Time for an Economic Sabbath?

After feeling somewhat exasperated while watching a reputable financial news program last week, an idea occurred to me: we need to re-introduce the Sabbath. Not in the religious sense of the word, but as a general day of rest from financial or economic progress. The notion struck me after hearing a reporter express dismay over a softer-than-expected read on some monthly economic data point. While I realize the media is paid based on viewer ratings and that doom-and-gloom stories attracts more attention than upbeat forecasts, it would still be nice to acknowledge what’s going right every now and then. And I think it would also be beneficial.

As everyone knows, our market system is based on capitalism. Lesser known is that we’re in a period of what’s called “growth capitalism.” But this hasn’t always been the case. Merchants only started tracking growth metrics during the Industrial Revolution, according to the book, “The Economics of Good and Evil.” Capitalism, as defined by my Google search, is an economic and political system in which a country’s trade and industry are controlled by private owners for profit, rather than by the state.   Notice that there’s no mention of the word “growth”. Now, I’m all in favor of growth, but with purpose and ideally, some periods of rest. Because growing all the time without set-backs, pauses, and most importantly, reflection, is unsustainable at best and dangerous at worst.

Dangerous because if growth must be achieved at all costs, debt often results as an unintended consequence. When nations and even individuals feel the need to grow for the sake of growth, they often go to extreme measures, often taking out more debt to meet unrealistic targets. For nations who have an independent Treasury, they are able to manufacture more paper money and at least temporarily out-run mounting debt levels. Individuals aren’t so fortunate – or are we? Knowing we can’t manufacture our own currency out of thin air, most individuals curb spending and debt issuance and work to live within their means. We ideally accumulate rainy-day savings funds for when growth naturally slows down or declines, i.e. a job loss or unexpected expense comes up.

But back to a financial or economic Sabbath. It seems in our modern-day society where growth is the undisputed law of the land we frequently fail to appreciate what is going right. We’re so afraid of not hitting the mark that we neglect to notice job growth is on the rise, unemployment is pretty darn low, and the housing market is on the mend. Sure there are plenty of problems that need attention, but acknowledging and even appreciating our relatively healthy economy in no way negates the problems. I would argue that focusing on what’s working and improving actually gives us more energy and capacity to better work with prevailing problems.

Finally, instituting a financial or economic Sabbath, if even on an individual level, allows us to shift from a deficit mentality to one of “enough.” As I reflected on the financial news program that got me thinking about a Sabbath, I realized that having to always meet certain growth targets implies a belief that our current situation is not okay, i.e. a deficit mentality. And interestingly, this mentality is prevalent at a time when debt as a percent of GDP has never been higher. It seems we’re creating what we fear the most – a big ole’ deficit.

Fortunately, things aren’t as bad as the media would have us believe and it’s not too late to stop and smell the flowers. Individually taking stock of what is working and how much we do have (we live during the wealthiest period in the history of the world) can start to reverse our collective deficit mentality and maybe turn the tide towards sustainable, purpose-driven growth.

 

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Carrie A. Tallman, CFA
Director of Research

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THE GREEK MESS WON’T HURT THE US ECONOMY

The International Monetary Fund (IMF) has performed a valuable public service by publishing a detailed “Debt Sustainability Analysis” for Greece on July 2. While this document is written in typically dry “bureaucratese,” it lays bare the failure of the strategy of “kicking the can down the road” that the other Euro Zone countries have been using with Greece for the past five years.

Dr. Carl Weinberg is Chief Economist at High Frequency Economics and a veteran of the mostly successful Brady Plan debt restructuring program of 1989-1992. Those negotiations took debt loads that were impossible and restructured them, in a manner similar to the way failing corporations are restructured in the US. Brady Plan deals were worked out for Argentina, Brazil, Bulgaria, Costa Rica, the Dominican Republic, Ecuador, Ivory Coast, Jordan, Mexico (the first one in 1989-1990), Nigeria, Panama, Peru, the Philippines, Poland, Russia, Uruguay, Venezuela and Vietnam.

Dr. Weinberg suggests that the €323 billion ($358.3 billion) Greek debt be restructured into bonds with a maturity of 100 years, a coupon (interest) rate of 5.0 percent and a 25-year grace period before the first payment is due. This would give Greece “breathing room” and would keep all its creditors (primarily the European Central Bank (ECB), the European Financial Stability Facility (EFSF) and the IMF) from having to take a “haircut” on their holdings of Greek debt.

