Document 6557634
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Document 6557634
© 2014 Dow Jones & Company. All rights reserved. THE WEEKLY GUIDE TO MANAGING YOUR MONEY It’s Getting Scary Bears Stalk the ‘Goldilocks’ Market BY TOM LAURICELLA Dow Mauled 00 17100 The Dow Jones Industrial Average fell 2.7% last week, its third consecutive down week. The Average has fallen 4.3% since its September high and is now down 0.2% for all of 2014. 00 17000 00 16900 00 16800 00 16700 00 16600 16500 16544.10 Oct. 6 long-term bull market “is not over,” she says. But selloffs like the current one, which have brought the S&P 500 down 5.2% from its most recent high, “are going to be a bit more par for the course,” she says. “It’s very normal at this stage…to get multiple pullbacks.” That would be a change for investors. For five and half years stocks have been in a bull market, and in the past two years declines have been shallow and short-lived. It’s been two years since the last “correction”—a 10% decline or more—in the S&P 500. The biggest decline this year was a three-week selloff totaling 5.8% that began in mid-January. As recently as last month, the Dow and the S&P 500 were carving out fresh record highs. But the Dow finished last week down 0.2% for the year while the S&P is up a bare 3.1%. Driving share prices steadily higher has been the combination of an improving U.S. economy and jobs market, strong corporate earnings and the Fed’s easymoney policies. There have been trouble spots, such as weak wage growth, high long-term unemployment and a stalling real-estate recovery. But broadly, most investors say that absent a shock to the 1250 1200 Small-cap companies with market values under $2 billion led the bull market up and are now leading it down. The Russell 2000 small-cap index closed Friday down 12.8% from its July high—official “correction” territory, and then some. 1100 1050 Friday: 1053.32 1000 J F M A M J J Source: FactSet 1 Miracle on 34th St.: Amazon.com plans to open a store in the middle of New York City, according to people familiar with the plans, the first brick-and-mortar outlet in its 20-year history and an experiment to provide the type of face-to-face experience found at traditional retailers. The site is set to open in time for the holiday shopping season on the same busy street as Macy’s. 2 Taylor Hill Autopilot: Tesla Motors, after weeks of speculation, unveiled an automated driving system designed to enhance Tesla CEO visibility, prevent ac- Elon Musk cidents and even allow vehicles to park themselves. A S O The Wall Street Journal 3 Save Money: Wal-Mart Stores is cutting health insurance for another 30,000 part-time workers and raising premiums for its other employees, as U.S. corporations push to contain health-care costs. 4 Flat Rate: Most Medicare beneficiaries will pay monthly premiums of $104.90 for 2015, the same as this year and last year, while cost-sharing for hospital and skilled nursing stays will increase slightly, the Obama administration said. 5 Back to the Office: As it pulls the plug on hedge funds, the California Public Employees’ Retirement System, the country’s biggest public pension, plans to increase its allocation to commercial real estate by 27% from the present $26 billion—giving Calpers with its largest property holdings since before the financial crisis. The Numbers Percent change for the week 2.4% GOLD 4.4% OIL 9 10 The Wall Street Journal economy, there’s no danger of a recession that would send stocks into a prolonged decline. “The economic fundamentals still are in a Goldilocks” environment, says Ms. Sonders. She points to the September employment report, which showed a healthy 248,000 new jobs created during the month. Meanwhile, corporate earnings have defied expectations of a slowdown. During the second quarter, companies in the S&P 500 posted a better-than-forecast 7.5% rise from a year earlier, according to FactSet. And with third-quarter earnings season having just kicked off, profits are expected to show a 4.6% rise. But worries about global growth threaten to crimp some of that growth. “The U.S. economy is not immune,” especially among larger companies, says Joseph Amato, chief investment officer at money-management firm Neuberger Berman, which oversees $257 billion. S&P 500 companies generated 46% of their sales outside of the U.S. as of June 2013 , according to S&P Dow Jones Indices. Europe accounted for roughly 7%. Slowing growth in Europe “will make earnings estimates a little more vulnerable than they were six months ago,” says Wil- BY DANIEL HUANG 1150 950 8 Tax Breaks Recent Grads Overlook NEED TO KNOW Small-Cap Correction 7 Source: SIX Financial 0.9% 2.3% 10 YR WSJ DOLLAR INDEX TREASURY YIELD Lawrence Rout, Senior Editor [email protected] David Crook, Editor [email protected] Christopher Gay, News Editor [email protected] Mark Tyner, Art Director [email protected] Lorri Wagner Business Partnerships (609) 520-4235 [email protected] Paul Carlucci Jr. Director of Sales (212) 597-5636 [email protected] CORPORATE HEADQUARTERS 1211 Avenue of the Americas New York, NY 10036 FOR A SPECIAL JOURNAL SUBSCRIPTION OFFER, CALL 1-888-295-2747 ALL OF THIS WEEK’S EDITION IS AVAILABLE ON OUR FREE WEBSITE: WSJ.com/Sunday Recent college