This week, there's relatively little due in the way of potentially significant economic reports. Perhaps the most interesting will be the release of the minutes from the Federal Reserve's June policy-setting session. It was after that meeting that Chairman Ben Bernanke indicated that the central bank could begin to scale back asset purchases later this year if the economy continues to recover. That specific guidance was not, however, offered in the Fed's official statement before Bernanke's news conference. The meeting minutes may provide a bit more insight into the behind-closed-doors debate among members of the Federal Open Market Committee.
Friday's release of better-than-expected hiring numbers for June, May and April have not derailed forecasts of so-called tapering of asset purchases later this year or early in 2014.
Mid-year status report on markets, housing and gold
The stock and housing markets see solid gains, while gold has taken a big plunge. Experts give the outlook for your money.
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Mark Hamrick: From Bankrate.com, this is "Your Money This Week." I am Mark Hamrick reporting from Washington.
Mark Hamrick: As we flip the calendar over to the month of July, we close the books on the first half of the year. It is worth mentioning the S&P 500 was up 13 percent in first six months of 2013. That is its best showing since early 1998. On the other hand, the price of gold has taken a remarkable beating, and is down nearly 30 percent this year, back to levels last seen in August 2010. So we thought this might be a prime opportunity to talk about where we have been and where we might be going with stocks and housing and some other assets. We will talk with Hugh Johnson. He is chairman and chief investment officer with Hugh Johnson Advisors. Later, we speak with professor Robert Shiller. He is a highly regarded expert on many things financial, particularly on speculative bubbles. He saw some warning signs before the housing market bubble burst in 2006, and lately he has been watching the housing recovery with interest. We will speak with Robert Shiller about owning homes, stocks, bonds and even gold. And then on that very subject, Bankrate's Claes Bell checks in with some thoughts about the dramatic decline in gold prices.
Hugh Johnson manages about $2 billion at the Albany, N.Y.-based firm Hugh Johnson Advisors. The second quarter and first half results now on the books in terms of market performance, we thought it would be a great opportunity to chat with Hugh, asking the question whether this rally in stocks still has room to run.
Hugh Johnson: I think it does. I think we have further to go in the current so-called cycle, which has got a stock market business interest rate cycle. We may have gotten all we are going to get for, say, the near term. In other words, the market being up 15 percent for the first six months of the year might be really tough to try to better that in the second half, or even equal that in the second half of the year. So things might slow down a little bit in the second half. Particularly you have got the issue of what the Federal Reserve might do. So I think that we may have gotten all we are going to get this year, but as far as whether we have got further to go in the current cycle, my answer to that question is definitively yes. Looks like the economy and earnings are going to continue to expand right through 2014. And so long as that is the case, the stock market is going to do better. It is just near term where I have some concerns about too far, too fast, maybe a little bit of evaluation problem.
Mark Hamrick: Well, along those lines Hugh, you know the adage do not fight the Fed and not only the Federal Reserve, but other central banks are doing seemingly all they can to help the global economy. And a lot of folks worry that all kinds of bubbles are forming. Are you worried about that?
Hugh Johnson: Yes, I always worry about bubbles, but I am not so worried about that. Certainly, in the stock market, I think that if I look at the bond market and I look at the performance of the bond market for a very long period of time, even going back to 1980. I do not want to call it a bubble, but I do want to call it a big bull market in the bond market. And that may be very much changing, we may be going from a bull market environment for bonds, where bonds were a good thing to buy, you made money there. And I think now we are probably in a period when interest rates are going to start to rise, or a bear market in bonds. Very much as came in, in 1946 and that usually ushers in not just a bad period for bonds or bear market in bonds, but also bull market in stocks. Yes, you are going to have some recessions and some bear markets along the way, but generally speaking, I think we are entering a period where it is going to be much better for stocks than it is for bonds.
Mark Hamrick: Well, Hugh, as you know, economic growth has been modest and inflation has been surprisingly low, many looking for growth to accelerate, but that is always of course, a very hard thing to predict. What is your take on growth and something also very important for stocks, corporate profits?