Not very surprisingly, the IMF analysis does not go this far. However, it rather drily suggests that extending the grace period to 20 years and the amortization period to 40 years (an effective doubling of each) together with new financing, would barely be adequate.

Greek voters went to the polls on July 5 in a hastily arranged referendum to vote “yes” or “no” on accepting terms from the creditors that were withdrawn on June 30. Thus, it’s not really clear what they were voting on. The wording in the ballot was also very confusing. It read: “Should the draft agreement submitted by the EC, ECB, IMF to the eurogroup on June 25, which consists of two parts that make up their full proposals, be accepted? The first document is titled, ‘Reforms for the Completion of the Current Program and Beyond’ and the second ‘Preliminary Debt Sustainability Analysis.’”

Despite that convoluted wording (it can’t possibly be any clearer in Greek), the 62.5 percent of voters who turned out gave a victory by a 61.3-38.7 percent margin to all those wishful thinking people who believe that reality won’t triumph. Greece is being kept afloat by the ECB. If they stop doing that, the banks will all be bankrupt. No one knows where this disaster will go.

Now the creditors need to follow the IMF recommendations, which include another €60 billion ($66.5 billion) of new money through 2018. This is in addition to the restructuring of all the existing debt.

Like so many economic problems in the world, the Greek mess will be finally resolved when there are no other options. If Greece were to leave the Euro Zone (a terribly complicated exercise), it would be hit with horrendous inflation and an even bigger collapse of the economy that the 25.0 percent decline it has already experienced since 2009.

Greece needs debt relief. It also needs to reform its ridiculous pension system to conform to those of the rest of the Euro Zone and figure out ways to collect taxes that are owed.

The Greek economy is about $200 billion a year in real GDP. That’s close to Alabama ($199.4 billion in 2014) or Oregon ($215.7 billion). Both are 1.2 percent of the US total.

A failure to follow something like the prescriptions of the IMF or Dr. Weinberg will condemn the Euro Zone to remain mired in a recession that began in the first quarter of 2008. Some people would argue that a recession lasting that long ought better be called a depression.

Either way, whatever happens to Greece is mainly a problem for the Euro Zone. It is simply too small an economy to have a major impact on the US. Most of whatever impact there might be would come through damage done to overall Euro Zone growth, rather than directly from Greece itself.

Dr.  James F. Smith, Chief Economist.

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Economic Predictions and Investment Decisions

The economy is an important factor that drives both capital markets and personal financial decisions. While we continuously monitor the latest economic news, have an opinion about the direction of markets, and incorporate these factors into our stock selection process, market or economic predictions do not drive us to make tactical shifts in your portfolio allocation.

We often hear, “What do you think the market will do this year?”

After a hefty caveat that the future is unknowable, and short-term market predictions can be hazardous to your wealth, we usually talk about the current economy, how it might affect markets in the near-term, and then provide a more intermediate-term view of the health of the U.S. and global economies.

Our investment philosophy hinges on the abiding belief that an investor should not attempt to time the market. That’s to say that an investor should not move his or her money in and out of asset classes based on economic predictions, or beliefs about what the market may do over the next few years. Rather, when we make decisions in a client’s portfolio, it is based on two factors: 1) asset allocation – based on the client’s financial goals and risk tolerance; and 2) individual security selection – used to comprise the contents of the asset classes that have been prescribed for the portfolio.

An investor’s asset allocation, if chosen correctly, shouldn’t fluctuate based on changes in the economic landscape. Instead, asset allocation should be reviewed regularly and modified if the individual’s financial situation changes. It’s the second of these two – security selection – where a bit more prognostication comes in. To be sure, we are fundamental analysts. We look at a company’s earnings, growth potential, balance sheet and cash flows relative to its price to determine whether or not the stock represents a good buying opportunity. Understanding the economy helps us understand those companies better. It helps us determine what the growth drivers of a certain sector may be, and what the consumer trends may look like for a given company. Understanding the economy is a critical component of our stock selection process.

