Consumer Sentiment: “Good, but Concerned About the Future”

Measuring-Consumer-ConfidenceOverall, Americans are feeling pretty good. Their total net worth is now $88 trillion.  That’s a major increase since 2009 when total wealth bottomed at $55 trillion.

In simple math, that’s an average of about $270,000 of wealth per person, obviously impacted in a major way by the 1% at the top.  The median amount (half the people have more and half have less) is about $50,000 per person.  And, on average, roughly 75% of that wealth is in one’s home.  The Federal Reserve report last week showed that mortgage balances are growing slowly, while home prices are increasing steadily.  Many homeowners who were underwater seven years ago now have some equity.

In fact, rising home prices have set off fears that real estate will become more expensive.  In the year ended March 31, 2016, cities like Denver, Seattle and Portland had employment growth more than 3% and double-digit increases in home prices.  At the same time, according to the Case-Shiller indexes, Boston, Cleveland and New York have had subdued growth and home price increases.  Pittsburgh and Dallas are facing housing affordability challenges as demand lately has moved toward central cities, where land is scarce, rather than more spacious distant suburbs. This month, McDonald’s announced its move from Oakbrook to the West Loop in Chicago to appeal to the younger, metropolitan workforce.

Despite a weak May labor report showing only 38,000 nonfarm jobs and some politicians claiming the economy is a disaster, overall consumer sentiment is up.  Home prices and wages are up, interest rates and gas prices are low and people are starting to spend more.  Consumer spending jumped 1% in April, the fastest pace in nearly 7 years.

In addition, everyone likes to hear that the stock markets are rallying, which they have done since February. And, daily media blasts about approaching or hitting new market highs, which are happening lately, prompt positive consumer sentiment as well.

The University of Michigan’s next “Index of Consumer Sentiment” due on Friday, is expected to be good.  Economists have forecasted it to come in at 93.5, down slightly from May.  However, it would still be above average for economic expansions.  What we are seeing, though, is a growing gap between the favorable Current Economic Conditions sentiment and the renewed downward drift of the Expectations Index.

Since the late 1940’s U of M has been interviewing households.  In early June, the 500 respondents who answered the 50 core questions, rated their current financial situation as the best since 2007.  And, their prospects for gains in inflation-adjusted income for the year ahead were also most favorable in 9 years.  However, these respondents did not think the economy was as strong as a year ago nor do they expect the economy to do as well in the year ahead as it has done.

The next six months will be quite interesting.  While the economy has posted steady job growth for most of the past six years, May’s disappointing labor report begs the question:  “Have things changed?”  In addition, what happens if the UK decides on June 23rd to leave the EU, and Brexit occurs? And, how about China’s big slowdown from double digit economic growth just a few years ago?

Certainly, there are lots concerns and uncertainties.  So, what’s new?  We all deal with uncertainty and change every day.

As our regular readers know, our advice is to focus on what you can control:

Investments-

  • Create an investment plan to fit your needs and risk tolerance
  • Identify an appropriate asset allocation target mix
  • Structure a diversified portfolio
  • Reduce expenses and turnover
  • Minimize taxes
  • Rebalance regularly
  • Stay invested

Other Key Metrics-

  • Separate your goals into needs, wants and wishes
  • Review your expected longevity
  • Target a date of financial independence
  • Use realistic targets for investment returns and inflation in your planning
  • Review all assets and make sure they are performing appropriately
  • Review all debt and determine if it is appropriate
  • Review all insurance for coverage and cost
  • Review your estate plan to make sure it meets your wishes and that assets are titling appropriately
  • Monitor your plan regularly and make appropriate changes

We encourage you to focus on the above.  And, of course, if you need some help or have a question, give us call.  At DWM, we’re here to increase family wealth by adding value.

“Saving on Lattes Will Not Make You Rich”

pound_foolish_bmpSo says Helaine Olen, a freelance journalist and author of “Pound Foolish: Exposing the Dark Side of the Personal Finance Industry.”  Ms. Olen takes direct aim at investors and advisers alike in her recently published book. She makes some very good points.

Saving $3 a day on lattes, or $1,100 a year and investing it can help a plan, but it won’t build a fortune. Ms. Olen terms such faddish advice as the financial equivalent of miracle diets. Most people are looking for a quick fix or the next “home run.” A belief in instant riches lured millions into buying internet stocks in the late 1990s and overpriced houses in the mid 2000s. Millions watch Jim Cramer on TV looking for the latest tip when, in fact, Cramer’s picks have not done well. And, over 75% continue to invest in actively managed stock and bond funds when these funds annually underperform passive, low-cost funds.The fact is that there is no single financial elixir or silver bullet that can guarantee personal financial success.

Yet, lots of investors are still looking for that free lunch and promises of double digit returns. According to AARP, over 6 million people attended a free seminar in the last three years. Many elderly are terrified of outliving their savings. Desperation, fear and insecurity become the salesperson’s best friend. At the World MoneyShow, an annual event in Orlando, 80% of the attendees were over 55. As Ms. Olen, puts it, “a panicked baby boomer is their best customer.”

Ms. Olen includes many leading financial women in her book, including Jane Bryant Quinn and Elizabeth Warren. She doesn’t like Suze Orman, whom she criticizes for making huge amounts of money by telling others to be frugal. Further, Orman’s “affiliations with companies like FICO and Lending Tree raise questions about the impartiality of her advice.”

Furthermore, Ms. Olen points out that many financial plans fail because the investor and their advisor forget to stress test the financial and investment planning. Risk management analysis is often completely ignored. A plan with reasonable investment returns may be destroyed by death, disability, long-term care issues, a job loss, or high-interest debt. 

We agree with Ms. Olen. Some investors and advisers should be taken to the woodshed. There are no quick fixes and no one-size fits all solutions. Successful wealth management is a process, not a product.

It starts with investors working with advisers who don’t have conflicts of interests but rather are fiduciaries; putting the client’s interests first. Next, it requires experienced and trusted advisers to understand the client’s goals, resources, risk assessments and constraints to realistically and objectively prepare an initial financial plan. Then, that plan needs to be stress tested from risk management, estate planning, income tax and investment perspectives. Only at that point can an appropriate asset allocation be determined and implemented for the client. Going forward, the entire plan and investment portfolio need regular monitoring, rebalancing and stress testing. To be successful (aka not running out of money), it needs continual on-going professional review.

With the right help, you might be able to have it all: a successful financial plan and all the lattes you want.