Stock Market Commentary
For the week of October 19, 2009
The Dow closed above 10,000 on Wednesday and Thursday last week, but lost ground on Friday following disappointing earnings results from GE and Bank of America Corp. A weak consumer sentiment report issued on Friday overshadowed an earlier announcement that industrial production increased in September. The major indexes still managed a second straight week of gains. The Dow ended the week up 1.33 percent to close at 9,995.91. The S&P rose 1.52 percent to finish the week at 1,087.68, while the NASDAQ climbed 0.82 percent to end the week at 2,156.80.
Shorter Fall – Employees who had contributed to their 401(k) plan for five or more years had an annual average account balance decline of 24 percent at the end of 2008, compared to the S&P 500’s drop of 37 percent. Across all 401(k) holders, the average account fell 30.5 percent during 2008. Nearly 50 million Americans had a 401(k) plan last year, with combined assets of $2.3 trillion. (Source: Employee Benefits Research Institute)
Less Debt – American consumers reduced their outstanding debt by $12 billion or 5.8 percent (annualized) in August, more than the $10 billion analysts expected, according to the Federal Reserve. Total consumer outstanding debt now stands at $2.46 trillion, which includes credit cards, store cards, auto and personal loans, but not mortgages or other debt related to real estate. In July, consumer debt dropped 9.1 percent, the largest decrease since June 1975. The decline reflects both less consumer spending and tighter credit standards among lenders.
Consumer-Fueled Economy – Consumer spending on cars, clothes, food and other items accounts for 71 percent of the U.S. gross domestic product (GDP), according to the Bureau of Economic Analysis – slightly more than the 70.1 percent of a year ago and well above the 65 percent long-term average. Total personal spending, however, has actually decreased, dropping 1.9 percent in the second quarter of 2009 compared to a year ago. Over the 20 years ending in 2006, consumer spending has risen annually
by 3.3 percent.
WEEKLY FOCUS – Recession, Deflation Impact Social Security
Recently we discussed the health and financial benefits of working longer, particularly until you are eligible for full Social Security benefits and Medicare. Last week, however, the Social Security Administration reported that 2.57 million Americans applied for retirement benefits in the fiscal year that ended in September, 22 percent more than a year ago. Based on the number of people reaching retirement age, Social Security had expected a 15 percent increase. The difference, it said, is the impact of the weak economy and the more than 7.2 million jobs eliminated since the recession started in December 2007.
Phillip Levine, a Wellesley College economics professor who co-authored a paper on older workers forced into retirement by the recession, said that group could be 50 percent larger than the number of older employees who elect to work longer to offset the impact of the recession on their portfolios.
A boon to retirees has been the fall in consumer prices. On the downside, the lack of inflation led the Social Security Administration to announce on Oct. 15 that 57 million beneficiaries would not receive a cost-of-living adjustment (COLA) for 2010, the first time since 1975 that there has been no increase. In contrast, Social Security recipients received a 5.8 percent COLA increase for 2009, the largest since 1982, because of higher energy prices. Because there is no COLA for 2010, there will be no change in the maximum amount of earnings subject to the Social Security tax, which stands at 12.4 percent tax on the first $106,800 of wages. There has been no word on how Medicare Part B premiums for 2010 may be affected.
Whether you are working longer or forced out of work, Social Security should be part of your overall retirement income distribution plan. If you or a loved one faces employment changes that may affect when you access your Social Security benefits, please contact our office to discuss the impact on your overall investment strategy.
* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Morgan Stanley Capital International Europe, Australia and Far East Index (MSCI EAFE Index) is a widely recognized benchmark of non-U.S. stock markets. It is an unmanaged index composed of a sample of companies representative of the market structure of 20 European and Pacific Basin countries and includes reinvestment of all
dividends. Barclays Capital Aggregate Bond Index is an unmanaged index comprised of U.S. investment grade, fixed rate bonds market securities, including government, government agency, corporate and mortgage-backed securities between one and 10 years. Written by Securities America. SAI# 300823