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Our Chief Economist, James F. Smith, provides insight to Parsec’s clients regarding the local, national and global economy. We appreciate Jim’s experience and perspective on economic matters, and we believe our clients enjoy getting to know him at various engagements, and of course hearing his entertaining, plain-spoken and informative economic speeches.

Recently, Jim was featured in an Asheville Citizen-Times article called “The Wisdom of Mr. Smith” about his success predicting housing prices. Way to go Jim! You can read that article here:

http://www.citizen-times.com/story/money/business/2015/05/08/asheville-economist-nations-top-housing-forecaster/26975203/

While economic predictions don’t drive us to make tactical shifts in our portfolio allocation, economic factors do play an ongoing role in our security selection process. To see Jim’s economic commentary each quarter be sure to read our newsletters. Back copies can be found here: http://www.parsecfinancial.com/news.html

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GREAT NEWS ON INCOMES, SPENDING AND INFLATION

The Bureau of Economic Analysis (BEA) hit a trifecta in its March 2 release, “Personal Income and Outlays: January 2015.” As the chart below shows, the first piece of wonderful news was that real disposable personal income (DPI), which is what you have left of your income after taxes and inflation, hit a new record in January of $12.246 trillion at a seasonally adjusted annual rate. That finally eclipsed the old record of $12.214 trillion at a seasonally adjusted annual rate set in December 2012. That old record was an unsustainable outlier at the time, which was caused by many people who had the ability to bring income such as bonuses and special dividends forward to avoid the higher tax rates of 2013, doing exactly that.

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Conversely, the January 2015 record was driven by a seasonally adjusted increase of $42.4 billion in wage and salary income from December. That accounted for a very healthy 83.5 percent of the total increase in personal income of $50.8 billion, seasonally adjusted. That strong performance of wages and salaries suggests that, driven by ever-growing employment, disposable personal income will set many more records in 2015 and 2016.

Even more astonishingly, real disposable personal income rose by 0.9 percent in January from December. That was the biggest increase since—you guessed it—the 2.84 percent spurt in December 2012, which was on top of a very strong increase of 1.44 percent in November 2012. Of course, real DPI plunged by 5.9 percent in January 2013, the biggest drop in over 50 years. That is most unlikely to occur this time, as we will see when we get the data for February 2015 on March 30.

This 0.9 percent increase in real DPI in January is even more amazing, because January wages and salaries are hit every year by increases in Social Security taxes on both employees and employers. Every employed person who exceeded the $117,000 taxable maximum in 2014 before December 31 had to start paying again on January 1. This year the tax covers wages and salaries up to $118,500. That change subtracted an additional $7.9 billion in January.

Note the phenomenal growth in real DPI in the previous chart. It is now six times higher than in 1959, triple the 1973-1975 level and double where it was in 1987-1988. It’s up more than 20 percent since 2009. Most countries would be delighted to have such terrific growth in DPI over comparable periods.

The second piece of great news in the report was the fact that real personal consumption expenditures (PCE) set a new record in January of $11.164 trillion at a seasonally adjusted annual rate, as shown in the following chart. That was up 0.3 percent from December and a very impressive 3.4 percent from January 2014. Because real PCE makes up by far the largest share of real GDP (68.2 percent in 2014), this strong beginning to 2015 reinforces the consensus forecast that this will be the first year since 2005 to see real GDP growth of 3.0 percent or more.

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The third piece of wonderful news was the continued low rate of increase of so-called “core” inflation, the implicit price deflator for PCE less food and energy. The chart below shows how this measure rose in the late 1970s and early 1980s hitting a peak of 4.02 percent in January 1981. It is probably not a coincidence that that was the month when President Reagan took office, as his first official act was to deregulate oil prices. While both energy and food are excluded from this index, the impact of that decision had far-ranging consequences in reducing inflation.

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The overall PCE deflator fell 0.5 percent in January from December and was only 0.2 percent above January 2014. That was primarily because “Energy goods and services” registered price declines of 10.4 percent in January from December, and fell a whopping 21.2 percent from January 2014.

This very small increase in the overall PCE deflator made a big contribution to the 0.9 percent jump in real DPI. The rest came from the large increases in nominal income.

This BEA report is one of the best ones we’ve had in many years. It should be followed by much more good news on income and spending by consumers in coming months.

