February 17, 2016 AZ Republic by Dr. Harold Wong
The first 2 weeks opening in the U.S. stock market was considered the worst opening 2 weeks ever. This negative performance also occurred in other stock markets in Europe and Asia. On January 12, 2016, the Royal Bank of Scotland said “Sell everything except high-grade bonds”. Now that we have passed February 15, 2016, many stock markets around the world have dropped 10-20% in value.
Many individual stocks, including Apple, have dropped 30-40% from their previous 52-week highs. After almost a 6.5 year bull market in U.S. stocks (with the low in the Dow-Jones Index March 9, 2009), the stock market started wobbling in August, 2015 over concerns about China’s slower economic growth. On Monday, 8/24/2015, the Dow-Jones Index opening dropped by 1,089 points (the largest ever in history) and ended the day down 588 points, the worst decline since August, 2011. After a brief recovery at the end of 2015, many investors have changed their sentiment and are no longer optimistic about stock market returns for 2016.
Robert Shiller, Professor of Economics at Yale, won the Nobel Prize in Economics in 2013. He developed the CAPE Index, where price earnings ratios are adjusted earnings over a 10-year period. Corrupt top management of a company can manipulate or fraudulently report profits for a short-term period, perhaps even a few years, to get unwarranted huge annual bonuses. However, even Enron can’t fool investors for 10 years before the accounting fraud was discovered and the company collapsed.
The CAPE Index ratio was 27 on August 30, 2015, vs. the average ratio of 17 from 1881-2015. This ratio of 27 had only been exceeded 3 previous times: 1929 (before the October stock market crash that triggered to Great Depression); 2000 (the peak of the Dot-Com Boom); and 2007 (just before the 2008 stock market crash). Shiller predicted the 2008 crash. While Shiller never claims to have an exact crystal ball, when the CAPE index gets too high, it has historically been followed by a substantial downturn or crash in stock market prices.
Another major concern by financial and economic experts is that the U.S. (and the rest of the world) has very slow economic growth and collapsing commodity prices. Let’s suppose that we enter a period of either actual deflation (prices drop) or no inflation (prices don’t go up). What would make sense for investors?
First, lock in as much guaranteed retirement income that you can. Almost everyone takes Social Security (SS) at 62. For older Baby Boomers, full retirement age is 66. If their SS benefit was $2,000/month at 66, it would only be $1,500/month at 62 and would be $2,640/month at 70. Only 5% of men wait until age 66 to take SS and only 1.2% wait until age 70, where they would get 76% more than if they took it at age 62 (See my series on SS strategies, found at www.DrWongInvestorGuide.com). Second, work 5-10 years longer to create more retirement savings. This will also allow some pensions to increase your benefits.
Third, look at the private pension concept. In July, 2014, a nurse (age 62) deposited $250,000 in a private pension fund. She will wait until age 70 to trigger the income and will be guaranteed $25,000 every year for the rest of her life. By combining all 3 concepts, she will retire at age 70 with a higher total net retirement income than the income she had while working. She will be able to enjoy her retirement years and not constantly worry about money.
Conclusion: If we are in a period of slow economic growth, stagnant wages, declining commodity prices, and the end of the stock market boom, preservation of capital and guaranteed income should be more important than taking major risks with your life savings.
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Category: Market Analysis