Hugh Johnson: Yes, that is going to be the big question, and that is where we tend to miss a lot. I think your growth, I am with the rest of the world and I think that gross is going to pick up in the second half of this year, and through 2014. I think that will be reflected and employment conditions getting better and better. In other words, we are adding about 165,000 jobs to payroll now as we finish out the first half. I think when we get to the second half, when we get to the fourth quarter, we might be adding as many as 200,000 per month. So I think that the economy is going to pick up or it is going to do better. Maybe inflation picks up a little bit, goes from a 1 percent, just above 1 percent level up to the 2 percent level. Things are going to get a little bit better. And of course, along with it, you have to keep in mind that if we do get employment numbers like I am talking about, 200,000 per month in say the fourth quarter of 2013, it might invite the Federal Reserve to taper or reduce its buying of treasuries. And that is going to be -- well let us just say it is a hurdle, maybe a little bit of a drag on stock prices. One of the reasons why, yeah, I think stocks could do a little bit better, but they are not going to do like they did in the first half. I think it is going to be a tougher second half than a first half.
Mark Hamrick: One thing we have seen is the cratering of precious metals prices, Hugh. Is that a warning of any kind?
Hugh Johnson: Yes, you see precious metals going down, and that is exactly what should happen when you have a low inflation environment, and that is a warning. And I think the Federal Reserve is taking it very seriously. They are saying, 'Look, we do not want very low inflation, now we have got fairly low inflation right now, 1 percent and 1.2 percent inflation, that is really too close to zero, you do not want deflation.' The Federal Reserve does not want it; quite frankly, anybody who thinks about it should not want it either. So I think one of the challenges for the Fed is not only to get better employment conditions, but also get better, meaning higher, inflation conditions. And I think, and I cross my fingers when I say this, I think we are going to get that in the second half, that we are going to be heading back toward 2 percent inflation and that is much healthier than something that is closer to 1 percent or even lower.
Mark Hamrick: You have been working in this business for decades now, and you have seen a lot of things. What is your sense about how investors feel regarding whether there is a level playing field for them, compared to, say, high-frequency traders or the big players in the markets?
Hugh Johnson: I think that is a really big concern. There is no question that when we see flash crashes, when we see the kind of volatility we have seen in the markets, it is very intimidating to small investors. They feel as if they are at a disadvantage, that it is the big investor's high-frequency traders that really dominate the market and really create a level of volatility that is not in the interest of small investors. So it is one of those issues that is on the minds of small investors and makes them very, very nervous about buying stock. Makes them very nervous about directly buying stocks or having equity investments at a time, unfortunately, when it is probably a good time to have equity investments and not such a good time to play it safe with bond investments. So it is one of those issues that face us today that is very troubling. Regulators have got -- I think they do realize that they have got to try to figure out something to do about it. It is a really troubling issue.
Mark Hamrick: Hugh, always great chatting with you, thank you for your time, Hugh.
Hugh Johnson: You are welcome, Mark.
Mark Hamrick: Hugh Johnson, chairman and chief investment officer with Hugh Johnson Advisors. He spoke from his office in Albany, N.Y.
Mark Hamrick: When discussing bubbles in markets, whether it is stocks or the housing market, you would have a hard time finding someone more expert than professor Robert Shiller. He is a professor of economics at Yale, author of the best-selling prescient book "Irrational Exuberance."He is also known for the S&P Case-Shiller Home Price Index. I asked him where he thinks we are in the housing market recovery, and we touched on a number of other fascinating areas as you will hear.
Robert Shiller: Well we are having a slow to normal recovery but it does appear at the moment to be on track for recovery. There is always a possibility of another recession or another problem. I wish it were faster and I would like to see more stimulate of activity, not necessarily in just the housing sector, I would like to see it in infrastructure more generally.
Mark Hamrick: So would you be suggesting that a fiscal stimulus from the federal government?
Robert Shiller: I have been writing about that, yes. I think that we need what I call debt-friendly stimulus. It has to be cognizant of the risk of raising the national debt. I would actually be in favor of raising taxes to cover additional expenditures, using what is called balanced budget stimulus. It does not seem to be very political feasible right now, but I think it would be a good idea (if) somehow we could get it through.
Mark Hamrick: So professor Shiller, what we have seen recently, as you know, with some indications the Federal Reserve intends to take its foot off the pedal a little bit in terms of asset purchases, that some market-based interest rates have risen. As we speak, mortgage interest rates are averaging a little bit above 4 percent. That is obviously, by historic standards, still quite low. Do you worry that this back-up in interest rates could have a negative impact on housing?