Dr. James F. Smith
Chief Economist

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Kit Kats, Blow Pops, and the Benefits of Diversification

“But international stocks are underperforming the S&P 500! Why are you buying international mutual funds in my account?”

We hear this question a lot. People often wonder why we include various sectors and asset classes in our portfolios, but the one that tends to get the most scrutiny is international equity. Many investors exhibit what is known as “home bias,” or the tendency to invest primarily in domestic securities, whether it stems from a nationalistic desire to “buy local” or simply the belief that international investing carries additional costs and complexities. Often, investors eschew international diversification to their detriment, as many studies have shown that the inclusion of international equities lowers portfolio volatility while increasing risk-adjusted return. However, these metrics are not what investors see – they see performance. They see that the return on their international fund is lower than the return on the S&P 500 and fear that it will be a drag on their returns forever. So why don’t we sell it?

Quite simply, we keep it for the diversification benefits. With Halloween just around the corner, perhaps an analogy will help. When you’re trick-or-treating, you knock on the door of every lighted house and collect as much candy as you can carry home. Then you dump it out on the floor and sort through it to revel in the spoils. Hopefully you’ll come home with lots of chocolate candy bars, M&Ms, Milk Duds, Junior Mints, and Reese’s cups. Then there might be a smattering of Smarties, Starburst, and Skittles, which are fine. Invariably there will be a few of those orange and black-wrapped peanut butter taffies, some chalky Dubble Bubble and a handful of Dum Dums – but that’s OK. A few crummy candies won’t ruin the night, since you have so much more of the good stuff. And you never know which houses are going to hand out what candy, so you have to hit them all. (And to the person handing out raisins, just stop. Don’t be that guy.)

Now imagine that your portfolio is a bag of Halloween candy. Even if you love Snickers, it would be pretty disappointing if your entire haul was nothing but Snickers – that would defeat the purpose of trick-or-treating, because you could simply go to the store and buy a bag. No, you want a wide variety from which to choose, based on changing moods and cravings! In a similar way, you need to diversify your investments so that the mood of the day doesn’t destroy your savings in one fell swoop. If your entire portfolio consists of the stock of one bank and the bank goes under, you lose all of your money. If you buy the stock of 5 different banks, but the entire banking industry hits a rough patch, your portfolio plummets…so you buy the stock of 40 different companies in different sectors and industries to spread the risk. But what if they’re all domestic companies and the domestic economy tanks? I think you see where this is going. Different investments zig and zag, moving in opposite directions simultaneously, which dampens the overall volatility of the portfolio.

You may not be a huge fan of Blow-Pops, but what happens if you fill your bag with Kit Kats and you’re suddenly in the mood for Sour Apple? What if you leave your bag in the sun and all the Kit Kats melt? It’s true that if particular sector (such as international equity) underperforms and you have it in your portfolio, you might get a lower return on your portfolio for that period. But when that sector rallies, you’ll be happy you had a couple of Blow-Pops in your bag.

Sarah DerGarabedian, CFA

Portfolio Manager

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Fears of a “Summer Pause” Prove Ephemeral

Many analysts, pundits and prognosticators were sounding alarms about “cautious consumers” and “threats to continued economic growth” after the Census Bureau reported on August 13 that both retail sales and the broader category of retail and food services sales in July were almost exactly what they had been in June. In other words, both categories were flat from month to month. Even more depressing, June was confirmed to have only increased 0.2 percent from May.

Those of us with more experience and greater knowledge of the volatility of these series cautioned against making snap judgments. We recommended waiting for the next release before becoming concerned about consumer spending, which makes up by far the largest share of GDP (68.5 percent of nominal GDP in 2013). The retail and food services part is about half of total personal consumption expenditures.

As is nearly always the case, this advice proved sound when we read the Census Bureau release of September 12. As the chart shows, not only did retail and food services sales set a new record of $444.7 billion in August, seasonally adjusted, but also both June and July were revised to be much larger than previously reported.

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July sales are now $ 441.8 billion on a seasonally adjusted basis, up 0.3 percent from June, rather than the originally reported $439.8 billion or 0.0 percent. June is now reported up 0.4 percent rather than 0.2 percent to a total of $440.3 billion rather than $439.6 billion, seasonally adjusted.

