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Maximum contribution levels to many retirement accounts rise next year. For instance, the 401k contribution rises to $17,500; the traditional IRA contribution goes to $5500. (“Catch-up” contributions for those over 50 remain the same, but add significantly to the amount you can put away. However, that legislation expires 12/31/12, and must be renewed to be effective in 2013.)
For a brief explanation with a link to the IRS’s pension plan limitations see here.
Several clients have inquired lately about how we think the election will affect the stock market. The answer is a sort of non-answer: based on historical data, the stock market has done well under both parties, and it has done poorly under both parties. So the election itself will have a negligible impact on the stock market. Indeed, stocks look forward. Today’s prices are reflecting conditions a few months hence. The market is already “past” the election and looking into 2013.
Interestingly, though, there is some evidence that the stock market may affect the election. According to InvestTech Research, if the stock market rises in September and October prior to an election, the incumbent wins 90% of the time. (See one article on this phenomenon here.) Intuitively, a rising market is indicative of satisfied investors who feel pretty good about the way things are going, and don’t want to change the status quo. Of course, 90% is not 100%. This year could fall into that 10% bucket; we’ll just have to wait and see.
Although the din about rising inflation has diminished since about 2010, we still hear concern from clients now and then, particularly when discussing bond portfolios. Investors worry that committing to longer bonds at current “low” interest rates is a bad idea, just in case we end up with rampant inflation. (We won’t discuss here what actually happens to bond portfolios when inflation rises quickly, but it’s not as bad as you think). Many investors think they see inflation today in higher food prices, or higher gas prices. But what they’re seeing is not, as economists describe it, inflation. It’s not anything like the inflation of the 1970s in the US, and its not anything like the inflation now infecting, say, Argentina.
Inflation is defined as widespread price increases, affecting virtually all goods and services in an economy. That’s what we mean when we say an economy is experiencing “inflation”. Singular, isolated price increases for bread, or gas, or health care are just that: isolated events. In our economy, while bread and gas rise in price, auto insurance, homes, and computer prices fall. In Argentina, prices for every item are rising nearly daily. Go to a restaurant, and you’ll see the menu prices in chalk on a board so they can be changed the next day, or even midday. Buy a dress and you might find the current price sticker hides older, lower price stickers.
We’ve said for years now that we don’t expect inflation for the foreseeable future. In fact, we think monetary and fiscal policy has been geared toward preventing deflation over the past five years, and we think we’re in for doses of much the same in coming years, no matter who is in office. Two factors influence our thinking: one is the giant deleveraging that the US economy is undertaking. People who are struggling to pay down debt don’t buy boats, houses, and trinkets. They save. And so they are.
The second factor is the large retiring-age population in the US. I can’t count how many times a client has said to me, “Gee I just don’t spend what I used to spend,” or “I don’t feel like I need anything,” or “I never buy clothes any more,” or “I think I’ll sell my home in Podunk, it’s too big for me now.”
Between less consumption as everyone pays down debt, and less consumption from the huge Baby Boom generation, we don’t think there’s much urge to spend all that cash the Fed and the administration have pumped into the economy.
Aside from the supporting factors for our opinion, there’s the evidence: where, after four years of profligate money creation, is inflation? Surely it shouldn’t take so long to show up, if it’s going to.
The U.S. probably has another 7-10 years of low inflation in store, maybe more. Japan, which also endured a real estate bust and has an aging population, is well into its second decade of an epic struggle with deflation, and while there are differences between the two economies that might account for degree, the basic theme is the same: forces are afoot to encourage less debt, more savings, and lower prices.
We’ve said it before, but we will say it again: Economic growth does not necessarily translate to a good stock market. China’s economy has grown strongly over the last few years and although the rate of growth has slowed recently, it has far outperformed the US.
Yet, the Shanghai Composite, China’s headline stock market index, is down 32% from a high it hit in November 2010. That’s the worst drop among the 21 developing country markets followed by Bloomberg. This period of time also marks the young index’s longest bear market. For comparison, the US Standard & Poor’s 500 is up almost 18% in the same time frame, and if dividends are counted, it’s far more than that.
Valuation has a bigger impact on stock returns than economic growth. Chinese stocks have been expensive. US stocks were cheap, and are still cheap.
Want to guess at what the Financial Times index of 100 largest European stocks has done over the same time frame? Ok, it’s not as positive as the US, but it is positive: a price return of +2.4%, and dividends would boost that. The Euro-mess hasn’t resulted in a bear market – yet. Just goes to show – the tortoise wins more often than we think.
We spend a lot of time thinking about things that other people don’t. The most common question we ask at strategy meetings is “What do other investors hate right now?” That’s our playground – whatever everyone else doesn’t like. Greek stocks, maybe. Europe. Auto parts companies. Condos in Beaverton. Whatever.
But sometimes it pays to think about the mainstream, or at least look at it through our own weird lens. One fact that stands out is that if I am counting correctly, we’ve had a number of so-so weather years, vis-a-vis growing crops. Not just here, but worldwide. We had a good corn year in 2011, but a bad wheat year. This year corn looks like a bust in the US. In 2010, Russia’s drought decimated its harvests. Looking worldwide, crop production has not kept up with population increases in the past few years, driving down grain reserves, and periodically causing price spikes.
Likewise, we’ve had at least four years of very low housing construction in the US, and at least two natural disasters that roiled the timber-lumber-construction chain: a tsunami in Japan and earthquakes in Chile. All these harms seem to be reversing; in particular, housing is picking up in the US. Nobody’s looking, but lumber and other timber product prices have been strong for several months now.
While crop prices are in the news, the media isn’t connecting the dots – linking up the year-after-year shortfalls in various crops in various places that are adding up to declining grain reserves; and I don’t think anyone except the odd timber geek is noticing the increasing number of log trucks on the roads and rising prices at Home Depot. Investing in agriculture in particular has been “hot” for a while, although many of the stocks have suffered a hangover with the soft economy. These probably deserve another look. And many timber companies haven’t participated in the market rebound since 2008 at all.
Right in front of us – two worthwhile investment ideas “inside the box.”