THE WEEK ON WALL STREET
The post-Memorial Day holiday trading week was short but potent as stocks delivered more record gains while confidence grew that a peace deal would materialize.
The S&P’s 500 Index advanced 1.43 percent, while the Nasdaq Composite Index gained 2.39 percent. The Dow Jones Industrial Average climbed 0.90 percent. The MSCI EAFE Index, which tracks developed overseas stock markets, rose 0.99 percent.
Ninth Straight for S&P
Stocks got off to a good start as the chipmaker-led rally continued to support the broader market, while the White House reported diplomatic progress on a Middle East peace deal.
Leadership shifted a bit midweek, with the Dow rising modestly to a new record close as oil prices fell.
The S&P and Nasdaq opened higher Thursday on upbeat economic news. Both posted solid gains, while the Dow Industrials went sideways.
Stocks wrapped up the week and the month on positive notes. Sliding oil prices and technology gains helped push all three averages to record intraday and closing highs, including the Dow cracking the 51,000 mark for the first time.
FACT OF THE WEEK
On June 1, 1980, CNN (Cable News Network), the world’s first 24-hour television news network, makes its debut. The network signed on from its headquarters in Atlanta, Georgia, with a lead story about the attempted assassination of civil rights leader Vernon Jordan.
CNN went on to change the notion that news could only be reported at fixed times throughout the day. At the time of CNN’s launch, TV news was dominated by three major networks—ABC, CBS and NBC—and their nightly 30-minute broadcasts.
MARKET MINUTE
Economic Updates
It was a mixed bag of economic news last week, with four key April data points released on Thursday.
The Fed’s preferred inflation measure came in cooler than expected. The personal-consumption expenditure (PCE) index rose 0.4 percent in April, less than the 0.5 percent expected. Annual PCE rose 3.8 percent.
The Gross Domestic Product report showed the economy grew more slowly in Q1 than initially estimated, with the estimate revised down to 1.6 percent annualized growth.
In a good sign for manufacturing, durable goods orders rose 7.9 percent in April, double the expected pace and the biggest increase in almost a year. The main reason? Civilian aircraft orders soared 166 percent after China ordered 200 planes following a recent U.S.-China presidential summit.
Homebuyers bought 6.2 percent fewer new homes in April over the prior month. But investors focused on the fact that homebuyers bought 8.9 percent and 7.4 percent more new homes in February and March, respectively, over the prior month.
FINANCIAL STRATEGY OF THE WEEK
The Investment Risk No One’s Ever Heard Of
Knowledgeable investors are aware that investing in the capital markets presents any number of risks, including interest rate risk, company risk, and market risk. Risk is an inseparable companion to the potential for long-term growth. Some of the investment risks we face can be mitigated through diversification.1
As an investor, you face another, lesser-known risk for which the market does not compensate you, nor can it be easily reduced through diversification. Yet, it may be the biggest challenge to the sustainability of your retirement income.
This risk is called the sequence of returns risk.
The sequence of returns risk refers to the uncertainty of the order of returns an investor will receive over an extended period of time. As Milton Friedman once observed, you should, “never try to walk across a river just because it has an average depth of four feet.”
Sequence of Returns
Mr. Freidman’s point was that averages may hide dangerous possibilities. This is especially true with the stock market. You may be comfortable that the market will deliver its historical average return over the long-term, but you can never know when you will be receiving the varying positive and negative returns that comprise the average. The order in which you receive these returns can make a big difference.
For instance, a hypothetical market decline of 30% is not to be unexpected. However, would you rather experience this decline when you have relatively small retirement savings or at the moment you are ready to retire – when your savings may never be more valuable? Without a doubt, the former scenario is preferable, but the timing of that large potential decline is out of your control.
Timing, Timing, Timing
The sequence of returns risk is especially problematic while you are in retirement. Down years, in combination with portfolio withdrawals taken to provide retirement income, have the potential to seriously damage the ability of your savings to recover sufficiently, even as the markets fully rebound.
If you are nearing retirement or already in retirement, it’s time to give serious consideration to the “sequence of returns risk” and ask questions about how you can better manage your portfolio.
1. Diversification is an approach to help manage investment risk. It does not eliminate the risk of loss if security prices decline.