Check Your Politics At The Door, Global Recession Odds, A Guaranteed 7%, Plus My Pees & Q’s

Many of you reading this letter weren’t around prior to 1950 (and that includes me), so I can only go with recent history of the last 20 years in saying that there may have never been a more divided time in American politics than the last 10 years.

I promise you this will not be a diatribe which delves into the political mess, but rather a blunt reminder that when it comes to your investments, you will be far richer if you have the discipline to leave your political beliefs out of your investment process and allocations.

We’ll also have some interesting charts on the probability of an upcoming recession, since recessions have tended to be the biggest risk to stock market returns.  In addition, there’s a simple way to earn 8% on your money, guaranteed, simply by being patient.  See below.  And along with a current update on the market environment, you’ll read about my pees and q’s.  Don’t cheat.  It’s not nearly as funny as the material we routinely close each letter with!

Why Investing With Your Politics Is A Bad Idea

I remember a number of clients back in 2008 expressing the view that if Barack Obama was elected President, the country was going to hell, and so was the stock market.  By my calculations, measured from November 2008 when Obama was elected to November 2016, when President Trump was elected, the S&P 500 Index compounded at about 13.8% annually.  If that’s investment hell, I wonder what investment heaven is?

Similarly in the summer of 2016, a number of clients had identical feelings about Donald Trump.  His Presidency is far from over, but since his election in November 2016, the S&P 500 has compounded at 19.8% annually (don’t be surprised if he tweets this soon, just to remind everyone!).  In contrast, for the eight years under President George W. Bush, the S&P 500 lost -4.1% annually.

Does this mean that Bush was to blame for the crappy 8 years, or that Obama was responsible for the fantastic 8 years, and Trump for the last couple of years?  Whether you are Democrat or Republican, I’m sorry to burst your bubble, but there simply is not enough statistical evidence to support such conclusions.

Bush took over after the stock market had been going up for 18 years and was the most overvalued in history (at that time).  Superman could have been elected President and it wouldn’t have mattered.  Obama took over after the worst decline since 1932, and stocks were cheap.  Trump took over in the middle of a bull market, which at this writing, is still going on.  His supporters will argue the tax cuts and rolling back of regulations are responsible for the gains in the stock market.  We’ll see if it lasts.  His tenure has over two years to go, and a lot can happen in two years.

I couldn’t agree more with the comment recently from Mike Ryan, chief investment officer for the Americas at UBS Global Wealth Management.  He wrote, “Political bias can significantly hamper investors’ ability to make prudent investment decisions—especially if they allow political disappointment to morph into investment pessimism or fear.”

The bottom line is, that since 1901, we’ve only had 29 four-year periods where either a Democrat or Republican was President.  With Democrats holding the Presidency 14 times and Republicans 15, that isn’t even close to being statistically significant.  Though it is nice to look at the data and see past tendencies, until there is a lot more data (which won’t be in our lifetimes), the best approach is to ignore the politics and invest with the evidence.  The market will tell you, if only you will listen.  And that is why we use unemotional, disciplined models to guide our allocation decisions.

Below is a chart courtesy of Ned Davis Research which shows the performance of the Dow Jones Industrial Average with different Presidential and Congressional Combinations.  The gains per annum are expressed in real terms (adjusted for inflation), rather than nominal terms.  Currently, we have a Republican President and Republican Congress, which has resulted in strong 7.28% real returns, the second best combination.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

But, if the November elections result in a split Congress, history shows stocks have lost money at a -6% annualized clip.  The problem is, this combination has only been prevalent 10% of the time.  So, it’s not something one can bank on.  When you only look at how markets have done based on who is in control of Congress, it reveals some surprising results.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

By far, with Republicans controlling Congress, the Dow has compounded at over 6.6% above inflation, compared to gains with Democratic control at just over 1%.  A split Congress has only occurred 13% of the time, but those results have been uniformly negative.  Since that is a real possibility come November, it may be easy to jump to the conclusion that bad things will happen to stocks should that occur.