Robert Shiller: I certain do worry. I think that probably recovery we have seen since early 2012, has to do with the perception that mortgage rates were at record lows, and hence affordability at very good levels. People conceive it as an opportunity; well, you might say a once-in-a-lifetime opportunity. And that is certainly spread demand for housing. But now that the opportunity seems to be fading, there could be a sudden pullback in investor demand. And now there is the pullback that occurred after the homebuyer tax credit. Remember that, that was instituted in 2009 and expired in 2010, and home prices rose when it was in place and then started falling afterward. So I have been arguing that home prices, while they appear to be on an upward trend, are definitely in danger of falling further. It is a speculative market, and it is affected by the government policy.
Mark Hamrick: Well it is, many people do believe that there is quite a bit of speculation in the markets right now. And given the fact that you are seen as a great expert in speculative bubbles, do you see the possibility of bubbles forming elsewhere in the economy, whether it is on U.S. basis or worldwide?
Robert Shiller: Well we do seem to have real estate bubbles going on worldwide in various places. I was just down in Colombia, South America, and at least in their luxury areas they have a bubble going on right now. It happened in areas, Scandinavia was recently bubbling, so I think that human psychology is highly variable and we are still in a -- now we could be, sorry to be so uncertain, but we could be launching out on another bubble here in the U.S. the way home prices are rising now. I wish I could predict the psychology better. It could go either way, I think it is just an uncertain time.
Mark Hamrick: And with central banks, many of them around the world, engaging in these expansionary practices adding to their money supply or expanding their balance sheets. How do you view this in the context of world history and economic history?
Robert Shiller: Well I think that we should be probably thankful for the coordinated action of the Worlds Central Bank after the Lehman crisis in 2008, because we saw the suspension of disbelief about stimulative -- both mantra and cisco policies. Without that, we might have had something more like the Great Depression. Now there is a question on how it will work out in the long term, and how it will work when they unwind. I think there is a lot of uncertainty about that. We could see a crash in the bond market, and that could affect the housing market. But I do not forecast that. I think it is -- there is too much uncertainty now to know. I think people should be cognizant of risk, but it may still be a good time -- it may still be a good time to be investing in housing.
Mark Hamrick: And of course, the stock market. We have seen the major U.S. stock indexes back up to new record highs recently. Obviously there is some adjusting to be done in terms of inflation given the fact that it has been a number of years since we have seen record highs there. But what is your assessment of the way equities are looking?
Robert Shiller: Well I tend to emphasize my Cape Ratio, that is cyclically adjusted price earnings, that is just real price divided by 10-year average of real earnings. And that is -- I think 10-year average works better than one-year because it is a better measure of fundamental value. So that ratio has been high, it is around 23. Historical averages, depending on the sample, is something like 15 or 16, so it is high. But it is not deterrent for investing in the stock market because I think that it has been much higher in the past. In 2000, it got almost in the mid-40s. So it is not so high right now and I think it probably, people should probably have some substantial exposure to the stock market now.
Mark Hamrick: So professor Shiller, you look out across the landscape of the economy, whether it is equities, whether it is housing, and indeed bond prices as you acknowledged earlier. Let us say if you were to give some fatherly advice to someone, is there anywhere out there that you see right now where you would urge people to be very, very careful?
Robert Shiller: Well, gold prices. I think that has been above -- exactly where it is going now is anybody's guess. I would stay away from major exposure to that. Bond price, bonds are hard to predict, just like the stock market. I think the Euro area probably still low and I think long-term bonds are still risky investment. We have seen all the volatility recently. So I would steer away from those, but in terms of real estate investment, I think it might be better to go into multifamily apartment buildings rather than single-family homes. They have them doing better, and I think they might be tilt toward renting rather than owning, also, apartments or houses here in urban areas rather than distant suburbs. There seems to be a public shift of demand away from remote suburbs. Probably reflecting higher gasoline prices that we have seen since around 2008. But also just I think a change in taste.
Mark Hamrick: Well of course we know there are some changes in the offing with regard to the U.S. population, the greying or the aging of the population. Do you think that there is a chance in the coming years and decades if more people look to downsize their homes that the value of a single family home. We know the people had been looking for larger homes in recent years, that they may not hold the same attraction that they had held at one time.
Professor Shiller: Yes, I think it is partly demographics and it is partly culture. Maybe the Internet culture. People -- maybe they want to be closer to other people, real people, they want to live in a more human environment after having logged in hours on the Internet. It does seem like 10, 20, 30 years ago, people got a lot of sense of social status by owning a giant house in the suburbs. And they did not care about being close to other people, or at least not so much. And it may be that our culture is changing, you never know these things for sure.
