As those who have followed this column for a while know, I become nervous during stock market rallies and practically gleeful during market corrections. So when the market dropped by 7.8% over a one-week stretch in early February (which happened to contain my birthday), I considered it a gift.
The Dow rebounded from back-to-back down sessions, climbing 0.3% on Wednesday, Jan. 31, to end trading at 26,149. Credit much of the gain to the strong performance of Boeing (BA), which jumped 5% to $354.41 a share. As the highest-priced component of the industrial average by far, the aerospace giant holds the biggest sway in the price-weighted Dow.
The Dow Jones industrial average index (DJIA) opened 2018 just shy of 25,000 on Jan. 2, and a little over two weeks later it already had topped 26,000. I was recently asked when I thought the Dow would reach 30,000. Since stocks are the long-term piece of an investor’s portfolio I think this question misses the mark. The better question is, when will the Dow double to hit 50,000?
Congress is working on its fourth stopgap spending bill since the 2018 fiscal year started in October 2017. If it can’t pass a bill by the end of Friday, Jan. 18, America could suffer a partial government shutdown – and even if the Legislature does get the job done, it will merely kick the can down the road to next month, where another impasse may loom.
But whether it’s Friday, or in February, or whenever – if the government shuts down, that does not mean the bull market will too.
It’s understandable if investors are getting nervous. They’re celebrating the market’s record sprint to Dow 26,000, and now the folks in Washington, D.C., look like they might just dump something in the punch bowl.
A government shutdown is serious business. It creates chaos and hurts the economy. Even if lawmakers come up with another last-minute, stopgap funding bill, that just creates more uncertainty down the road. And as you may have heard, the market hates uncertainty.
With the clock ticking down, investors are rightly wondering what they should do in the event of a government shutdown. We’re here to help. Here’s how to handle the situation in three easy steps:
Stocks are at all-time highs. By some measures, they’re more expensive than they have been in nearly a decade, with the Standard & Poor’s 500-stock index going for more than 26 times trailing 12-month earnings. Moreover, the current bull market is the second-longest in history, just months away from reaching the nine-year mark.
It’s natural, then, to worry about headlines that could put an end to the rally.
However, neither worrying about government shutdowns nor the actual shutdowns themselves are novel experiences for equity investors, experts note. And it always has worked out OK in the past.
“The market has seen this before, and while the short-term reaction is unpredictable, it tends to be short-lived,” says Oliver Pursche, chief market strategist at Bruderman Asset Management.
Indeed, there have been 18 government shutdowns since 1976, according to LPL Financial and FactSet. They have ranged in length from one to 21 days, and have produced an average loss for the S&P 500 of – wait for it – 0.6%. Even the worst loss, from September to October 1979, was a mere 4.4% that the market clawed back by the start of 1980.
Historically speaking, the market doesn’t seem to care about whether Washington shows up for work.
Investors still should be at least prepared for a potential hiccup in the markets – that’s just prudent planning. After all, a short government shutdown would affect some small level of spending, which could put an unexpected blemish on what’s otherwise expected to be a rosy 2018 for corporate America.
But rather than being ready to head for the hills, investors should put together a shopping list.
A massive corporate tax cut promises to boost profits for many American companies. And a repatriation tax holiday on overseas cash has numerous corporations bringing home billions of dollars, much of which is being pledged toward new jobs, wage hikes and other investments that should fuel domestic growth. That all points to continued gains for stocks – which is why a government shutdown-sparked drop in the market should be viewed as a dip-buying opportunity.
After all, the idea is to buy low, and when estimated earnings-growth rates are taken into account, stock prices don’t look so out of whack. The S&P 500 trades for a bit more than 18 times analysts’ expectations for future earnings, according to data from Thomson Reuters. That’s not much higher than its long-term average of 17.6, according to FactSet.
Any pullback in share prices, then, will afford investors an opportunity to buy stocks at valuations closer to historical norms.
Enjoy the Ride?
If anything, the market seems to have almost developed an appreciation of government shutdowns. The S&P 500 has actually delivered gains the past three times Congress couldn’t agree on a spending bill.
When the government was closed for 16 days in 2013, the S&P 500 rose a whopping 3.1%. (See the accompanying table, courtesy of LPL Financial and FactSet.) A 21-day shutdown from December 1995 to January 1996 resulted in a 0.1% increase in the benchmark index. And a five-day shutdown in November 1995 delivered a gain of 1.3%.
With numbers like that, investors should be praying for as many shutdowns as they can get.
That is said in jest, of course. But this does hammer home the point that Wall Street does not view government shutdowns as top-priority bear triggers. Why? Because they ultimately have little effect on what actually moves share prices.
