Employment Milestone!

Today marks the first day in over 6 years in which we recovered all of the jobs lost during the financial crisis.  It is important to understand that we’ve had population growth during that time so the unemployment rate is still higher than it was 6 years ago, but the pure number of jobs is now at an all time high.  We’ve showed this chart from the Calculated Risk blog before:

Screen Shot 2014 06 06 at 8.44.47 AM


One thing that continues to stand out is just how bad the last recession was on the job market.  It really was unparalleled in the post WW II era.  It is hard to say for sure what the next several years look like in the labor market, but for the time being the trend is certainly going in the right direction. 

Jobs- Almost There!

This morning was the monthly jobs report, which is a decent barometer for how the economy is fairing.  The Great Recession was devastating to the jobs market.  The drop in consumer demand (due to in a large part deleveraging) along with company profits soaring to record highs (by keeping their labor costs low) have kept jobs growth muted over the past several years.  It finally looks like we may be getting back to our high water mark in the next few months.  Here is a great chart from Calculated Risk showing this jobs recovery compared to others:

cotd scariest jobs chart ever


The first observation I see when reviewing this chart is how severe the recession was on the jobs market and how long it has taken to recover.  The second observation is that we are within a few months of recovering all the jobs that were lost during the recession.  While jobs have taken a long time to recover, this chart shows that it would be hard to argue that the economy isn’t improving.

The Five Year Anniversary Of The Market Bottom

Five years ago yesterday the S&P 500 hit 666, marking its lowest level since 1996.  Fear was rampant as the financial system was on the verge of collapse and the government had to take unprecedented actions to stave off a true catastrophe.  What a difference 5 years make!  Those that had the fortitude to stick with their investment strategy (especially as it relates to equities) have been handsomely rewarded.  Here is the chart of the S&P 500 over the last 5 years:

Chart forS&P 500 (^GSPC)



A few things to point out over these last few years:

  1. Growth has been spectacular- the S&P 500 is up over 180% over the last 5 years.  Those who stuck with equities were handsomely rewarded.
  2. Growth has not been a straight line- there were several periods (mainly in 2011) where we had losses, so those that did stick with equities had to go through some tough periods.
  3. The news wasn’t always good- while this isn’t in the chart, most of the news during this 5 year period has been bad.  First, it was economic news (unemployment rate was stubbornly high, financial system still on the brink, real estate continuing to flounder, etc).  Next it was political news (debt ceiling, government shutdown, inept politicians, etc).  The point is that the market climbs a wall of worry.  Those who were waiting for the news to get better before investing have missed a huge rally.

No one knows what the next five years will bring.  Trying to base your investment strategy on some prediction is dangerous.  Stick with what you can control (diversification, discipline, costs and taxes) and you will be ahead of the vast majority of investors.

What Makes A Good 401k Plan?

What makes a good 401k plan?  Last week I offered my perspective on the challenges I see with President Obama’s myRA retirement plan initiative.   Today I’ll share my opinion on how companies can design a 401k plan for participants the right way.  From a participant’s standpoint, there are only four variables that go into the “retirement savings equation” – what goes into your account (contributions by you and your company), what comes out (fees, loans and distributions), what rate of return you achieve and time.  If people are going to retire successfully it’s going to require a combination of sacrifice and an aggressive partnership between workers and companies which I think should include:

  1. Aggressive automatic enrollment (at least 6%) – studies show that opt-out rates are not strongly impacted by the default percentage so it makes sense to be aggressive – your employees will thank you later
  2. Aggressive auto escalation (at least 2% per year) – most participants keep their contribution at the default instead of incrementally increasing over time – people need to save more
  3. Diversified, Low Cost Portfolios – The vast majority of employees will be far better off over time by being invested in a well-diversified, low cost portfolio (with exposure to riskier asset classes like stocks) that is managed for them – plus, a 2-3% return is not going to be enough over time
  4. Low Fees – Participants should pay no more than 1% in total plan fees (and ideally less than .50%) – to achieve this companies generally need to pay more of the plan’s administrative fees directly
  5. Company Generosity – Studies show that employees need to save at least 10% per year and in many cases that number may be closer to 15-20%.  I believe companies (including my own) have a moral obligation to help their people retire successfully and a 3-4% company contribution just isn’t going to get them there.  Companies need to begin to view retirement contributions as not just an expense but an investment in their people and their business
  6. Time – Accumulating sufficient retirement assets does not happen over night, it takes a long time, which means employees need to start saving as early as possible

Are Tax Hikes Inevitable?

An article at the website “Think Advisor” today got my attention with a catchy headline,  “Your Clients Will Pay for World’s Debt, Advisor Warns“.  The article paints the picture of a world with higher tax rates due to the inability of developed countries to reign in their debt.  The last couple sentences summed up the entire article well:

But the bottom line is that today’s developed world, budgetary imbalances imply higher taxation. “The debt is going to have to be paid for one way or another,” Hatchuel says.

In speaking with clients over the past few years,  I would say this is the prevailing wisdom.  In fact, we were probably in the same camp up until a couple years ago, but the evidence is no longer suggesting that this is the case.  Government deficits are not only shrinking, but shrinking fast.  This is due to the slight bump in taxes, the sequester, but most especially growth in the economy.  I am not sure that the theme of this article should still continue to be taken as fact.  Let’s take a look at the government deficit.

FRED Graph

You’ll see that since the recession hit, the deficit has been contracting.  The Congressional Budget Office is now saying that the deficit has shrunk another 20% over the first two months of fiscal 2014.  Are we still spending more than we bring in?  Yes, but the gap is closing fast and the debt as a percentage of GDP (a figure used by most economists) is expected to stay fairly stagnant over the coming years, and that is without any additional tax increases.  Growth cures a whole lot of our ailments.  If the US is able to continue its modest recovery over the comings months and years, there is a good chance that higher taxes may not be necessary to close our budget gap.  


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