Mark Hamrick: Professor Robert Shiller of Yale (University), where he is the sterling professor of economics and also author of the best-selling book "Irrational Exuberance"
Mark Hamrick: It has been a modern version of the gold rush, but this has been the rush to sell the not quite as precious as before metal, leading to a nearly 30 percent decline in price from the high. Bankrate's senior banking analyst and writer Claes Bell has these thoughts.
Claes Bell: Sorry in advance for the terrible pun, but it is clear that gold has lost some of its luster as an investment these days. Last week, the price of an ounce of gold dipped below $1,200 for the first time since the middle of 2010. If you were one of the unfortunate folks who bought gold when it peaked at more than $1,900 an ounce in September 2011, your investment has now lost more than one-third of its value.
For the recent roller coaster drop in prices, gold bugs can blame their old nemesis, the Federal Reserve, which has recently hinted it wants to slow down its quantitative easing program. Much of gold's appeal was based on it being a refuge from currency debasement by the Fed, but with the Fed looking to get out of the debasing business, investors just are not as bullish on bouillon. And while it is true investors buy gold for all kinds of reasons, it has been pushed especially hard by some political pundits who pitch it as a hedge against the apocalyptic collapse of society that is always just around the corner. For those who bought gold on that basis, and have lost a bundle, it may be time to reconsider getting investment advice from the same place you get your political commentary. After all, when it comes to investment recommendations, all that glitters is not … well you get the idea.
Mark Hamrick: Bankrate's senior banking analysis and writer, Claes Bell.
Mark Hamrick: You have been listening to "Your Money This Week." ITunes listeners, if you enjoyed this podcast, please rate and subscribe to our program. We have been doing this only a short time and we are looking to help get the word out. For more on this and other personal finance issues, visit Bankrate.com and you can follow us on Twitter at Bankrate. Our editor in chief is Julie Bandy, managing editor, Katie Doyle. And thanks to producer Lucas Wysocki for his work in the studio. I am Mark Hamrick, from all of us here at Bankrate, here is hoping you have a great week.
Reports on tap
This week, we have the following reports scheduled:
- The Federal Reserve reports on May consumer credit Monday at 3 p.m. (all times eastern).
- The Federal Reserve releases minutes from the June 18-19 meeting Wednesday at 2 p.m.
- The Labor Department releases the June producer price index Friday at 8:30 a.m.
Mid-year status report
As investors begin to look at the markets' results from the first half of 2013, they might be wondering about the outlook for the rest of the year. Generally, the mood is fairly upbeat, despite lingering worries about possible impacts of forced federal budget cuts and weak economies in Europe. Hugh Johnson, chairman and chief investment officer with Hugh Johnson Advisors, sees continued improvement on the horizon.
"I am with the rest of the world and I think that growth is going to pick up in the second half of this year and through 2014," Johnson says. "I think that will be reflected in employment conditions getting better and better."
What does that mean for investors? Even with market-based interest rates rising, Johnson isn't too worried. "Generally speaking," he says, "I think we are entering a period where it's going to be much better for stocks than it is for bonds." Johnson's Albany, N.Y., firm manages about $2 billion in of assets for clients.
Any bubbles out there?
With unconventional means being employed by the Federal Reserve and other central banks around the world, some have worried about the possibility of new bubbles or crises popping up. Yale University economics professor Robert Shiller says he is among those who worry about a variety of areas, including the housing market. Shiller is known for his warnings about the risks associated with the housing market before the bubble burst. He's author of the best-selling book "Irrational Exuberance."
Says Shiller, "I have been arguing that home prices, while they appear to be on an upward trend, are definitely in danger of falling further. It is a speculative of market and it is affected by the government policy."
Rising rates, stocks and earnings
While he's concerned about a rise in interest rates, Shiller says, "It may be a good time to be investing in housing." He's also not urging people to avoid equities, even as his own gauge of stock valuations is running above the historical trend right now.
For stocks, Shiller watches what he calls his "Cape ratio," or cyclically adjusted price-earnings ratio. He says that is "real price divided by 10-year average of real earnings." He puts his ratio at 23 right now, compared to a historical average of "15 or 16."
This week in business history: Movie mogul's birthday
On July 12, 1884, Louis B. Mayer was born in Minsk. Although the exact date of his birth has been a subject of debate, the magnitude of his impact on the movie business is not. He first owned theaters and then a movie production company. As the head of MGM, short for Metro-Goldwyn-Mayer, he was credited for building the star system behind cinema classics such as "Gone with the Wind" and "The Wizard of Oz."
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