John Wasik

Demographics will drive the ‘new normal’ economy

Sep 30, 2013 22:27 UTC

CHICAGO (Reuters) – One of the most difficult terms to understand in long-term investing nowadays is “new normal.”

Coined by PIMCO Chief Executive Mohamed El-Erian, it means the “world of muted growth” that followed the 2008 meltdown. And although stock returns have been strong this year, down the road, the “new normal” will largely be driven by demographic forces.

And unless the current fight over the U.S. government’s debt limit forces a deep and prolonged market meltdown, now is the time to focus on an investment strategy with a longer view.

A combination of rising wealth, lower fertility rates and a smaller working-age population in developed countries will depress economic growth. Fewer younger people in the workforce and more older, retired people could translate into lower stock returns.

So how do you adjust your expectations? Follow the demographic trends. More than 10,000 “Baby Boomers” turn 65 every day and will continue to do so for the next 19 years, so as an investor, you need to focus on what this population will demand. Retired people require fewer consumer goods and that means fewer homes, appliances and lower sales for many items.

Three ways to profit from the taper tempest

Sep 23, 2013 19:31 UTC

CHICAGO (Reuters) – After the Federal Reserve’s revelation last week that it would not be trimming its bond-buying stimulus program, the storm clouds menacing the stock and bond markets parted.

Investors in both markets relish the prospect of cheap money continuing to fill the coffers of banks and corporations. The Fed has been buying Treasury securities at the rate of $85 billion a month to keep interest rates low and stimulate the economy.

U.S. stock market indexes hit all-time highs on September 18 in the wake of the Fed’s announcement, followed by gains on overseas exchanges the following day. The Standard & Poor’s 500-stock index is up almost 22 percent year to date through September 20. Bond prices have also recovered, as yields fell from the 3 percent range in recent weeks to about 2.74 percent. As yields fall, bond prices rise.

Five investment lessons from the Lehman Brothers blow-up

Sep 17, 2013 12:00 UTC

CHICAGO, Sept 17 (Reuters) – Five years ago I was watching
the world financial system implode after the failure of Lehman
Brothers in real time. Since I’m largely a buy-and-hold
investor, I grimaced while my retirement savings took a
pummeling in 2008-2009.

What have we learned since that calamitous year? There were
certainly a few gut-wrenching surprises as well as some enduring
truths that still hold in personal investing for the future.

1. Gravity is stronger than diversification

For years, we adherents to the Modern Portfolio Theory of
diversification have practiced the fine art of blending our
portfolios with assets that don’t typically move together. In
2008, many, including me, were surprised when commodities funds,
which were supposed to move in the opposite direction of stocks,
followed stocks into the abyss. When nearly everything declines
in a global meltdown, there are few safe havens.

Why dividend-growing stocks are beating bonds

Sep 9, 2013 19:08 UTC

CHICAGO, Sept 9 (Reuters) – With all the angst in the market
lately about rising rates bruising bond prices, where can you
find reasonable income with less sensitivity to interest-rate

The answer, surprisingly enough, is dividend-growing stocks.
These cash-rich companies not only have the ability to raise
payouts but their returns are still competitive with bonds in a
low-rate environment.

Dividend growers can offer better performance than bonds
because total return rises as the dividend yield is increased.
(Total return is a stock’s appreciation plus reinvestment of
dividends and capital gains before taxes.)

Use convertibles to straddle stock and bond markets

Sep 3, 2013 16:25 UTC

CHICAGO, Sept 3 (Reuters) – As bonds that can be converted
into stocks, convertibles are securities that long-term
investors can learn to love.

Just like regular bonds, convertible bonds have a maturity
date, coupon payment and face value. As an enticement to
investors, though, they can be converted into common stocks at a
later date. While their yields are not as high as conventional
bonds, the conversion feature offers you a potential stock play
at lower risk.

With anxiety mounting over the Federal Reserve’s next Open
Market Committee meeting – and whether it will back off its
bond-buying program – convertibles may represent a little-known
sweet spot between pure income investing and the stock market.

Another key factor for stock investors to watch

Aug 27, 2013 16:32 UTC

CHICAGO (Reuters) – It’s well known that small-company stocks have outperformed large-company stocks in terms of average annualized return since the 1920s, and bargain-priced stocks tend to outperform growth stocks.

Now there’s another factor worth watching: direct profitability.

Recent research by money management firm Dimensional Fund Advisors (DFA) shows a significant premium over time for investing in companies with high direct profitability – and you can adjust your portfolio accordingly to reap those outsized gains.

DFA’s definition of direct profitability is a bit technical: operating income before depreciation and amortization minus interest expense. In non-accounting terms, companies with high direct profitability are expected to have better returns than those with lower direct profitability.

Preferred stocks still make sense for yield

Aug 20, 2013 12:01 UTC

CHICAGO (Reuters) – Frustrated yield seekers have been drawn to preferred stocks because they offer a several-point yield advantage over most U.S. investment grade bonds, including Treasuries, corporates and municipal bonds.

But these quasi-stock, quasi-bond investments act like bonds when interest rates rise: They fall in value. That has brought them some negative attention in the last few months. Preferred stocks declined in value as investors scrambled to find higher-yielding vehicles when rates rose. They may now may be oversold and offer some bargains.

Preferreds straddle a territory between common stocks and bonds. Mostly issued by financial companies, preferred stocks confer no voting rights, but represent a higher claim on earnings than common stocks, and are less volatile.

Will rising rates bring rising stocks?

Aug 13, 2013 16:47 UTC

CHICAGO (Reuters) – For years, the conventional wisdom has been that rising interest rates are no friend of the stock market. A combination of higher costs of borrowing and potential inflation can be a one-two punch for companies and consumers.

But rising rates and stock prices happen more often than investors know, and they can herald brighter economic fortunes in the short term. There are ways to invest in both without getting burned.

This duet has had some off-key news of late because of fears that the U.S. Federal Reserve will curtail its bond-buying program: Bond yields have been rising over the past few months, which depresses bond prices. This has caused a minor shock to income-oriented investors.

Dividend darlings can beat S&P 500 index

Aug 5, 2013 19:23 UTC

CHICAGO, August 5 (Reuters) – When stock-fund managers beat
the market average, often it’s because of a roll of the dice.
Skill may come into play, but only rarely.

Sometimes, though, you can think counter-intuitively and
come out ahead. Such is the case with high-dividend funds that
may avoid loading up on the most glamorous stocks.

Dividends create something of a security blanket around a
stock price. In a market selloff, the stocks with the highest
market capitalization often get dumped and the dividend payers
often stay in portfolios because they promise higher total

After Detroit, muni bonds are safe, but no slam dunk

Jul 30, 2013 14:29 UTC

CHICAGO (Reuters) – Despite the Detroit bankruptcy and record sell-off of municipal bonds this year, most top-quality “munis” are safe to hold.

If you are a conservative, buy-and-hold investor who wants to temper risk, you might want to stick to the highest-rated bonds from states and localities that do not have looming pension or other payment problems.

Those quality munis offer decent yields and their prices are even more attractive in the wake of the Detroit bankruptcy.