Imagine this — you’re on a cross-country road trip. You’ve mapped the 2,800-mile distance between San Francisco and Washington, D.C., charted your course, and now you’re on the open road, cruising along at 60 mph with the wind in your hair. Life is good, right?
Now imagine that you’re on the home stretch, with only 400 miles until your destination point, and traffic slows to a crawl. You drop from 60 down to 39 mph. It feels like a snail’s pace, and it’s going to be that way for the rest of your drive. Enter a longing for the 60 mph clip, and frustration for the remainder of the journey.
This is precisely how many Americans feel about our current economy. Yes, the overall economic picture in the U.S. is relatively good, but few would describe it as “gangbusters.” So as U.S. stock markets have continued to close at all-time highs, the ho-hum pace of economic growth has created a sense of unease for many investors due to this disconnect.
Over the past several months, I’ve continuously heard the following from investors, “Hey, Wes, the economy doesn’t seem to match the stock market.”
Before we look at where we are now, it’s important to also look at some economic history. From 1965 until 2008, the U.S. economy grew 3.1 percent per year on average. Since the Great Recession, we’ve been growing at 1.9 percent on average. While at first glance these numbers don’t seem exceptionally far apart, consider that they represent a 35 percent slowdown in what was a more than 40-year trend. Hence, our economic speed feels like 39 mph, down from 60 mph.
Where are we now? The most recent jobs report indicated that July ushered in 209,000 new jobs, and the unemployment rate fell to 4.3 percent. But wage growth is still stuck at the same modest, uneventful 1.5 to 2.5 percent annual growth rate since 2010.
These numbers could explain some of our frustration. While the unemployment rate is low, we aren’t seeing the accompanying wage growth of between 3 and 4 percent per year like we did for the three decades before the Great Recession.
We as humans don’t do well with uncertainty or stagnation. We expect something to happen. We expect things to get better. Or worse. Something. So when we’re entrenched in a slow growth economy — the 39 mph economy — our human psyche conjures up a sense of anxiety.
Sure, we know markets are hitting all-time highs, but most American families aren’t really buying it. The Dow is near an all-time high, but we don’t believe that business is the best it’s ever been. This disconnect is the culprit. The difference between how the stock market is faring and how we interpret the real world economy is what’s making us suspect.
From my experience, this is the state that a lot of folks are in — they’re uncomfortable with the disconnect between today’s “great market” and “just OK” real world economy. Factor in the market-related catastrophes we’ve lived through in the past 17 years (2000-2002 and 2007-2008), which feel like just yesterday, and no wonder we are unsettled.
But isn’t the stock market a barometer for how the economy is doing, and doesn’t it say we’re doing well? The short answer is yes, and yes. The stock market gives us a big numerical measure of corporate and economic health. But the less reported, more subtle tide of the economy matters more to most families.
For starters, we’re heading into the market correction months of August, September and October. Student loans are tipping in at $1.3 trillion. And then there’s the dual-income housing trap. Studies have shown that two-income families are more at risk than their single-income counterparts to fall short on their mortgage payments. Since 1975, the Equal Credit Opportunity Act has essentially encouraged dual-income households to take on bigger mortgage payments. As a result, more households are at risk of foreclosure if one earner loses their job.
And let’s not forget about the ongoing health care conundrum. We’re still staring into the unknown when it comes to the future of health care costs. If anything, the cost of care continues to rise.
Right now, you’re saying, “Wes, thanks for sharing all of the problems, but what’s a nervous investor to do?”
First, don’t panic. You have time. Investing is a marathon, not a sprint. I’ve said it before and I’ll say it again — we feel the 15/50 Stock Rule is a prudent way to view your long-term investment strategy. If you believe you have more than 15 years of living left to do, we believe your portfolio should consist of at least 50 percent stocks, and the remaining balance in cash and various bonds. This rule seeks to help investors strike a balance between risk and reward.
Second, remember to acknowledge there are a multitude of things happening in our economy that aren’t highly publicized, but make big statements nonetheless. Dividend increases are an example of this. Take, for instance, Caterpillar Inc. The company recently raised its quarterly dividend by a penny. This doesn’t sound like much, but let’s do the math.
Caterpillar has about 600 million shares. One penny per quarter equals 4 cents per share, which translates into a $24 million increase in what this company pays out to investors. That’s on top of the existing dividend. Today, the $3.12 per share price equates to almost $1.9 billion per year. A small increase like this is actually a very big deal.
Finally, remember the “Rich Ratio.” Your Rich Ratio is the amount of money you have in relation to the money you need to realize your dreams. In essence, this is a real number that can reassure you that you’re in a good place based on your income, investments and projected retirement needs. To calculate your Rich Ratio, take the amount of monthly income you should have or do have in retirement (Social Security + pension + any additional steady income streams), including what your nest egg should produce, and divide it by what you expect to spend each month to live the retirement you want. Your “have” divided by your “need.” Once adjusted for taxes, if your ratio comes in at over 1.0, you’re in good shape, no matter the ups and downs of the market and overall economy.
While uneasiness about our current stock market relative to the economy may reign supreme, it’s important for us to rein in our emotions. Remember, our economy has more storylines than “Game of Thrones.” Don’t get fixated on the dragons; look at the big picture as you take stock of your financial future.
The original AJC article appears here.
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