“Markets rise and fall based on economic conditions and corporate earnings,” Pursche says. “And right now, it looks like both are going to continue to rise, which should bode well for the market. In short, ignore the news headlines and focus on what matters – data, and the data looks good.”
Every year or so, I pen a column about how to invest for the long haul using just a handful of Vanguard index funds (read the latest version: “6 Best Vanguard Index Funds for 2018 and Beyond”). Without fail, this article is more popular than anything else I write for Kiplinger.com. Plainly, keeping investing simple is a goal of many investors. Unlike me, most folks don’t relish the prospect of spending endless hours researching funds.
Think the U.S. stock market will gain another 20%-plus in 2018? Guess again. With stocks richly priced, the bull market nearly nine years old, and the Federal Reserve likely to raise interest rates three times in 2018, expect much lower returns.
If you Google “buy-and-hold investing,” you’ll easily find dozens of articles that say the strategy is tried and true.
And you’ll find almost as many that say it’s dated and overrated.
Which is accurate? A lot depends on the individual investor.
Simply put, buy and hold is an old-school passive investment strategy that emphasizes long-term growth over short-term thinking or market timing. An investor who employs a buy-and-hold strategy actively selects stocks and mutual funds, but once that’s done, isn’t concerned with short-term price movements and technical indicators.
An investor’s age plays a role with buy and hold
The strategy generally makes sense for a younger investor who is accumulating assets for retirement but doesn’t plan on tapping into them any time soon. Younger investors usually have years, or even decades, to recover from negative swings in the equity markets.
For example, during the 2008 market crash, when the S&P 500 lost 51% in less than a year and a half, many investors grew scared and sold their holdings at a significant loss. Those who lost the most were the ones who got out of the market near the bottom and failed to participate in the big rebound that followed. Hanging in there paid off for those with a longer-term focus.
But for the older investor who is at or near retirement, this strategy may not work so well. If you were fully invested in the bear market of 2008 and already taking withdrawals, you may have had to take a 40% reduction in income to preserve your assets long enough to not outlive your money.
Buy and hold also may be a bad idea if you don’t have a lot of money to invest, as big pullbacks in equities can all but wipe you out — especially if you end up needing those funds while the market is down. That’s why after the 2000-2002 dot-com (“dot-bomb”) bubble, many market commentators, including author and Fox Business anchor Lou Dobbs, said, “You shouldn’t invest money in the stock market that you can’t afford to lose. Period.”
You may want to rethink the ‘4% rule’ too
Old rules of thumb are hard to let go of in any situation — and the financial industry is no exception. Another popular strategy dating back to the ’90s, designed to “ensure” that your money would last at least 25 years in retirement, is the “4% rule,” which says a 4% annual withdrawal rate from a typical portfolio should be a “statistically safe” amount, although not guaranteed to last a lifetime.
Recently, experts from a variety of sources have said the 4% rule is no longer realistic, mostly because of lower interest rates, longer life expectancies and recent markets showing much larger than normal corrections and recovery periods of five years or more. Some are now saying the percentage should be 3% or less. In 2013, the folks at Morningstar published research that found retirees who want “a 90% probability of achieving retirement income over a 30-year time horizon and a 40% equity portfolio” should withdraw just 2.8%.
Based on those numbers, if you had $1 million in assets, you would be safe to take out $28,000 per year. Most people likely would say that falls far short of what they’ll need in retirement.
Taking another direction instead
So, what else is there if you don’t want to run out of money and you need to use savings and investments to supplement your other guaranteed-income sources?
An increasingly popular strategy is to use a fixed-index annuity with a guaranteed lifetime income rider to create another dependable income stream to go along with your Social Security benefits and pension income.
These annuities do not directly participate in the market, but earn interest credited to the principal — capped at a certain amount — when the market goes up. Your principal is kept safe. You participate only in the market upside (up to the cap, but if the market rises above that, you wouldn’t share in those higher gains). You don’t lose principal when the markets pull back.
Because this is an insurance contract with guarantees and protections provided by the insurance carrier, it can be a good way to keep a portion of your assets safe. By adding an income rider, the carrier is able to guarantee your income for as long as you live and could pay out at a rate as high as 5% to 6% or more, depending on your contract terms and your age. There are almost always fees associated with riders offering guarantees, so it is important to understand how the fees work, including how they are calculated, if they can be changed during the contract period, and how they may impact the growth and death benefits of the contract. It is worthwhile to educate yourself on the costs and benefits to make sure they make sense within your retirement income plan.
If you haven’t heard about this type of annuity from your broker or adviser, it’s probably because it is not a security, it’s an insurance product, and doesn’t fit under the “Wall Street umbrella” or typify the normal brokerage-house model offering. More often, you will find these guaranteed-income products through independent financial advisers who also have an insurance license. Financial advisers are required to work as fiduciaries and have a legal obligation to put their clients’ interests first.
