"In school, you're taught a lesson and then given a test. In life, you're given a test that teaches you a lesson."
- Tom Bodett

Welcome back everyone I hope you all enjoyed your summer vacation. Now take out some paper and a pen because we’re going to start the school year off with a pop quiz. So write down your choices and then further down the page I will give you the correct answers and make some comments about each question.

1.        As of September 1 on what day of the year was the S&P 500 at its lowest point?

A.    May 13   B. January 3  C. June 4  D. August 14

2.       How long has the average recession lasted? (Since the end of WWII)

A.    3 Months  B. 10 Months  C. 12 Months  D. 16 Months

3.       What has been the average stock market decline during recessions?  (Using the S&P 500, since 1955)

A.     -15%    B. +3%   C. -1.5%  D. -12.5%

4.       If you have a married couple of 65 year olds; what age can you expect at least one of them to live to?

A.     83  B. 79  C. 89  D. 95

5.        What is the median retirement age in the United States?

A.    62  B. 65  C. 66 and 4 months  D. 68

6.       What is the median retirement age in the U.S. for those who say health is not a factor in their retirement decision?

A.    62  B. 65  C. 67  D. 70

7.       Approximately how many publicly traded companies are there in the U.S.?

A.     8,000  B. 5,700  C. 4,300  D 1,800

8.       What is the highest grossing movie of all time, adjusted for inflation?

A.     Avengers: End Game  B. Gone with the Wind  C. Titanic  D. Star Wars

9.       What percentage of investment grade bonds have the lowest rating (BBB)?

A.    57%  B. 45%  C. 32%  D. 19%

10.   What is the average annual cost (tuition, fees, room & board) of a four-year private college in New England?

A.     \$32,000  B. \$41,000 C. \$50,000 D. \$61,000

Let’s see how you all did?

Question 1:  As of September 1 on what day of the year was the S&P 500 at its lowest point?

B / January 3

The markets have recovered dramatically from the big sell offs in the fourth quarter of last year. Don’t let the news media trick you into thinking these recent sell-offs in June and then August were really much of anything. Nobody likes to see the markets drop, but you have to keep things in perspective. A market that drops a modest 100 points on average for a month is worrisome– a market that drops 800 points in one day and then goes up 200 points a day for a week may be hitting new highs. Now could we be heading into a recession so these swings are just the warning signs of things to come? Let’s look at the next two questions and talk about that.

Question 2:  How long has the average recession lasted? (Since the end of WWII)

B / 10 Months

Question 3:  What has been the average stock market decline during recessions?  (Using the S&P 500, since 1955)

C / -1.5%

We may very well be headed to a recession, I’m sure you’ve all heard about the inverted yield curve by now. But so what? If you’re 65 you’ve lived through 10 of them and you’ll probably live through three to five more. Recessions happen, and a recession is not the same as a financial crisis like we experienced in 2008. In the 1980 recession the stock market actually went up over 16%, and in most recessions the markets don’t correct massively overall as much as they revert to the mean. In the late 60’s there were a few dozen stocks – known by the moniker The Nifty Fifty – that were driving the market. When the early 1970’s recessions hit they didn’t hurt the overall market as bad as people remember, but those fifty or so stocks did see huge declines. Likewise in the early 2000’s recession coming off the tech bubble; the overall markets saw declines but it was those who were over invested just in those new Dot Com names who actually lost everything. A diversified portfolio, structured for you should already anticipate a couple of recessions during your retirement years. There are much bigger things to worry about when it comes to your retirement success than a couple months of stock market movements. We see that in the next few questions.

Question 4:  If you have a married couple of 65 year olds; what age can you expect at least one of them to live to?

C / 89

If you’re a recently or soon to be retired couple in your mid to late 60’s you have to think about a 25 year retirement.  Even if you’re in your 70’s or early 80’s the life expectancy charts give you well more than a decade – you are a long-term investor. You don’t want to ignore the markets or not make some tactical changes along the way, but by and large you should worry more about a portfolio that is built for the next decade rather than the next few months. Changing everything because of a coming recession is like stopping during a cross country drive because it’s raining out – you have places to go and windshield wipers – get moving!

Question 5:  What is the median retirement age in the United States?

A / 62

Question 6:  What is the median retirement age in the U.S. for those who say health is not a factor in their retirement decision?

