a Kiddie Roth IRA for them. Learn more about them here. Always consult a tax advisor and/or a qualified financial advisor to make sure you are meeting current tax law and your personal financial goals.
Source: A Wealth of Common Sense
Please read Ben's entire post. He describes a few different retirement scenarios. Everyone under age 40 should read this article. Ben Carlson ends his post with the following:
"The numbers I ran here make it seem like it shouldn’t be that hard to save at least $1 million by retirement age. But everything looks easier on paper than in real life, especially when money is involved. Saving, investing and getting your personal finances in order is always more of an exercise in psychology than math. It would be irrational of me to suggest that “everyone” should be able to be a 401(k) millionaire because getting your finances in order is no easy task."
4. Extrapolating Growth (Hussman Market Comment)
This article speaks to the problem of investing when the prices an investor is paying for stocks become elevated. Moreover, the investor's error is using those recent return numbers to assume gains will continue forgetting that stock prices are becoming more elevated. John Hussman writes:
"For example, from 1982 to 2000, the S&P 500 enjoyed an extraordinary period of total returns averaging just over 20% annually. The primary driver of those gains wasn’t growth in revenue or earnings (though the combination of 4.6% average annual S&P 500 revenue growth and a high starting dividend yield certainly helped). No, the primary driver was expansion in the S&P 500 price/revenue ratio, which rose from a profound low of 0.3 in 1982, to an offensively extreme 2.2 by the 2000 peak.
Conversely, in the 9-year period from 2000 to 2009, the S&P 500 lost half of its value despite positive overall growth in revenue and earnings. The reason was that the S&P 500 price/revenue ratio collapsed from 2.2 to less than 0.7 over that period – a retreat that even 9 years of 4.7% annual revenue growth was wholly unable to offset.
From 2009 to 2018, the S&P 500 price revenue ratio advanced from less than 0.7 to a breathtaking multiple of 2.4 early this year – the highest level in the history of the U.S. stock market. Extrapolating the market gains of these past several years, as if they are somehow a birthright of passive investing, is likely to have brutal consequences for investors."5. Updating Some Performance Charts... (A Wealth of Common Sense)
Ben does an excellent job showing you the volatility associated with different asset classes and the post illustrates a common rule of investing that over decades: Stocks outperform bonds and bonds outperform cash. Currently, as we move later into this economic cycle, now the second longest expansion in the US since WWII, we need to be aware that the long term and short term may diverge. This means as we reach the end of the cycle the short term returns reveal the opposite of that long term investing rule. Hence, over a short amount of time, typically less than five years, cash and bonds will outperform stocks. This remains the case until the next expansion begins. If you are young and able to keep your job, dollar cost averaging through the drop in stocks will allow you to accumulate more shares. As volatility increases please consider these guidelines: 1) Have a plan for rebalancing 2) Minimize high cost credit and aggressive leverage and 3) Have a prudent emergency savings (typically 3-6 months of your personal expenses for someone in the workforce and 1 to 2 years of your personal expenses for a retiree). Below is Ben's chart showing the volatility of returns for stocks, bonds and cash since 1928.
Please click to enlarge.
Source: A Wealth of Common Sense
Notice the wide range of returns for stocks versus the relatively narrow return band for cash. I highly recommend you read his entire post to learn more about the historic volatility of investing.
Let's end with this quote from Apple co-founder, Steve Jobs:
"My favorite things in life don't cost any money. It's really clear that the most precious resource we all have is time."As always, wise investing my friends.
Please consult a qualified financial advisor before making any investment decisions. This blog is for educational purposes only and does NOT constitute individual investment advice.