For the first eight months of 2014, total retail and food services sales were $3.46 trillion, up 3.7 percent from the same period in 2013. The biggest gain was at auto and other motor vehicle dealers, where sales were 8.0 percent ahead of the first eight months of 2013.

There are several reasons for this. One is that the average age of the 253 million vehicles we own (the “fleet”) is the highest ever, about 11.4 years. Another is that consumers have record levels of income and near-record levels of employment. A third is that banks, car dealers and credit unions are all competing to finance vehicle purchases at very good terms, including low rates, relaxed credit standards and maturities as long as eight years to keep monthly payments down. A fourth reason is that some measures of consumer confidence, while far from record levels, are at the highest point since the recession ended in June 2009.

Nonstore retailers (think catalog and internet stales) are up 6.5 percent from the first eight months of 2013 to $300.9 billion. That amount is 71.3 percent of the total for general merchandise stores ($421.6 billion) and nearly triple the $101.9 billion at department stores, where sales are off 2.5 percent from the first eight months of 2013.

We should see a record holiday shopping season in 2014. That will keep retailers smiling and contribute to several more quarters of real GDP growth above 3.0 percent at a seasonally adjusted annual rate, which is now the consensus for the first time in this expansion. That will be very good news if the economy follows that forecast. We’ve all been waiting impatiently for the US economy to break out of the subpar 2.1 percent a year growth path it’s been stuck in for the five years since the recession ended.

Dr. James F. Smith

Chief Economist

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Market Update Through 6/30/2014

as of June 30, 2014
Total Return
Index 12 months YTD QTD June
Stocks
Russell 3000 25.22% 6.94% 4.87% 2.51%
S&P 500 24.61% 7.14% 5.23% 2.07%
DJ Industrial Average 15.56% 2.68% 2.83% 0.75%
Nasdaq Composite 31.17% 6.18% 5.31% 3.99%
Russell 2000 23.64% 3.19% 2.00% 5.32%
MSCI EAFE Index 23.57% 4.78% 4.09% 0.96%
MSCI Emerging Markets 14.31% 6.14% 6.60% 2.66%
Bonds
Barclays US Aggregate 4.37% 3.93% 2.04% 0.05%
Barclays Intermediate US Gov/Credit 2.86% 2.25% 1.23% -0.07%
Barclays Municipal 6.14% 6.00% 2.59% 0.09%
Current Prior
Commodity/Currency Level Level
Crude Oil  $105.37  $102.71
Natural Gas  $4.46  $4.54
Gold  $1,322.00  $1,246.00
Euro  $1.36  $1.36

Mark A. Lewis

Director of Operations

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One Down, One to Go

There was much rejoicing among analysts, economic forecasters and financial market participants on June 6 when the BLS told us that total nonfarm payroll employment on a seasonally adjusted basis set a new record in May 2014 with 138,463,000 such jobs then. The old record of 138,350,000 such jobs on a seasonally adjusted basis was set in January 2008, which was the first full month of the 18-month long recession that began in December 2007 and ended in June 2009.

The chart shows the pattern of this widely followed economic series since January 1978. It is quite obvious that instead of the fairly quick recovery in such jobs that followed every recession from 1945 to the 1981-1982 one, the length of time to return to previous levels has gotten longer and longer with every recession beginning with the 1990-1991 event.

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While many reports on this new record contained statements claiming that all the jobs lost in the recession had been made up, that is not technically true. What IS true is that the total number of jobs has now been matched. But tens of millions of actual jobs that disappeared in 2008-2010 will never come back. They have just been replaced by other jobs.

In addition to that, the total population and the labor force have grown a lot over this time frame. Some estimates are that we might need as many as five million more jobs today just to be even with how well off we were in January 2008 in terms of payroll employment.

It turns out that the pattern of nonfarm payroll jobs today is vastly different from what it was back in January 2008. Here are some of the comparisons.

By far the largest number of net new nonfarm payroll jobs over that period is found in the “health care and social assistance” category, which has risen by 2,150,000 such jobs. Next is “Accommodations and food services” with an increase of 941,000. “Professional and technical services” jobs have grown by 512,000. “Education services “has gained 425,000 jobs and “Temporary help services” has added 307,000 jobs since January 2008.

