Fun Fact Number One: As of January 2013, there were 16 people left in the world born in the 1800s, according to the Gerontology Research Group. With dividends reinvested, these centenarians have witnessed a 28,000-fold increase in U.S. stocks over their lifetime.
The U.S. economy saw a slight market correction during the month of October. According to a survey completed by Bankrate, Americans feel that their financial situation has changed since the new administration. Opinions related to the economy are divided among the major political parties. More than 30% of democrats believe that the economy has gotten better under the current administration, while 60% of republicans subscribe to this belief. This is important because next month is a critical time in the voting process. The movement of the economy, wages, the stock market, and consumer confidence will weigh heavily on which way the votes come in. It goes without saying that we have had some tremendous growth in the American economy over the last decade.
In this month’s edition of The Good, The Bad, and The Money, we will explore several topics, including consumer sentiment, wages, market performance, inflation, and more.
Some good things to point out throughout the month of October are (in no particular order): consumer sentiment data, wages, inflation, and market performance.
As we review consumer sentiment, this indicator is important as it tells us how investors are feeling about the market. As noted before, throughout the year investors’ concerns and expectations for market performance change. As we know, the market has seen substantial growth over the past several years; however, investors are certainly expecting that a market correction is due.
According to the American Association of Individual Investors (AAII), Investors typically feel one of three ways about the market: either they are bullish, bearish, or neutral.
In their survey for the week ending October 10th, the AAII found bullish sentiment and expectations that stock prices will drop during the month of October. In fact, the average dropped 15.1% to 30.6% from the previous month. However, this drop does not come as a surprise, being that October is typically a negative month. 35.5% of surveyors responded as being bearish, which translates to a 10.3% increase from the previous month’s survey.
When it comes to consumer sentiment, the University of Michigan’s monthly report reveals some interesting results. Keep in mind that consumer sentiment is a statistical measurement and economic indicator of the overall health of the economy as determined by consumer opinion. The University of Michigan Consumer Sentiment Index (MCSI) is a consumer confidence index published monthly by the University of Michigan. According to the MCSI, consumer sentiment slipped in early October, while maintaining favorable levels of just about 98.5. Essentially, this means that consumers are still highly optimistic about the U.S. economy and its continued growth potential. However, the MCSI found that the slight drop was due in part to consumer sentiment surrounding personal finances. MCSI’s chief economist, Richard Curtin stated that downward revisions in the growth rate of median household income were accompanied by upward revisions in the year-ahead expected inflation rate, weakening real income expectations.
With that said, let’s take look at wage growth and inflation.
Unemployment currently is at 3.9%, which typically proves beneficial. With low unemployment, it may appear that more people are working and contributing to the American economy. However, this is not necessarily the case. According to the United States Department of Labor, wages, salaries, and employee benefit costs have risen. While the unemployment rate is low, wages have moved in a positive direction, but not at the same rate as inflation. Inflation in the United States is currently at 2.3%. With that said, for consumers to take advantage of increased wages, the rate of inflation would have to decrease. This doesn’t seem likely in the foreseeable future.
Market Performance: Historically, the stock market has undergone some corrections during the month of October. This could be due to the beginning of the final earnings season of the year. This brings to mind an interesting yet common theory known as the October effect. The October effect contends that stocks are more likely to decline during the month of October. The October effect is mainly considered as a psychological expectation rather than an actual phenomenon, as most statistics go against this theory. The October effect was said to have originated during the Great Depression. When the stock market crashed back in 1929, investors were not appropriately prepared for it.
Fun Fact Number Two: Prior to Great Depression, the market hit an all-time high and stock prices were up just over 25%.
However, by October the economy began to weaken and it became apparent that the economy was suffering as stocks lost close to one quarter of their value in less than 2 days. This decline subsequently cost investors billions of dollars. October has served as a reminder to investors of how quickly the market can change and that no one has complete control over its movement. Additionally, October typically is known for being the fourth worst month for the Dow Jones industrial Average and the S&P 500.
CNBC reported stocks have been punished since October began. The worst two days of selling were Wednesday October 10th, 2018 and Thursday October 11th, 2018which drove the Dow down a total of 1,300 points. All in all, the stock market fell to a year-to-date low of negative 1.75% for the year. This drop speaks to the fact that investors are fearful and increasingly doubtful of the market. Confidence is slowing and investors are beginning to pull out or consolidate their holdings. The market saw a dip in October because investors are concerned about slowing economic growth and for the final quarter. According to MarketWatch, Wall Street investors are closely following the earnings reported by the corporate giants and feel that there are few reasons for investing now. The Fed is holding strong to its process of tightening the monetary policy by continuing to raise interest rates. In addition, investors have concerns related to the tariff war between the United States and China. The uncertainty surrounding the implications of increased tariffs does not give investors a solid and comfortable reason for infusing the market with investment dollars.
The Fed possesses the Beige Book, which is a collection of anecdotes on the economy. More formally called the Summary of Commentary on Current Economic Conditions, the Beige Book is a report published by the United States Federal Reserve Board 8 times a year. Published in advance of meetings of the Federal Open Market Committee, each report is a gathering of "anecdotal information on current economic conditions" by each Federal Reserve Bank in its district, from "Bank and Branch directors and interviews with key business contacts, economists, market experts, and others." With that said, the most recent data suggests that the economy is growing at a modest to moderate pace. However, even with this data, the Fed’s view of the business atmosphere helped drive investor sentiment in the current market environment. Alec Young, Managing Director of Global Markets Research at FTSE Russell, laid blame for market sell-off on macroeconomic headwinds: “Chief among them is a Fed that seems determined to continue steady rate increases despite growing signs of weakening global growth as China struggles to stabilize its economy and markets all while US trade tariffs loom.”