I’d encourage investors to adapt the attitude of “I don’t know.  Let the market tell me.”  On a positive note, regardless of the outcome, this is a Mid-term election year.  According to Doug Ramsay of the Leuthold Group, since 1942, the average gain from November to April following mid-term elections has been over 17%, and there has never been a loss.  That’s really encouraging, but still with only 19 data points, not any more significant than the Presidential and Congressional data cited above.

What’s The Chance Of A Recession

The economy continues to be pretty strong, and consumer and business confidence is running pretty much at all-time highs.  Earnings are strong, and as earnings go, so goes the stock market.  At least some believe that.  But, it doesn’t hold up to scrutiny when things get stretched too far.  Historically, the biggest declines in the stock market have been associated with recessions.  In theory, then, if one could accurately forecast a recession, it would be helpful in getting out of stocks and avoiding pain.

If it were only that easy.  Nevertheless, Ned Davis Research and others have attempted to model this area.  I’ve reproduced below their two Recession Probability Models—one is Global and one is for the U.S.  Unfortunately, each model only has 39 to 48 years of data, but let’s examine what their current message is.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As shown above, the U.S. model is at 1.2%.  Not even close.  But take a look at the Global model below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

It is at just over 68%.  This bears watching, since a reading over 70 would raise the odds of a global recession to 92%.  It is interesting contrasting these models, because they mirror what has been happening in 2018 with domestic equities in comparison to international stocks.

Year-to-date, the Vanguard Total Stock Index has gained 9.2%, while the Vanguard Total International Stock Index has lost -6.1%.  Normally, it is healthier when global stocks are performing in sync with each other on the upside, but it also may be premature to conclude that weakness abroad is a warning sign of domestic problems to come.

A recent study by Ned Davis Research examined all cases (there have been 10 since 1987, as far back as data goes), when the S&P 500 has beaten the ACWI (All Countries World Index) ex-U.S. by at least 10 percentage points over a 12-month period.  One year later, the S&P 500 has been up every time by an average of 16.8%.  So, this may be encouraging after all, but the gains have not come without bumps, with a mean drawdown of -9.4% during those 12 months, and two cases with drops of greater than -19%.

The Easiest 7% Risk-Free You’ll Ever Make

For those of you approaching the magical age of 62, I’m going to emphasize as strongly as possible that you take Nike’s famous slogan, and do the opposite.  DON’T DO IT!

Don’t do what, you ask?  Don’t claim your Social Security benefits early.  And, don’t retire either.  Unless you have known health maladies that are definitely shortening your life expectancy, you would be leaving significant permanent income benefits on the table by starting your benefits at age 62, not to mention harming your spouse as well, if they have smaller benefits than you do.

The table below, from the Social Security Administration and USA Today, shows that 34% of people claim their benefit at age 62, more than any other age.  Fully 56% of them are claiming benefits from age 62 to 65.  Why is this a dumb idea?  Because by simply waiting those four years and starting at age 66, which is the FRA (full retirement age) for many, your benefit will compound at about 7.4% per year, yielding about a 33% increase at age 66 over age 62.

 

 

 

 

 

 

 

 

 

 

 

 

Here’s an example.  If at 62 you are scheduled to receive $2000 monthly, by waiting four years, that benefit will grow to about $2660, an extra $660 per month, or $7,920 annually.  That’s not chump change, unless you are part of the ultra-rich.  And since, on average, men tend to live a few years less than women, considering one’s spouse is also important in this decision.

Say a married couple retires at age 62, and the man has earned a $2000 benefit while his wife has earned a $1000 benefit.  Then, at age 70, unexpectedly, the man dies.  His wife then gets his benefit of $2000 (plus inflation riders) and gives up hers.  Just think how important that $660 per month would be to her, for the rest of her life, had they waited to claim benefits until age 66?

We know–we’ve heard many of the comments from clients over the years who have ignored this advice.  “I’m worried it’s not going to be there.”  “I want to start before they means test it and take it away.”  “I’ve worked all my life–I’m going to take it while I can, ’cause I don’t know how long I’ll be here.”  In our view, these are just excuses for choosing immediate gratification with little regard for long-term consequences.