Not very surprisingly, the biggest loser is jobs in manufacturing. There were 1,650,000 fewer of those in May 2014 than in January 2008. This is hardly a new story. The peak was 19,553,000 jobs back in June 1979. The recent trough counted 11,453,000 such jobs, which was the lowest number since March 1941, well before the US became involved in World War II. The May 2014 level of 12,099,000 is still lower than in June 1941, both on a seasonally adjusted basis. No one expects to see a new record here for many years, if ever. It is a fact that total manufacturing output has soared since then. The Industrial Production manufacturing index was 10.5 (2007=100) then and 99.5 in May 2014. That shows how huge the labor productivity increases have been in manufacturing. The US has the highest levels of labor productivity in manufacturing in the world and also the highest average annual rate of increase in this critically important measure over the past 70 years.

The construction sector was still down 1,496,000 jobs in May 2014 from January 2008. The government sector lost 507,000 jobs over that period, but almost all of these were at the state and local level.

Consistent with this shift in the type of nonfarm payroll jobs over the past 6-1/2 years, it should not surprise you to learn that the number of nonfarm payroll jobs held by women has been above the old peak set in February 2008 every month since September 2013. There were 68,393,000 nonfarm payroll jobs held by women in May 2014 or 49.4 percent of all such jobs.

As a corollary to the still-missing millions of construction and manufacturing jobs, the total number of nonfarm payroll jobs held by men is still below the old peak. It will take several more months to see a new record for men holding nonfarm payroll jobs.

Of course, there are two different measures of employment. In addition to nonfarm payroll employment, we have total civilian employment, which includes the self-employed and agricultural workers. This measure counts each person only once, whereas the payroll survey does not adjust for people who have more than one payroll job.

Total civilian employment peaked in November 2007 with 146,595,000 people employed on a seasonally adjusted basis. In May 2014 there were 145,814,000 people employed, so there are still 781,000 fewer people employed than at the peak. There were 9,799,000 people who were unemployed and looking for work in May for an unemployment rate of 6.3 percent. We should see a new record in the next two or three months. Then we can celebrate the fact that we are in uncharted territory by both measures.

The June 10, BLS report on “Job Openings and Labor Turnover” (the JOLTS report) told us that on April 30 on a seasonally adjusted basis there were 4,455,000 unfilled job openings in the US. That was the highest since September 2007, before the recession began.

The report also said that there were 55.1 million hires in the twelve months ending in April 2014. There were 52.8 million job separations in the same period.

Thus, we had 107.9 million people changing jobs over 12 months in order to get a net employment gain of 2.2 million people. The US economy remains the most incredible “jobs machine” every seen.

 

Dr. James F. Smith

Chief Economist

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Gen Y, Say Yes to Stocks!

It started with anecdotal evidence: a conversation with a co-worker about a group of professionals he spoke to about their 401k. The wiser (by which I mean older) folks were asking about the outlook for the economy and how they could maximize their 401k contributions. But the young man in the group, who was in his early 30s, expressed complete contempt for the stock market.  All of his money, he said, was in cash. Then a client of mine who is nearing retirement called me just to tell me about a dinner he went to where the topic of investing came up.  He was shocked at how vehement the young people at the table were about not investing in stocks due to their risk.

Since then I’ve read about a growing body of evidence coming from surveys and other research that suggests that the younger generations are too conservative in their investments. Gen Y is saving but not investing aggressively enough. The problem is that they distrust financial institutions (we don’t count) and believe another financial meltdown is all but imminent.

Gen Y, we don’t blame you. You were in your teens on Sept. 11, 2001, which had to have rocked whatever concept of stability you had. By the time you were old enough to know what the stock market was, the technology-driven crash of 2001-2002 was causing strife in budding 401k plans. And just when you were starting to dream about home ownership the housing market was spiraling out of control in 2008-2010. Many of you watched your parents go through extreme financial duress during this time period, something you were well old enough to understand.

It’s no wonder that Generation Y is too conservative. Your generation doesn’t have the benefit of personally experiencing the roaring 80s and 90s to boost your confidence about the markets. You don’t know who Crockett and Tubbs are. Looking at historical stock returns on paper just isn’t the same as living through it. And it’s hard to understand why men ever wore over-sized shoulder pads, but they did. Even the last five (amazing) years of positive stock markets seems like mere payback for the horror of 2008-2009. Despite this, we have to remember that stocks have historically provided the highest long-term return. No matter what your steadfast beliefs are about the future of the economy, it probably carries no more predictive capacity than the next differing opinion. That’s why we look to history as a guide, rather than trying to guess the future.