graduates, overloaded with debt, tend to skimp in any way possible. Yet many overlook features in the tax code that offer substantial savings. Here are a few: Student-loan interest deduction: As graduates start earning and paying off debt, they can slash their taxable income by up to $2,500 for interest paid on both federal and private student loans, says the Internal Revenue Service. Most borrowers who are single filers and have adjusted gross income of less than $60,000 are eligible for the full deduction. Those with AGI between $60,000 and $75,000 are eligible for a reduced one. Lifetime learning credit: This is worth up to $2,000 for those paying qualified expenses for postsecondary education, or paying them for an eligible student. You need to have been in school at least part of the relevant year to claim it. The credit is a “nonrefundable” dollar-for-dollar reduction of one’s tax bill, says the IRS. If the tax owed is less than $2,000, for example, the credit will reduce the sum to zero but won’t refund the difference. The amount of the credit phases out at an AGI of $53,000 to $63,000. Students who graduated in May this year, or are still in college, also could be eligible for the American Opportunity Tax Credit—a $2,500 nonrefundable credit available for the first four years of postsecondary education. Moving-expenses deduction: Reasonable moving expenses covered by the deduction include packing and traveling costs, but not meals or costs related to car maintenance or depreciation. Eligible expenses are those incurred six months before or after the first day of work, says the IRS. The employee also must work full time for at least 39 weeks during the first 12 months after arriving in the general area of the new workplace. Tax-smart saving strategies: The first place many young workers should start saving is in their employer-sponsored 401(k) plan. Contributions are pretax, meaning that taxes aren’t paid until the funds are withdrawn. Many companies match part of your contributions. Oscar Ramos Investors were taken on another white-knuckle ride last week, as stocks posted wide back-to-back gains and losses. Unexpectedly weak economic news out of Germany helped pull the Dow Jones Industrial Average down 1.6% on Tuesday, its sharpest one-day decline since July. Then on Wednesday the Dow rocketed back 1.6%—its biggest gain of the year—on news suggesting that worries about Europe and a stronger dollar could lead the Federal Reserve to raise rates slower than some had expected. Just when the coast seemed clear, the Dow tumbled 2% on Thursday, before falling another 0.69% on Friday. When the dust had settled, the Dow had lost all of its gains for 2014. For several years, it’s been a Goldilocks stock market. Now, some investors wonder if an economic slowdown overseas and the Federal Reserve will spoil the fairy tale. Most think the bull market will endure, but investors should expect a bumpy ride. Concerns are building that a renewed weakening of economies in Europe, at a time when Japan remains in the doldrums and China’s massive economy is slowing, could spill over to the U.S. economy. At the same time, the Fed is signaling that it expects next year to begin raising short-term interest rates, which have been locked near zero since the financial crisis. Though most investors expect the Fed to move slowly and carefully, many also think uncertainty about its timing will make stocks more prone to sharp swings. Liz Ann Sonders, chief investment strategist at Charles Schwab, had been a steady bull on stocks, but in recent months she’s become more cautious. The WSJ.com/Sunday liam Kennedy, manager of the $11.1 billion Fidelity International Discovery fund. It’s not just the pace of growth in Europe that raises concerns. It’s also been the 9% rise in the value of the dollar against the euro since its 2014 low in March. That makes U.S. goods more expensive overseas and reduces the value of profits earned abroad. This swift rally follows a long period of dollar weakness that had helped U.S. exporters. “What had been a tailwind...has now reversed,” says Mr. Kennedy. Still, he doesn’t expect the bull market to be derailed. “As you recalibrate expectations, clearly there are some individual stocks that will not perform as well,” says Mr. Kennedy. “But just because Europe is slow it doesn’t mean the story is over for the next three to five years.” For many fund managers, the primary question is whether eventual rate increases by the Fed will mean an end to the Goldilocks environment for stocks. On the positive side for the broad stock market, the strong dollar can keep inflation in check, allowing the Fed to raise rates slowly. A strong dollar damps inflation in part by lowering the cost of imported goods— good news for retailers, in particular. In addition, many globally produced commodities, such as oil, are priced in dollars. As the dollar rises, those commodity prices drop. Crude-oil prices have fallen more than 20% from September 2013, to $85 a barrel. That, in turn, is leading gas prices lower. The average price for a gallon of gas as of midweek was $3.24, according to AAA, down from $3.43 a month ago. At Neuberger, Mr. Amato is among those thinking the Fed’s eventual rate increases will lead to