Factually, a 60-year-old man has nearly an 85% probability of living until age 70, while a 60-year-old female has an 89% chance.  Where their financial plan can afford it, we also encourage clients who are 66 to wait until 70 to start their benefit, since that free 8% compounding continues for another four years.  Look at the difference.  If you retired in 2018 at 66, your maximum benefit would be $2788 per month, but if you were 70, it would be $3698.  The difference would be nearly $11,000 annually.

An obvious question would be, “where is the income going to come from during those 4 years that I’m deferring (or 8 years, for those waiting until age 70).  First, this assumes one has the assets and other cash flow in order to safely retire at age 62.  If they do, we routinely advise clients to begin an income plan drawing from their retirement plan assets or after-tax savings, and then look to reduce that draw once they have reached age 66 or 70.  It is amazing what an extra four years of work can mean to a person’s or couples’ financial plan.

That’s four years where you’re not drawing down assets, but instead are still saving.  This can’t be emphasized enough.  Another reason that the majority of retirees claim benefits early is that they simply don’t know any better.  A recent study, “Early Social Security Claiming and Old-Age Poverty,” by Gary Engelhardt, Jonathan Gruber and Anil Kumar, concluded that early claiming is associated with a greater probability of living below the poverty line.

These researchers found that the biggest increase in early claimers living in poverty came at the bottom of the income distribution tables.  In all likelihood, these people are the least educated and the least likely to engage the services of a financial planner.

This one decision is no different, and just as important, as choosing the right pension option (for those lucky enough to have one).  You only get one chance to make the right choice.  Wouldn’t it be great if personal finance courses were mandatory in high school and college, so that more people would have the education to make better choices in these areas?

The Current Market Climate

As noted above, U.S. stocks are up decently year-to-date, with the S&P 500, S&P Midcap 400, Russell 2000, NASDAQ, the Dow Transports and the NY Advance/Decline Line all making new all-time highs within the last two weeks.

Since May, four of our eight stock market risk models have been in a negative mode, which has limited our equity allocations to 50%.  In general, monetary and sentiment indicators have contributed to this process, as Treasury Note yields have risen nearly 60 basis points this year and fundamental and sentiment indicators continue to exhibit one of the most overvalued stock markets in history.

It is unfortunate (in hindsight) our models have not kept higher exposure, given that our selections have been handily beating benchmarks, but we strongly believe in diversifying our models, always giving a bit more weight to trend-following than external indicators.  We can only say that our models are designed to keep losses to a minimum, and it’s not so bad to be matching the market in this environment with much less risk.  At some point, the combination of overvaluation and complacent confidence will be resolved with large market losses, but we have no idea when that will be.

Thus far, U.S. stocks have been able to shrug off tariffs, interest rate hikes and the ongoing circus known as the Trump Presidency.  It won’t last forever, but as I’ve written many times before, historically when the Advance/Decline is confirming new highs in the stock market, it is typical that final price highs are at least four to six months into the future.  At present, that puts us anywhere from December to February, provided the market doesn’t continue higher.  And it very well could, as I have outlined above.

On the fixed income side, our high yield corporate bond model went negative on February 12 after being on a BUY signal for nearly 14 months.  It finally flipped back positive on August 27, and with it, we moved a substantial amount of capital out of short duration bond funds back into high yield.  It is not an ideal entry and hasn’t started with a bang, but our discipline says we follow every signal, despite any misgivings our gut may have.

Minding My Pees And Q’s

I’ve debated in my mind whether to write this section, and ultimately decided if it will help others, why not?  If you are a guy, and at least 50 years old, you’re definitely going to want to read this.  Its about a topic most guys want nothing to do with, let alone talk about.  Urology.  Yep.  As in, “Don’t Mess With My Junk.”  So, here’s my story.

A little background is first in order.  About six years ago, I was diagnosed with a rising PSA (prostate specific antigen) score, a simple blood test associated with detecting prostate cancer.  It was recommended that I have a biopsy.  I was pretty petrified, based on stories from friends, clients and family.  I don’t exactly have a high pain threshold, and candidly, I don’t know any guys who are excited by having a needle up their butt to extract some tissue.

But, thanks to a referral from a client, I connected with Dr. Thomas Ahlering, a Professor and Vice Chairman of the Urology Department at UC Irvine, ironically not even 1 mile from our office.  Not only is he tremendously compassionate, he is likely one of the top 10 surgeons in the world when it comes to experience with robotic prostate cancer surgery.