D / 70

Health, both for good and ill, can have a much bigger impact on your retirement success than what the markets do over the next year. About half of all retired Americans say they retired earlier than they originally planned for health reasons.  While we all want our investments to go up in value, having to retire a couple years before we’re eligible for Medicare and having to pay five figures for health insurance out of pocket for three or four years can have a much more negative impact on your plans than the S&P correcting. Relying on the stock market to get you huge returns in order to fund your retirement is foolish –and most people know that. But there are many more people that just assume they’ll be able to work to 68 or 70 years old. Statistically upward movements in the stock market are more likely than being able to work until you’re 70. Planning for these eventualities; having to retire early for health reasons, or conversely living ten years past your expectations, is much more important than worrying about next quarter’s GDP growth.

Question 7: Approximately how many publicly traded companies are there in the U.S.?

C / 4,300

Twenty-five years ago there were over 8,000 publicly traded companies in the United States, today there are 4,300. There are a lot of reasons for this drop; consolidations, the cost and hassle of being pubic etc. But the largest single reason is the availability of investment capital from sources other than the stock market. Venture Capitalists (VC’s) and Private Equity have been around a long-time, but the goal used to be getting a company up and running and then going public as quickly as possible. Over the past twenty years, VC’s have found more value in keeping companies private for longer periods. Sometimes this translates into not going public at all. In fact many very well-known U.S. companies have decided to go private, knowing that Private Equity is available if they need access to new capital that in the past they only could have gotten by issuing more stock. Burger King, Heinz, and Dell Computers are just a few of these names. What this means for us as investors is we may not be able to reflect the overall U.S. economy with our stock portfolios anymore. Keeling Financial is looking into ways for the average investor to get access to this private equity space, but it’s complicated. We’ll keep you informed.

Question 8:  What is the highest grossing movie of all time, adjusted for inflation?

B / Gone with the Wind

The producers of this past summer’s Avengers: End Game re-released the movie in theaters just so it could knock Avatar off the top of the non-adjusted, box office leader list. So far that movie has earned about \$2.8 Billion. If you adjust Gone with the Wind’s box office total into today’s dollars it would top \$3.7 Billion. Now times were different before TV, DVD’s and Streaming Services; Gone with the Wind was in theaters for FOUR years! Over that time about half the population of the country saw the movie, selling over 60 million tickets. What this points out more than anything is what a big impact inflation can have. Over the past dozen years (including the financial crisis) balanced investment portfolios haven’t quite met their long-term average returns, but at the same time inflation has been lower than it has historically. If you make 10% but inflation is 5% - you only increased your purchasing power by 5%. If you make 8% but inflation is only 2% - you have actually made more money net, just like Gone with the Wind made more money than Avengers. Experts are saying we’ll have lower than expected returns in the stock markets over the next five to seven years, but these same experts are also calling for almost non-existent inflation so it’s possible your net returns are as high as you were expecting.

Question 9:  What percentage of investment grade bonds are at the lowest rating (BBB)?

A / 57%

In my opinion this is the biggest problem if growth continues to slow that could tip us into a recession – and it’s also the reason we could have a very short, mild one. More than half of all investment grade debt is at the lowest grade, what that means is it doesn’t take much of a slow-down in the economy and corresponding drop in company profits for that debt to be downgraded to “non-investment grade” or junk status. If that happens most banks, pension funds, insurance company reserves, and bond mutual funds will no longer be able to hold that debt – causing a sell off which is mildly negative, but also forcing those companies to rollover their debt at rates maybe double what they were paying before which is very negative. Some companies won’t be able to afford these rollovers and they’ll have to lay people off, consolidate or maybe cease to exist. However, there is lots of money in cash out there at the moment as well – unlike during the financial crisis. That means there will be bargain hunters who can buy up that debt and take over those companies for pennies on the dollar that are worth something in the long-term. This is the very definition of creative destruction, the force that helps drive economies forward. When Global Crossing went bankrupt in 2002 it had laid fiber optic cables across most of the world’s oceans, connecting Europe to the Americas to most of Asia. Since its assets were bought so cheaply the companies that then owned the cables could make a profit charging pennies for usage, where Global Crossing had to charge tens of dollars. This is the primary reason calls overseas went from hundreds of dollars to being included free with your phone service. There are a lot of great companies out there with a lot of great ideas, but they’re having trouble paying their debt without making their products or services unaffordable (yes I have examples.) A little recession followed by a few bankruptcies might ultimately be good for the economy.

Question 10:  What is the average annual cost (tuition, fees, room & board) of a four-year private college in New England?

C / \$50,000

My oldest daughter just started her senior year in high school, and my youngest is a freshman. I’m going to have a lot of tuition payments over the next eight years. But you can help, if you know anybody who may be getting ready to retire, is worried about possible recession, or just wants a second opinion about their investment plans have them give us a call. We are looking for a few new clients just like you.