more volatility, and a potential change in leadership among top-performing stocks. Many of the best-performing stocks, he says, have been companies with high debt levels and weaker balance sheets. Those companies have benefited from the Fed’s cheap money policies. But as the cost of borrowing rises, the advantage should shift to “higher quality” companies with stronger cash flows, lower debt levels and more dominant market positions. “A move to a more normalized monetary policy is a good thing” he said, adding it’s just “never fun when you’re going through it.” Email: [email protected] JONATHAN CLEMENTS The Hazards of Overreach Leverage and Other Tactics That Can Put You in a Hole During a stock-market decline, there are those who panic and sell. And then there are those who don’t have any choice. In late 2008 and early 2009, I remember talking to many investors who lost their nerve as share prices plummeted. Some of those who dumped stocks were folks I considered to be seasoned investors. But today’s column is aimed at a different group: those who set themselves up for failure before share prices even decline—by pursuing high-risk investment strategies that just don’t make sense for the typical investor. Flirting With Zero Let’s say you take out a margin loan, which involves borrowing against your portfolio’s value. You then use that money to buy additional shares, so you end up owning, say, twice as much stock as you could otherwise afford. That leverage should prove mighty rewarding if shares rally from here. But if, instead, stocks tumble, you could get a margin call demanding that you repay part of the loan. At that point, you might be forced to sell shares and give up all chance of recouping your losses. In a sign of the market’s frothiness, margin borrowing has doubled since the start of 2010. Selling put options can also lead to permanent losses. When you sell a put, you receive a premium from the option’s buyer. In return, you give the buyer the right to sell you shares at a specified price. If the stock falls far below that price, you will lose a fistful of money—and the premium received will be scant compensation. You could also suffer large, permanent losses if you bet heavily on a few stocks. While it’s reasonable to expect the broad market to rebound from a severe decline, there are plenty of individual stocks that plunge and never recover. Just think about all the dot-com companies that went out of business during the 2000-02 bear market. In addition, I would be leery of leveraged stock funds. For instance, ProShares Ultra S&P 500, an exchange-traded fund that aims to deliver twice the daily return of the S&P 500-stock index, lost an eye-popping 84.7% from 2007’s market peak to 2009’s trough, according to Chicago investment researcher Morningstar. Amazingly, the fund eventually recouped that loss, though it’s hard to imagine many shareholders toughed it out through the entire roller-coaster ride. cause you have a plain-vanilla diversified stock portfolio. Still, you too could suffer permanent losses during a bear market—if you’re forced to sell stocks to pay for upcoming goals. Give It Five Years As a rule, money you plan to spend in the next five years should be out of stocks and in more conservative investments, like certificates of deposit and short-term bonds. Why this caution? Even with a five-year time horizon, you could lose money with a diversified stock portfolio. Consider the S&P 500’s performance since yearend 1925, which includes 84 rolling five-calendaryear periods. Morningstar calculates that stocks lost money in 12 of those fiveyear stretches, or 14% of Some people set themselves up for failure before share prices even decline, by pursuing high-risk strategies that make no sense for the typical investor—things like margin loans and leveraged funds. Keep in mind that such brutal losses aren’t just a bear-market phenomenon. In a rising market, there are other strategies that also offer the prospect of staggering losses. Suppose you borrow shares and then sell them short, in a bet that they’ll fall in value. If, instead, the stock rallies, there’s no limit to your potential loss. Similarly, in a rising market, you can face hefty losses if you sell so-called naked call options. Buyers of these call options have the right to purchase the underlying stock from you at a specified price. But because you don’t own the stock—hence the term “naked”—you could lose big money if the shares climb sharply. All this talk of buying on margin and selling options might seem irrelevant, be- the time. This performance includes reinvested dividends. What if you look at 10year stretches? The S&P 500 lost money in four of the 79 rolling 10-year periods, or 5% of the time. Let’s say you have money you plan to spend in the years ahead on retirement living expenses, college costs or a house down payment. Once your goal is five years away, you should look to move the money involved out of stocks. If shares are currently in a funk, you might hold off selling and see if the market recovers. But if stock prices are at or close to their highs— which is where we are today—consider shifting the money into conservative investments, so you avoid the risk of selling shares at fire-sale prices.