In the past five years, I’ve had three MRI’s of the prostate along with two biopsies, and the conclusion was, there is no evidence of cancer, but rather that I have BPH (benign prostatic hyperplasia).  In English, I have an enlarged prostate, which is a pretty common ailment for men in their late 50s, 60s, 70s and beyond.  This condition causes frequent urination, because one is not fully emptying the bladder, and often is accompanied by multiple trips to the bathroom in the middle of the night.  Ah, the golden years.

The condition is often treated by drugs, such as Flomax, Finasteride (also known as Proscar) and Cialis.  You might recognize the latter from all the television ads which almost exclusively focus on erectile dysfunction, but the reality is, Cialis also treats BPH.  I really don’t like to take any drugs unless they are absolutely necessary.  Three years ago, I tried Flomax for about three weeks, and didn’t like it at all.  Almost all of these drugs have side effects, which vary by person.   So, I gave up Flomax and did nothing for about 9 months, tolerating getting up at least twice nightly as the cost of getting older.  Then, I actually read all the fine print in one of those double-paged ads in Sports Illustrated on Cialis (even with a $200 coupon!).

When I read that Cialis also treated BPH, I asked Dr. Ahlering about it, and he said, hey, try it, let’s see what happens.  Taking a tiny, 5 mg tablet every day, within a month, I was sleeping all through the night, and except for a couple of bouts of heartburn which quickly evaporated, I had no side effects.

Perfect.  All was going well for over two years, even with slightly lower PSA scores into this January.  Then the evening of February 12 came, and the last seven months have been quite a ride.  We were vacationing in Deer Valley, Utah on a ski trip with dear friends when I got this terrible pain in my left flank.  It persisted to where I skipped dinner and went to urgent care.  The doctor thought I had a kidney stone, treated me with drugs, took a urine culture and sent me on my way.  For two days, I was mostly OK, but then in the middle of the night, the pain returned, and would not go away, and finally, I woke my wife up at 4 in the morning and said, “I need to go to the ER.”

So, at 5 in the morning at the Park City Hospital ER, I get a CT scan of my kidneys, which indicated they were fine, and then a bladder scan, which indicated my bladder was almost half full, causing the pain.  They recommended a foley catheter to drain everything, and I just couldn’t deal with it, so I said no.  In hindsight, that was a very bad decision.  The drugs they gave me got me home the next day, but the pain returned again, and I ended up in the ER at UC Irvine the following day, an experience you do not want to have.

From that evening, February 16, until the morning of August 28, I have had a catheter in every day and night with the exception of two days (during the day only) for testing.  I went through five urologists, including two who seemed more interested in performing a procedure that they had a financial interest in, as opposed to what was best for me.  One of those two in Yorba Linda was the most arrogant, complete jerk of a physician I’ve ever encountered, which has since been corroborated by several other people.  I’ve learned much about being your own advocate, even with all the homework and research I did to learn about what I was dealing with.

Ultimately, I had a procedure called TURP (trans urethra resection of the prostate) on August 21 at Hoag Hospital, performed by Dr. Greg Barme.  I returned home the next day, had the catheter removed the morning of August 28, and have slowly been getting back to normal the last two weeks.  I expect to resume my full exercise workouts in three weeks, and want to be careful with my running to make sure I don’t injure any tendons since the antibiotics associated with treating urinary tract infections have a tendency to cause tendon damage.  Dr. Barme has been great, along with his staff.  He combines experience and wisdom with a friendly personality and a lot of compassion.

I’d recommend him in a heartbeat, but as luck would have it, he’s actually joining a practice in the Bay Area starting in November to be closer to his wife’s family, along with the fact that his partner of 16 years is retiring.  You might be wondering—why did you have to go through all these urologists?  Well, Dr. Ahlering spends all his time on prostate cancer surgery—his days of being a general urologist are long ago.  A referral I got to a doctor at USC Keck who I really liked ended up costing me at least two months.