When you look at stock volatility over long time frames, it isn’t nearly as risky as the day-to-day movement would have you believe. In the last 87 years large company stocks’ annual returns ranged from -43% in the worst year to +54% in the best. That’s quite a spread! But those same stocks in any given 20 year period (starting on any given day in any year) averaged returns in a range of +3% in the worst 20-year period to nearly +18% in the best 20-year period. That includes the Great Depression and the market crashes of this century. That’s a lot easier to swallow. You have a long time before liquidating your accounts for retirement – probably more than 30 years, so you should be taking a longer term view.

And let’s not forget about inflation. That cash that’s in your 401k is doing less than nothing for you. Long run inflation is around 3%. If you are getting a 0% return on your cash, that is actually -3% in real dollars, guaranteed.

Saving money isn’t good enough. Millennials need to invest with a little more oomph. Yes, diligently putting away $500 a month for 30 years is hard work and no one wants to see their money shrink. But consider this: if you get a modest 4% average return on those savings, you will have $347,000 in retirement; if you double that return to 8% an amazing thing happens: $745,000. Taking risk means a lot of ups and downs along the way, but potentially twice the money in the end. If you can go cliff-jumping with your friends, you can buy stocks, right? (No? Was that just my friends?)

There is no reward without risk, to be sure. Any investment plan should be done with the full comprehension of the volatility, range of outcomes and potential for return. There certainly is risk in losing money in the stock market over short and intermediate time periods. However, those losses only become permanent if you sell out during periods of decline. It seems all but certain that an all-cash/fixed income portfolio is doomed to growth too slow to possibly reach any long-term financial goals.

 

Harli L. Palme, CFA, CFP®

A Gen-exer who believes all of the above applies to her generation too, except the part about over-sized shoulder pads.

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Paralysis from Analysis

This month, I celebrate my 500th year at Parsec.  OK – it is really 22 years, but sometimes it feels like 500 years.

During that time, I have been involved in a lot of highly technical projects.  With one project in particular, I was really stressed out about the details.  I analyzed every piece of data so much that I made little progress.  Bill Hansen, one of our Managing Partners, said I suffered from “paralysis from analysis.”  After some reflection, I realized he was right.  At some point, I had to let go and realize nothing would ever be perfect.

In my lengthy career here, I have seen the effect of “paralysis from analysis.”  Some investors may be reluctant to act based upon the endless stream of information available now.  One can flip on the TV at any hour and hear the opinions of investment commentators.  Peruse the Internet, and one can find a vast amount of data about the stock market and the economy.  With so much information and contradictory opinions, it is easy to sit on the sidelines and do nothing.

In some cases, inaction can be as devastating as making the wrong choice.  Consider this scenario.  On March 9, 2009, the S&P 500 hit bottom.  A lot of people panicked and sold all holdings, leaving the proceeds in cash.  Five years later, the index was up 205.84 percent or 22.6 percent annualized (total return).

At the bottom point, there were probably a few people on TV who claimed the end was near.  One could probably find endless charts and articles foretelling great doom to come.  If an investor was paralyzed by this data overload, sat on the sidelines, and did not invest during that five-year period, he or she could have missed an opportunity to recover from deep losses.

What should a person do?  For starters, it helps to leave emotion out of the decision as much as possible.  Then, develop an investment plan that will not lead to sleepless nights.  The real test will come when the market has wild swings – either up or down.  One must commit to the plan and not deviate based upon the mood of the moment.  It is fine to alter the plan if goals or needs have changed, of course.

We at Parsec try to help our clients develop these plans and weather the inevitable market fluctuations.  Communication is a key factor in success.  We encourage our clients to tell us their goals, their changing life situations, or anything that is relevant to staying on target.

So, let’s switch off the talk shows, put down the business magazine, and take a nice walk.  Let’s try to enjoy life instead of obsess over every little detail.

Cristy Freeman, AAMS®
Senior Operations Associate

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