Bull Run Continues On Tax Cut Hopes

Let’s pick up where we left off last week:

“The short-term analysis of the market remains broadly positive with both the ongoing bullish trend and recent break above 2500 remaining intact through the close on Friday. As I noted last weekend:

As shown below, the market is pushing a short-term ‘buy’ signal. However, now at 2-standard deviations above the 75-dma, as seen previously, the market likely has limited upside from here.”

The breakout, of course, was driven by continued hopes of tax cuts/reforms from the White House as details of the latest proposal from the House Ways and Means Committee were released this week.  (Click Here For Details & Analysis)

While the recent breakout is a continuation of the “hopes” f or legislative agenda to boost economic growth, there has actually been very little accomplished on that front. Nonetheless, with over $2 Trillion in Central Bank interventions flowing into the markets since the beginning of the year it is not surprising stocks have remained in a strong bullish trend. 

More importantly, since the March 9th lows, the bull market has surged more than 268% with no decline greater than 20% along the way. Importantly, the correction in early 2016, did not violate the trend line from the 2011 lows which keeps the current market defined to a singular bull market.

This bullish backdrop keeps portfolios allocated towards equity risks currently. With the breakout above 2500, we have:

  1. Increased equity allocations in new accounts that were underweight.
  2. Added bond exposure on the push higher in rates which suppressed bond prices in the short-term.
  3. Shifted cash management accounts into the cash allocation strategy increasing yield to 2.0%

Overall, models remain fully allocated toward equities as there has been NO indication currently the bull market has come to an end. 

However, don’t mistake the current bullish stance as a long-term position.

Investing simply doesn’t work that way.

The Real Problem Of Buy & Hold

Currently, there are a plethora of articles being written suggesting that since “you can’t beat the market,” you should simply just buy low-cost indexes and hold on.

This strategy will work at increasing your net worth over a long enough time frame.

However, you will FAIL at reaching your retirement goals.

Let me show you the math.

Let’s set up a quick example to prove the point.

Bob is 35-years old, earns $75,000 a year, saves 10% of his gross salary each year and wants to have the same income in retirement that he currently has today. In our forecast, we will assume the market returns 7% each year and we will use 2.1% for inflation (long-term median) for planning purposes.

In 30 years, Bob’s equivalent income requirement will roughly be $137,000 annually.

So, starting with a $100,000 investment, he gets committed to saving $7500 (10% of his salary) each year into his index fund and sits back to watch it compound at 7% annually into a whopping $1.46 million nest egg at retirement.

See, absolutely nothing to worry about. Right?

Not so fast.

PROBLEM #1

Given the economic drag of the 3-D’s (Debt, Demographics & Deflation) currently in progress, which will span the next 30-years, long-term interest rates will remain low. Therefore, if we assume that a portfolio can deliver an income of 3% annually, the assets required by Bob to fulfill his retirement needs will be roughly $4.6 Million.

(Yes, I have excluded social security, pensions, etc. – this is for illustrative purposes only.)

The roughly $3-million shortfall will force Bob to reconsider his income requirements for retirement.

PROBLEM #2

MARKETS DON’T COMPOUND. The chart below is a $100,000 investment plus $7500 per year compounding at 7% annually versus variable rate returns. I have taken historical returns from 2009 to present (giving Bob the benefit of front-loaded returns at the start of his journey) and then projected forward using a normal standard deviation for market returns.

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Disclosure: The information contained in this article should not be construed as financial or investment advice on any subject matter. Streettalk Advisors, LLC expressly disclaims all liability in ...

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