The doctor was tied in to a procedure called Aquablation, a relatively new therapy which uses powerful water jets to destroy prostate tissue.  It had good reviews, but was only recently approved by the FDA in December 2017, so it wasn’t readily available nor was it covered by insurance.  By the time I realized the company making the equipment was not going to be available anywhere until late June at the earliest, I moved on.  Then came two more referrals before finding Dr. Barme.

Many men successfully treat BPH symptoms with drugs, and several clients have shared their experiences with me during the last several months.  In my case, drugs would not work, so one is left with surgical options to basically fix what is a mechanical problem.  However, I found there are about 8 different procedures one can consider, and even with a lot of reading, studying and examining clinical trial research, it is not very clear what is best.

More and more, urologists are turning to newer procedures that employ a variety of high-energy sources to vaporize excess prostate tissue and relieve BPH symptoms.  Among these are PVP (photoselective vaporization of the prostate), BPV (bipolar plasma vaporization), HoLEP(holmium laser enucleation, Rezum (convective radiofrequency water vapor thermal energy), Aquabeam or Aquablation (mentioned above), which uses image-guided water jets, and UroLift, which uses small permanent implants placed in the lateral lobes of the prostate.  Two other procedures, TUMT (transurethral microwave therapy) and TUNA (transurethral needle ablation) are used less commonly today.

All in all, though, these newer procedures are all variations of the same thing that TURP does, which is to remove a portion of the prostate, typically about 30-40%.  Unlike TURP, though, none of these procedures have the long term history of outcomes, where symptom relief is likely to last 10 or more years.  Unfortunately, there is no central depository of research, where objective comparisons can be made.  Ultimately, you have to trust your doctor, but that should not be a blind trust.  They’re not all equal, and the more research you do, the more prepared you will be to ask questions that need to be asked.  As I found out, some doctors are more interested in their own financial incentives than they are in best serving you.  Come to think of it—doesn’t that sound a lot like financial services?

But, don’t give up hope.  As one of my friends, who is a cardiologist, told me during this ordeal, “Bob, remember, there is more than one good urologist in Orange County.”  Even if it is just to one guy out there, I hope this has been helpful.  Many of our clients and friends have been so encouraging to me these past number of months, checking in on me, and thinking of me and praying for me.  Thank you.  Life is all about relationships, and I’m grateful for all the wonderful friends, clients and family I have.  I also want to recognize that many of you are dealing with your own health issues, and support goes both ways.

Should you have any questions or need any guidance, don’t hesitate to call or write.  I will be as helpful as possible.  I’ve left out much of the detail on the issues of sexual function related to these treatments, simply because, well, this is a family publication (with some adult humor below!).  Believe me, though, most men DO care about that area, but they’re not likely to pick up the phone and say, “Hey, bud, can we go have a beer and talk about my junk?”

Material Of A Less Serious Nature

Little 8-year-old Sally was baking cookies with Grandma one day, when she blurted out, “Grandma, how old are you?”

Grandma replied, “Well, Sally, I’d rather not say.  There comes a time in life when I don’t really think about that, or talk about it.”

“But, Grandma,” said Sally, “I really want to know!”

“I’m sorry, Sally, but it’s not something I’m comfortable talking about.  Just let it be.”

Grandma went about her business, kneading the dough, and placing the cookies on cookie sheets, when after about five minutes, she realized that little Sally had left the kitchen.  She went in the playroom and the downstairs bedroom, but no Sally.  Finally, she climbed the stairs and poked her head into the master bedroom.  There was Sally, on the bed, with Grandma’s purse, and she had dumped the entire contents onto the bed, and was examining her driver’s license.

“Grandma, Grandma,” she yelled excitedly.  “You’re 86 years old!”

“Well, yes I am,” said Grandma.  “How did you figure that out?”

Sally replied, “Well, I just took your birthday right here, and subtracted it from this year, and I got 86.”

Grandma replied, “Well, that’s very sharp of you, Sally.  Is there anything else?”

“Yes, Grandma,” Sally said.  “I also noticed you got an F in Sex!”

 

Speaking of grades, school has started all over the nation, and so has pro and college football, with the baseball playoffs looming.  What a great time of year.  As always, thanks for reading this far, and your continued trust and confidence in all of us at TABR.

Sincerely,

Bob Kargenian, CMT
President

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