Bottom line: Don’t depend on old rules of thumb to get you through retirement. Keep an open mind and check into all the options available to you.
The market’s hotter than a pistol right now, leading many to argue stocks are too expensive. If that’s true, and I’m not saying it is or isn’t, doesn’t it at least make sense to take a closer look at your portfolio for money-losing stocks to sell?
Since President Trump’s election in November 2016, the Dow Jones Industrial Average is up more than 5,000 points and the S&P 500 is trading at 18.5 times earnings, almost 50% higher than the index’s long-term average.
We’re in the ninth year of a bull market and while some are suggesting it could carry on for another six to eight years, common sense suggests owning money-losing stocks at this stage of the game is unnecessarily putting your hard-earned money at risk.
I don’t believe regular investors should ever own money-losing stocks, especially if they’re held within a retirement account, but if you do own any of these seven stocks to sell now, at least reconsider why you own them.
You’ll be glad you did.
It wasn’t a pretty picture for Snap (SNAP) stock Nov. 8, after it laid a complete egg with its Q3 2017 earnings.
The social media company lost $443.2 million in the quarter from $207.9 million in revenue. It’s hard to understand anyone investing in a business whose revenues look like earnings and earnings look like revenues.
Evan Spiegel and company have it all backwards.
To make matters worse, the company behind Snapchat added just 4.5 million new daily active users in the quarter ended Sept. 30, an increase of just 3% over the second quarter. By contrast, Facebook (FB) increased its DAUs quarter-over-quarter by 3.8% to 3.7 billion.
Facebook did better than SNAP despite having 21 times as many users. That’s not a good sign when you’re losing $400 million a quarter.
I don’t care who you think is buying this company, SNAP’s a toxic stock you don’t want to own.
At the end of September, CNBCs Jim Cramer weighed in on Wayfair (W), the Boston-based online retailer of home furnishings.
It seems everyone’s got an opinion about the hotly contested stock, including short sellers who hold more than 25% of its stock.
“[Wayfair is] spending a fortune to grow in the hopes of taking over the furniture world,” Cramer said September 27 on Mad Money. “I wouldn’t go short or long this thing. I just think the whole thing is just too dangerous to play in.”
If you think it’s going to become the Amazon.com (AMZN) of furniture, you’ve got another thing coming; Ikea’s got a much better chance of success than Wayfair.
All the way back in October 2014 when Wayfair went public, I had five reasons to avoid its IPO. One of them was that it was losing money.
“Wayfair had an operating loss of $51 million in the first six months of 2014. Keeping all of the margins the same while inputing a $300 million marketing budget for the year, I expect it to generate an operating loss of $102 million or $1.23 per diluted share,” I stated October 14, 2014. “If it continues to spend 23% of every dollar of revenue on sales and marketing, it’s going to lose money indefinitely.”
I was wrong. Wayfair didn’t lose $102 million in 2014; it lost $148 million. It has lost $277 million in the two years since despite more than doubling top-line revenues. In Q3 2017, its operating loss was $74 million, 20% higher than a year earlier on a 40% increase in advertising.
The 20/40 rule isn’t going to make Wayfair profitable anytime soon, which makes it a stock to sell now.
Fitbit (FIT) is not looking very healthy at the moment. It coughed up a $113.4 million loss in Q3 2017 on a 22% decline in revenue. Not only that, but its gross margins were 330 basis points lower… not exactly the remedy for a stock that’s now below $6 and down more than 30% over the past 52 weeks.
About the only person that believes Fitbit’s got a fighting chance of surviving as an independent company is CEO and co-founder James Park who sounded weirdly optimistic in the company’s Q3 press release.
“We continue to execute on our transition plan by delivering on our financial guidance and product roadmap, positioning Fitbit on a path back to growth and profitability,” said Park. “We believe Fitbit Ionic delivers the best health and fitness experience in the category.”
When I last wrote about Fitbit in September, I was remarkably positive about its share price, suggesting that it likely wouldn’t drop much farther than where it was trading around $6; that’s exactly what has happened even after another money-losing quarter.
My rationale is that someone will come along and buy Fitbit for $9-per-share or three times its enterprise value. I still feel that’s going to happen, but unless you can afford for me to be wrong and it doesn’t get an offer, time is money that’s best spent elsewhere.
Blue Apron (APRN)
I feel like I’m Captain Obvious from the Hotels.com ads, but if you bought IPO shares in Blue Apron Holdings (APRN) and are still holding, you’re not very happy about it.
