Give Up Spending for Lent

by Matt Ahrens

The usual items to make this list are chocolate, alcohol, sweets, soda pop, coffee, and in more recent history: Facebook.  But have you ever thought about giving up spending?

Granted it would be tough to eliminate spending for 40 days, but I have participated in a week long financial fast and it can be very rewarding.  We often overlook the small spending that we do throughout the day but over a week these small dollar amounts add up.  Multiply that over a month and then a year and a pop a day (or coffee a day) really adds up.

During down periods in the market (such as we are experiencing now) a financial fast can also do wonders for your portfolio.  Say you usually take $3,000 a month from your investment portfolios but you find that for a short period of time you can live off of $2,500.  Reinvesting that extra $500 a month in a down period can significantly help your portfolio over the long run because you have the ability to buy more shares in income producing stocks, bonds or ETFs.

Take it from me, a financial fast for a week can be difficult especially if you have kids at home, but it can also be very rewarding. 

Temporary Belt Tightening can be a Solution to Market Volatility

Jeremy Grantham is the founder and chief investment strategist of GMO,  an institutional advisory firm with over $100 billion under management.  It should be noted that Mr. Grantham is a perennial bear, but is sounding somewhat optimistic about the U.S. economy and stock market this year.

In his latest quarterly letter, Mr. Grantham stated that the global economy and the U.S. in particular will do better than the bears believe, ”largely because of the positive impact of depressed oil prices, and that, in turn, makes a major market break unlikely.” At worst, he expects “an ordinary bear market lasting a few months, not a major collapse.”

One key reason he doubts it is the price of oil. “Everything we buy has cheaper input costs” because of the deep dive in oil prices, writes Grantham. "The U.S. and global economies are likely to do significantly better this year than recent opinions predict."

That's another reason he doesn't expect a stock market collapse this year. Before the financial crisis of 2007-2008, oil prices reached “cosmic highs" – over $150 a barrel (today there are 80% lower) and the housing market was also highly overpriced, writes Grantham. Those variables are absent today.

Currently, the S&P 500 index is down approximately 10% so far this year, and some investors increasingly worry that a recession may be forming. That being said, it remains difficult to see what, exactly, would cause a full-blown recession, while there are plenty of reasons to think it won’t happen.

For those looking to feel better about the big market selloff of 2016, here are 7 reasons for optimism:

1.  What causes recessions isn’t happening now. In the past, recessions have been caused by major policy mistakes at the Federal Reserve, soaring oil prices, or bursting bubbles in large parts of the economy. Presently, the Fed is at the very beginning of a gradual tightening cycle, and appears is in no hurry to raise rates. Oil prices are obviously falling rather than rising, and while there could be bursting bubbles in energy or tech, those sectors aren’t nearly as big as the subprime debacle in the housing sector, which triggered the last recession

2.  U.S. exposure to China is minimal. Exports to China account for less than 1% of U.S. GDP. Also, few Americans hold shares in the turbulent Chinese markets. Besides, most of the damage in China may already be done.

3.  U.S. companies are getting more efficient. They’re rapidly adopting new technology to lower costs, as topline revenue growth becomes scarce. Energy firms in particular are learning how to break even at lower energy prices. It is reported that some large companies are rapidly liquidating inventories, which could lead to a spending spurt later in the year.

4.  Consumers are in good shape. The savings rate was 4.8% back in 2014, when oil prices were over $100 per barrel, but is now at 5.5%. So some of the savings from cheaper energy is going straight into the bank. Home values are rising too, making middle-class home owners better off. Consumers are in much better shape financially than they have been in years. That doesn’t bode for a recession.

5.  Stocks are reasonably priced. Citigroup's “valuation bull’s-eye” puts the value of S&P 500 stocks in the second-most favorable range, with a price-to-earnings ratio between 14 and 16 times earnings. On average, the index has returned 13.3% during the next 12 months when trading in that range. In general, stocks aren’t cheap on a historical basis, but they are reasonably priced given that the economy is still growing.

6.  Investors are having a depressive moment. Several investor sentiment indicators are extremely negative, which is very bullish in the contrarian sense. Some examples:

One key go-to fear gauge, the CBOE Volatility Index (VIX), shot up above 30 recently, and it’s still in the mid-20 range. Generally, anything above 21-23 shows enough fear to confirm a “buy” signal.

Various put-call ratios are showing extreme negativity. This means that put buying, a bearish bet, far outweighs call buying, a bullish bet. 

A recent survey from the American Association of Individual Investors (AAII) showed only 18% were bulls. Amazingly, that’s the lowest reading in 10 years and below levels in 2008 and 2009, points out Bruce Bittles, chief investment strategist at Robert W. Baird, a brokerage.

7.  Meanwhile, insiders are getting more bullish. A good way to measure insider sentiment is to track the ratio of insider selling to buying. An insider is someone in the know regarding a company's financial picture, such as a director or senior officer of a company, as well as any person or entity that beneficially owns more than 10% of a company's. For purposes of insider trading, the definition is expanded to include anyone who trades a company's shares based on material non-public knowledge.

A declining number here signals greater bullishness among insiders.

This ratio has been steadily declining — turning more bullish — since the market selloff started in December. A rolling eight-week sell-buy ratio tracked by the newsletter Vickers Weekly Insider (a service that tracks insider buy/sell transactions) recently fell to 1.19. Anything below two, by this measure, is bullish. “Insider sentiment remains extremely bullish,” says David Coleman, of Vickers.

It goes without saying there’s a lot that could go wrong, since that's the unpredictable world we live in. But confusion isn’t the same as catastrophe, and the markets could promptly decide the risks aren’t that severe after all. They overshoot in both directions.

It should be noted that Tobias Levkovich, a Wall Street analyst with Citigroup, uses a combination of factors, including short interest, investor surveys, to calculate whether the market sentiment has gotten euphoric or desperate. Last week, the measure fell deeper into the terror territory and sat at -0.65, well below the -0.17 threshold that defines a run-of-the-mill panic. Interestingly, Levkovich noted that this level of distress among investors signals a 95% probability that the S&P 500 will be higher in 12 months.

Just because some investors are making emotional decisions, does not mean that you have to. As noted at the beginning of this commentary, a more logical response during market downturns is to reduce your withdrawals. This temporary belt tightening takes some pressure off your investments until the market rebounds to higher and more profitable levels, which allows you to preserve your principal.

Quotes

“Prudent spending and cutting back during market downturns gives your portfolio a breather during financially stressful time, which sets the stage for surviving and recognizing much higher returns over the long run."

                   Tony Moeller

"Being willing to delay pleasure for a great result is a sign of maturity."

                   Dave Ramsey


Quotes selected by the IAG Staff

“How many blessings are you missing because you spend every dime you make?”

                   Michelle Singletary

“The habit of saving is itself an education; it fosters every virtue, teaches self-denial, cultivates the sense of order, trains to forethought, and so broadens the mind."

                   Thornton T. Munger

 

Tony Moeller, CPA

The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only. It is not a recommendation or solicitation of any particular investment or strategy. A risk of loss is involved with investments in the stock and bond markets.

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