Debt: National debt has eclipsed more than $21 trillion dollars, which represents a 6.9% increase over the previous year. In 1989, a New York real estate investor by the name of Seymour Durst created the National Debt Clock which is affixed to a building he once owned in Times Square. Now nearly three decades later, the clock is still up and running yet many individuals pay little to no attention to it. The current administration has added more than $1.5 trillion to the national debt in the past year alone.
Now, the United States is about to hit a new milestone in the area of debt. According to JPMorgan, the federal government’s total debt owed to outsiders will exceed all U.S. household debt for mortgages, credit cards, cars, student loans, and other personal loans. The U.S. debt is now up to $127,000 per household. If the debt margins continues in this direction, who knows what the national debt will become. As you can see from the chart below, the U.S. national debt is owned by U.S. investors, the Federal Reserve, the U.S. government, and foreign investors. The rising debt is a concern for most investors, especially U.S. investors, as they hold more than $6.89 trillion (32.5%).
Fun Fact Three: The name October has been derived from the Latin “Octo” which means eight because October was the eighth month of the year, according to the Roman calendar. It was called Winterfylleth, meaning the “fullness of winter”, by the Anglo-Saxons because it had the first full moon of the winter season.
Fundamentals of Life Insurance
As a response to a reader of my September 2018 edition to The Good, The Bad, and The Money, I was asked to give somewhat of a deep dive into insurance. As you may know, there are several forms of insurance. You have life insurance, homeowners insurance, car insurance, key man insurance, and many others. I will focus here on life insurance. According to the American Council of Life Insurers (ACLI), in 2007, life insurance provider’s policies paid $58 billion to beneficiaries in the form of death benefits. While this data is somewhat dated, it still speaks to the benefits of having life insurance. I’ve found that many individuals are not properly prepared for their own final expenses. Essentially, some people are afraid to really have the conversation around death, but it’s a conversation that must be had. Now I’m sure you’ve heard about whole life vs. term life premiums, universal vs. variable insurance, etc.
The first ever life insurance company in the United States was the Presbyterian Ministers Fund. Established in 1759 in Philadelphia, it was specifically created to assist Presbyterian widows and orphans. According to a 2016 LIMRA U.S. Ownership Study, more than half of Americans (172 million) have some form of life insurance coverage (individual or group), 8 million more than in 2010. This equates to more than half of the American population not being insured or not having an appropriate amount of coverage. The insurance business is sometimes hard to understand and even sophisticated investors are not sure how to properly leverage insurance. For more on those strategies, please contact a trusted investment advisor. In order to be protected, there are several things a potential insurer has to go through. They have to successfully pass a background check, sometimes a credit check, their medical history has to be reviewed, and a few other items are reviewed. Upon approval, the insurance professional will go over the potential policy. Now, some financial professionals advise against purchasing certain types of insurance. But for the purposes of answering the question of my reader, one reason insurance are important is because it protects against financial loss. I will explain those policy types next.
Term insurance is a policy that is purchased and covers the insured for a specific time period. These policies typically only provide coverage for the insured for 10, 20, or 30 years. Once the term is over the coverage for the insured ceases to exist. If the insured dies after the term ends, his or her heirs will not receive any payment from the insurance company. Additionally, term policies can be an important part of an individual’s portfolio. While there’s an expiration date on the policy itself, people may combine a term policy with permanent life insurance. They may do this because term policies are less expensive than a permanent policy.
A whole life policy is just as it sounds, it is good for your entire life. It is most often referred to as a permanent insurance policy. This type of policy is held throughout the insured’s lifetime. This policy typically comes with both living benefits and death benefits. One living benefit is that the policy builds cash value which the policyholder can make withdrawals on. Additionally, the policyholder can borrow against the insurance policy. These features and benefits are good for some people because they have access to additional forms of capital. The death benefit of the policy is paid out to the insureds beneficiaries.
Universal and Index Universal Life Insurance
Universal life insurance, often referred to as a UL policy, is somewhat of a hybrid between permanent insurance and term life insurance. UL policies have the ability to help people build savings as well as provide death benefits. This allows for some flexibility in how the savings within the policy are utilized. It must be said that these type of policies are typically invested in the market, sometimes mirroring market performance. Because of the uniqueness of UL policies, there were past concerns with the values in the investment portion of UL Insurance due to unstable markets. As a result, indexed universal life insurance (IUL) evolved to address concerns with changing markets and other problems faced by those who had purchased universal life in the past few decades.
The concept of whole life and universal life policies is that the investment and/or cash value will grow over time and eventually may even be able to cover for the premiums of the life portion of the policy. The advantage in this situation is that you could pay into the cash value of the policy for a certain number of years and the investments would eventually start to cover the cost of the premium. As a result, you’d end up receiving life insurance for whole life, yet you won't continue to make payments.
As addressed previously, consumer sentiment data, wages, inflation, and market performance are moving in various directions. With the stock market sliding into negative territory, it’s difficult to predict the movement of the market for the month of November. U.S. debt has reached an all-time high and there’s still uncertainty as to how the economy will move going forward. As this series progresses, I’ll continue to address consumer sentiment, market performance, wages and inflation, and many other fun topics.