Down almost 70% from its $10 IPO in June, you’re probably wondering how you could have missed all the signs?
First, no one is making money in the meal-kit business. German-based Hello Fresh, which has a big presence in the U.S., lost $66 million in the first six months of the fiscal year on $505 million in revenue, while Blue Apron had $84 million in red ink on $483 million in revenue in the same period. And there are many other competitors.
However, the big sign you shouldn’t buy Blue Apron shares came June 16 when Amazon announced it was buying Whole Foods. That was a full 13 days before Blue Apron’s IPO. You had time to withdraw your commitment.
If there’s a company that can sustain losses building a business, it’s Amazon. Once they hooked up with Whole Foods, the writing was on the wall.
Blue Apron is a prime example of why you shouldn’t buy IPO shares in money-losing companies.
As Bud Fox (Charlie Sheen’s character in Wall Street) would say, “It’s a dog with fleas.”
Of all the stocks I’m recommending investors sell now, Fossil Group (FOSL) just might be the toughest call to make.
It’s not because I’ve got some attachment to the watch and jewelry manufacturer and retailer; rather, it’s just so difficult comprehending that Fossil was once valued at $6.6 billion (2013), 23 times its current market cap.
How can you possibly get back to that? You can’t, at least not without a miracle or two.
It has been a long time since I’ve followed Fossil competitor Movado Group (MOV), but I’ve attached an interesting article from 2015 that compares the two companies.
At the time, Fossil’s market cap was four times’ Movado’s. Today, Movado’s is double Fossil’s. Oh, how the tables have turned. But it’s not necessarily an endorsement of Movado, either. Movado might be a little more upscale and profitable than Fossil, but they’re both experiencing shrinking sales that might never come back.
If you must own a watch company, have the good sense to sell Fossil and buy LVMH Moet Hennessy Louis Vuitton SE ADR (LVMUY), which owns several high-end watch brands including TAG Heuer.
LVMUY isn’t going anywhere but up.
AMC Entertainment (AMC)
The Chinese conglomerate Wanda Group acquired AMC Entertainment Holdings (AMC) in August 2012 for $2.6 billion, including debt or 7.5 times EBITDA.
Wanda took AMC public the following December at $18-per-share or almost eight times EBITDA. Today, although it trades at less than $12, its enterprise value is $5.5 billion or almost 15 times EBITDA.
That’s a nice trick when you can double your multiple while losing money for shareholders. How can I get in on that action?
In 2016, AMC acquired Carmike Cinemas for $858 million and Odeon Cinemas, a European operator of movie theaters, for $637 million. The two acquisitions plus additional debt for future purchases added $1.8 billion in long-term debt to its balance sheet pushing its enterprise value higher. As of the end of September, AMC had $4.3 billion in long-term debt.
However, it now has over 1,000 theaters, almost three times as many as it had at this time last year. It’s definitely growing.
Why sell when its shares are near an all-time low?
Because you can do better with Cineplex Inc (CPXGF), Canada’s largest cinema company with 163 theaters generating almost as much in EBITDA from one-tenth the number of theaters.
Pandora Media (P)
I can’t believe that Pandora Media (P) is still around. Years ago when it was still an experiment, I used to listen to it, but once Spotify and other internet music services came along, I lost interest.
However, one look at its five-year operating history and it’s easy to see why. In fiscal 2012, it had operating losses of $11 million on $274 million in revenue. In the trailing 12 months, it had operating losses of $534 million on $1.5 billion in revenue.
No wonder its share price is under $5, well below its all-time high of $40.44 set in early 2014. Unless you’re an exceptional company, investors move on.
In June, Sirius XM Holdings (SIRI) bought $480 million in Pandora’s Series A preferred stock, which pays 6% annually and gives it the right to convert to common at $10.50-per-share. Pandora can’t redeem the shares until September 2020.
With the investment, Sirius XM gained two seats on the board and a 16% ownership stake based on the conversion of those shares.
So, why sell?
It might take three years or more for Sirius XM’s investment to deliver more than a reasonable dividend payment for its investors. The $480 million it has put into Pandora is chump change. Whether Pandora lives or dies isn’t going to affect SIRI stock.
Sirius XM obviously feels Pandora’s worth no more than $10.50 per share or the two parties would have agreed to a buyout.
In the meantime, Pandora continues to lose buckets of money. The opportunity cost is too high. If you like Pandora, sell it, and buy SIRI.
Part of the beauty of buy-and-hold investing is its simplicity. The market always has occasional pullbacks and crashes, but the long-term trend has always been up. A high-quality company with an extensive track record of success and reasonably priced (or even cheap) shares will go along for the ride, if the investor is patient enough.
Just because stock valuations are high doesn’t mean they can’t still go up from here.