Paper Chase: Mortgages, Oil and Gas
The latest market downswing was fueled on worries about weakness in Europe, ebola in the U.S., and deflation. Oil is below $80 per barrel for the first time in four years. This is due to weak global demand and a strong dollar as oil is traded only in U.S. dollars.
Pain and Gain
Investors were already panicked going into this period. Once there was not more certainty than people were used to, the market went down quickly. Economic fundamentals indicate no bare market to be seen. Though it is being reduced, there is no tightening of liquidity from any central bank, and corporate earnings are still strong.
The fed, a lagging indicator that is admittedly data dependent, does not want to replay 2008 any more than investors. If the stock market is correct and the economy weakens, expect the fed to reverse course and ease more aggressively especially since fiscal policy is also stymied.
Exposure to Europe
While we may not be at bottom of this downturn, there are encouraging signs. First, emotional selling has been replaced by strategic picking. For example, if Europe is the cause of the downturn, we would expect companies exposed to Europe to underperform. Those companies were actually over performing. Small U.S. companies with no exposure to Europe were the ones actually underperforming. This trend has stopped.
Earnings should continue to modestly grow. Cash flows are strong, and capital spending is down. If the market goes craters, expect companies to increase their share repurchase plans.
Oil and Interest Rates
Lower oil and gas is great for all of us. Is the economy that weak? Employment is strong to very strong. Energy and commodity prices are weak. While oil at $107 was not justified, it is not justified at $78 per barrel.
Emotion vs. Logic
What To Expect
Earnings are the story now as the emotional selloff has ended. People want to see fundamentals return. If corporate earnings continue to improve, the market should inch back upwards.
The average retirement age is 62. The average length of retirement is 18 years. The average savings of a 50 year old is $43,797. The total cost for a couple over 65 to pay for medical treatment over a 20 year span is $215,000.
80% of people age 30-54 believe they will not have enough money put away for retirement. 35% of Americans over age 65 rely completely on Social Security. 36% of Americans don’t save anything for retirement.
6,000 Americans turn 65 daily. 13% of the population is over the age of 65.
Savings for retirement requires a continuous process of saving throughout life. The later you begin, the more difficult it becomes to live comfortably in retirement. Far too many Americans are dependent upon social security which was supposed to be just a backdrop to other private savings options. Unlike the private sector, federal employees have a great retirement plan. We are living longer complicating retirement planning solely off social security.
Defined contribution plans are a fixed about or percentage of money contributed by an employee, employer, or both, intended to be used as a retirement savings plan (e.g. 401k). The business community is at risk for not educating employees. The move from defined benefit to defined contribution plans was to reduce corporate liability. The responsibility is now on the individual who lives for today instead of the future.
Saving for a 30-40 year outcome is not front and center for most people. Hindrances to retirement savings include buying a home/paying a mortgage; becoming unemployed, the recession/economic downturn, paying for children’s education, severe financial difficulty/ getting into debt. People tend to watch the news, become frightened, and pull back their investments to cash and short term bonds. The focus should be on how to manage your money over a 30-40 year time horizon with dips and lows.
If you’re not working to help your parents to save for retirement, be prepared to have your parents live with you. This phenomenon, in addition to restricting your autonomy, will drag down the economy as shared dwellings means less construction.
How To Save
If you believe that the world is safe over the next 40 years and the U.S. is the best place to invest, assume a 6% to 8% return compounding on equities. This calculator is an awesome tool to see what you need for retirement planning.
Not All Bad
30 year mortgages dropped below 4%. Trying to refinance. 4.25 to 4 or 3.75. Drop in mortgage rates translates into real money into your pocket. A 30 year 250,000 mortgage would be a savings of $36 per month from 4.25%. It would be a savings of $72 per month if rates drop to 3.75%. The question is really how much equity do you have in your home? Home prices have risen so you may have more than you think.
The national average for gas is $3.15, a 50 cent drop since the 4th of July. Every time you fill up you are saving 5-15 per gallon. 4 times per month is 60 dollars per month. 2 car families is 120 dollars per month.
Drop in oil to below 80 dollars per barrel affected heating prices. While only really affecting the northeast, there will be a dramatic decrease in those prices. Natural gas may be higher but milder winter may result in savings of $20-$30 per month. Propane has been a crazy market and the midwest could see 800 dollar savings. Combined, the northeast and midwest could see 15 to 30 percent savings this winter on their heating bills.
Lowered rates may give you the ability to refinance your home allowing you to repay credit card debt. This is particularly useful if you plan on getting into more credit card debt this holiday season. This volatile market provides a lot of good news for consumers.
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The information should only be a starting point for doing additional independent research in order to allow you to form your own opinion regarding trading decisions. You should ask the firm with which you deal about the terms and conditions of the specific securities which you are trading and associated obligations. You should always check with your licensed financial advisor and tax advisor to determine the suitability of any investment.