Publisher’s note: In this September 2017 issue, Dick Young has announced his decision to step away from writing Intelligence Report after more than 30 years. There is no September 2017 Economic Analysis. Please see the Issues page for archived versions of the Economic Analysis and Master List Supplements.
Every month in the Economic Analysis supplement, I give you an array of charts giving you a bird’s-eye view of the current environment. I update the particular charts I feature from time to time as things change, and adjust the length of the supplement as necessary. I know of no more concise or useful investment and strategy guide in terms of the business cycle, economic momentum, interest rates, inflation, currencies, gold, commodities, and the stock market.
Above, you will find the first several charts found in this month’s Economic Analysis supplement (a number of which are explained in more detail in the “About the Money Charts” section below); however, for the complete supplement, download the PDF found on the right-hand margin of this page. I would keep all your monthly Economic Supplements in a binder, with my monthly letters in a separate one. It is important that you have these binders and maintain all your reports. You will build a bible of economic, monetary, and investment intelligence completely irreplaceable by any book or even group of books.
With knowledge comes consistency and a highly developed approach to investing that cannot help but place you and your family many steps beyond your immediate circle of friends and associates. By simply understanding what’s going on today, you can project, with some accuracy, into the not-too-distant future. I use these charts as the beacon for my complete global investment strategy, and with my Economic Analysis supplement, you can, too.
These charts illustrate important concepts that are vital to your long-term investment success. Save them for your future reference. The Power of Compounding chart illustrates the awesome power of compound interest. A $40 investment in Coke stock in 1919, without dividends reinvested, would have grown to almost $300,000 by year-end 1999—a respectable return to be sure. But by reinvesting dividends, an investor would have unleashed the power of compound interest and ended up with almost $6 million by year-end 1999. If you do not fully grasp the power of compound interest, your investment success is likely to be temporary at best.
The Arithmetic of Portfolio Losses chart shows the return necessary to break even after incurring a loss. The horizontal axis shows the assumed portfolio loss incurred. The vertical axis shows the portfolio gain required to break even. A 50% loss requires not a 50% gain to break even, but a 100% gain. And a loss of 70% requires a 233% gain just to break even. During the 2008–2009 financial crisis, the S&P 500 dropped 56% from peak to trough. Investors in or nearing retirement cannot afford such devastating losses. To reduce volatility and avoid devastating bear market losses, you want to favor a balanced approach. A fund such as Vanguard Wellesley Income with a 60%-bond/40%-stock mix is unlikely to lose much more than 10% even in a bad year. After adding bonds to your portfolio, the second most important step you can take to reduce portfolio volatility is to focus on dividend-paying stocks.
The Risk chart compares the volatility of dividend-payers to non-dividend payers. The average dividend-paying stock is much less volatile than the average non-dividend payer. And companies that pay dividends are most often more durable businesses than non-dividend payers. Investors in or nearing retirement should favor only dividend-paying equities.
In an effort to make your job of keeping score easier, I have selected for your focus seven charts (found in the Economic Analysis Supplement) from Young Research’s huge database. Give this group your full attention before digging into each monthly issue of these strategy reports. You will benefit tremendously as your focus improves. These seven charts provide a snapshot of the current state of the economic and financial markets. The importance of each indicator is described below.
The Conference Board’s Leading Economic Index is a composite of 10 economic indicators that lead the economic cycle. The indicators include key measures of business activity in the U.S., like manufacturers’ new orders of consumer goods and nondefense capital goods. Another measure included is the ISM’s survey of vendor performance, which measures how quickly manufacturers are getting their products to their customers. The leaders offer one of the best tools economists and investors have to help identify turning points. The leaders are of course not foolproof; they are revised heavily and have been known to provide false signals. So use the leaders as part of the big picture, not as your only guide.
The Coincident Economic Index, as compiled by The Conference Board, is a combination of four indicators released monthly. This is as current a gauge of economic strength as you will get, and along with GDP, the four indicators in the Coincident Index are the NBER’s major guides in determining the beginning and end dates of recessions.
Moving the Goods
Young Research’s Moving the Goods Index is a market-cap-weighted stock index made up of non-airline transportation companies. If I had to choose only one economic indicator to use, this would be it. Transportation companies lead the business cycle. The theory is that you have to move the goods before you sell them. If the index is reaching new highs, economic growth is likely improving. And if the index is dropping to new lows, economic growth is likely slowing.
Young Research 10-Yr. Treasury Valuation Indicator
My momentum-based valuation indicator helps you identify attractive entry and exit points in long bonds. There have been four major cyclical buy points in Treasuries over the time period shown.
World Currency Reserves/World Gold Reserves
The world reserves chart calculates the ratio of dollars held by central banks worldwide to the gold reserves those banks hold. The ratio shows what the price of gold would have to be if all central banks held their currency reserves in gold. This chart is not meant to be a price target for gold, but rather an indication of the amount of money that is being printed globally.
My Swiss franc chart is a simple currency exchange rate chart, but one that you should follow closely. The Swiss currency can be considered a “hard” currency. The long-term trend of the franc is one of appreciation.
Vanguard Wellesley Income Fund (VWINX) Annual Returns
The Vanguard Wellesley fund (VWINX) is a balanced fund. Through the decades-long history of the fund, it has only had a total of six years with losses. Of those years, the worst return was a loss of 9.84%. During that same time, the fund had 14 years with returns higher than 15%, including 7 years with returns higher than 20%. Use my Wellesley chart as a reminder of the value a balanced investment approach can provide.