Markets were overdue for a pullback

It should come as no surprise that the equity markets were down this week. For many, the next few weeks will be uncomfortable, but sit tight. Markets will come back and prices will be higher again by the fall. My regular readers know the drill. I have been warning you that a pullback in the 5-7% range was overdue. Last week, I explained that August through September “The danger zone,” was a seasonal period of the year where stocks usually perform poorly. I also said that, “If we were to have a pullback, look for something out of left field such as North Korea as a trigger.” That is exactly what happened. Yesterday’s column (which you can read on my blog: www.afewdollarsmore.com) reviews this week’s Korean controversy and my opinion on how to solve it. Look for continued volatility in the markets as the rhetoric war continues to heat up. Do I really think that a shooting war is around the corner? Doubtful. Of course, anything can happen, given the lead players in this drama, but I have faith that cooler heads will prevail. Nonetheless, the show provides the market an opportunity to work off some of the overbought conditions that have been building for weeks. Cheer up because the last thing we needed was a “melt-up.” That is a condition where fundamentals remain the same, but investors stampede into the stock market fearing that they will miss out on further gains. It usually signifies a “top” followed by a double-digit decline. Give me a modest sell-off instead, followed by a few weeks of consolidation and I’m a happy...

The Korean Question

So far, the political tension between the United States and North Korea has been confined to a war of words and not much else. This week’s verbal threats and counter-threats, however, reached a new level. What might that mean for the financial markets? One could argue that North Korean dictator Kim Jong Un has had it in for the United States and for Donald Trump, in particular. North Korea has fired off 18 missiles in 12 tests since February, 2017. On July 4, he fired North Korea’s first Intercontinental Ballistic Missile (ICBM), which they claim could “reach anywhere in the world.” This was no accident. Less than six years into his reign, Un has tested more missiles than his father and grandfather combined. Most experts believe that the goal of North Korea’s missile program is to develop a missile topped with a nuclear warhead that is capable of reaching the United States. This week we discovered that this rogue nation is one step closer to that goal. U.S. intelligence analysts revealed that they believe North Korea is capable of producing a miniaturized nuclear warhead that could be placed on their newly-operational ICBMs. In response, President Trump threatened “fire and fury like the world has never seen” if they continue to make threats against us. Kim Jong Un immediately called the President’s bluff by announcing an operational plan to strike areas around the U.S. territory of Guam in the South Pacific, including the Anderson Air Force base. The statement also said that “a preemptive strike is no longer the monopoly of the United States.” So why Guam? Guam is a...

The danger zone

The market has entered the most dangerous part of the year for equities. Some of the worst market drops have taken place over August and September. After enjoying the longest streak in 22 years, without as much as a 3% pullback, the stock market is vulnerable to a downdraft. Market pundits call it “seasonality” and sometimes it works and sometimes it doesn’t. There are other months in the year when the markets are usually up. On the positive side, think of the “Santa Claus Rally,” where December and January are usually great months for the market. August has been one of the worst months of the year. In the last four years, it has been down half the time. For some reason, bad news seems to cling to August like fleas on a dog. The “Asian Contagion,” as well as the demise of Long-Term Capital Management back in the late Nineties (1997-1998), torpedoed the markets in August. In 2010, it was worries over a perceived weakness in the global economy. China was the culprit in 2015, and the U.S. debt downgrade sank the markets in August of 2011. When August is down, it is usually down big but it recovers quickly. If a downdraft were to occur this year over the next two months, I suspect it would be in the 5-6% range. That is nothing that should concern long-term investors. Looking back in history from a long-term perspective say from 1980 to last year, August’s average return was -0.1%, while September’s return was -0.7%. No big deal. If we were to have a pullback, look for something out...

The market may not be the greatest risk to your retirement portfolio

Most investors think the greatest risk to their retirement portfolio is the stock market. As such, many of us have a myopic focus on returns, performance and investment risk. But are we ignoring a far greater risk—our health care burden? Let’s say you have amassed $1 million in savings toward your retirement. If faced with another stock market decline similar to 2008-2009 (year-over-year decline of 38% on the S&P 500 Index) or the cost of meeting your lifetime Medicare premiums, which has more risk? The 2017 Retirement Health Care Costs Data Report, put together by Health View Services, a data resource for financial advisors, reveals that the total retirement health care costs for a 65-year-old-couple retiring this year is $404,253. And that is in today’s dollars, which does not account for the medical inflation rate of 6%. These lifetime premiums include Medicare Parts B, D, supplanted insurance, dental, vision, hearing, plus deductibles, copays and any other out-of-pocket costs. It is a conservative number because the 6% medical inflation rate does not include a variety of additional medical costs that the typical person would pay. Just to be sure, I asked my partner Zack Marcotte, who just loves to crunch numbers, to figure out my health costs. My lifetime bill tallies up to be $420, 696.   Now, let’s look at market risk. You would have incurred a $380,000 stock market loss in the financial crisis, if you were fully invested in equities and took no action. Remember, too, that the 2008-2009 periods was the worst stock market loss since the 1929 crash. Many believe that the risk of another financial...

Volatility returns to the markets

It has been a “sell on the news” earnings season so far. Corporate results continue to beat earnings forecast, but most stocks have been either sold after the announcements or, at most, mark time. What does that say about the direction of the markets? Granted, you can’t read a whole lot into this week’s actions. We have had plenty of one-day pullbacks in the averages. Thursday’s dip (met by buying) could have only been one more. Once again, technology took it on the chin, but that is to be expected since tech has been leading the market, hitting new all-time highs on almost a daily basis. As I said last week, “expect a pullback sometime soon.” Right now, I am looking at 2,455 as a support level for the S&P 500 Index. If we remain above that level, then it is business as usual in this bull market; below that, and the story changes. Aside from earnings, which are still coming in at the predicted 75% “beat” rate (such a scam), the shenanigans in Washington have reached a level that the noise is beginning to spill over into the market. The Senate healthcare votes are a case in point. After a seven-year tirade over the failings of Obamacare, Republicans could hardly muster the votes to even discuss its repeal.  Despite a President who has been throwing a tweet tantrum over killing the Affordable Care Act on a daily basis, the Republican majority in the Senate could not even muster the votes to repeal even parts of the ACA. I, for one, say “hurrah,” since I have long been a...