AP Business Writer

Slashed spending by drillers could lead to price spike by 2020

HOUSTON (AP) — Oil prices will more than double by 2020 as current low prices lead drillers to cut investment in new production and gradually reduce the glut of crude, the head of a group of oil-importing countries said Feb. 22. Fatih Birol, executive director of the International Energy Agency, said oil would rise gradually to about $80 a barrel. Oil prices shot to more than $100 a barrel in mid-2014 before a long slide sent them crashing below $30 last month. “There was a rise, there will be a fall, and soon there will be a rise again,” Birol said on the opening day of a huge energy-industry conference that featured addresses by the oil minister of Saudi Arabia, the secretary-general of OPEC, the president of Mexico, and U.S. Energy Secretary Ernest Moniz. Birol’s group issued a fresh outlook on energy markets. It forecast that 4.1 million barrels a day will be added to the global oil supply between 2015 and 2021, down sharply from growth of 11 million barrels a day between 2009 and 2015. A year ago, the Paris-based IEA, an organization of 29 major oil-importing nations including the United States, had forecast a relatively swift recovery in oil prices, but the decline continued, with the price for a barrel of crude hitting levels last seen in 2003. Experts underestimated the ability of shale-oil producers in the United States to withstand falling prices — for a time — which, combined with OPEC refusing to cut production, led to a glut. The same experts now think that U.S. production, along with new supplies from Iran, which has been freed from international sanctions, will blunt what otherwise might be a sharper run-up in prices. Nobody saw the shale-oil boom coming, and it has changed the market, said Neil Atkinson, who edited the IEA report released Feb. 22. “Producers everywhere around the world are having to accept that $100 a barrel is not something that is likely to return soon,” Atkinson said. He and Birol declined to blame low oil prices on OPEC’s decision to keep pumping away to preserve market share in the face of rising competition from the U.S. and elsewhere. Now, IEA says, investment in future oil exploration and production is declining for a second straight year — the first back-to-back downturn in 30 years. U.S. shale oil production will fall in 2016 and 2017 before recovering with higher prices, the group predicted. Meanwhile, Saudi Arabia, Russia, Venezuela and Qatar have discussed freezing production if other oil countries go along with a strategy to boost prices. On Monday at IHS CERAWeek, an annual energy-industry conference in Houston, OPEC Secretary General Abdalla Salem El-Badri called a potential freeze “a first step” that, if it sticks, could be followed by other measures, which he did not specify. Oil prices have tumbled 70 percent since mid-2014, and gasoline prices have followed. The U.S. Energy Information Agency expects an average price of $1.98 per gallon nationwide this year. The last time gasoline averaged less than $2 for a full year was 2004. Low oil prices have had devastating effects on communities that rely on the energy industry. Home sales have fallen sharply in North Dakota and the West Texas cities of Midland and Odessa, and more recently in Houston.

Beyond growth and value: Investors are tired of choosing

NEW YORK (AP) — Coke or Pepsi? Biggie or Tupac? Growth or value? For decades, investors chose their stock mutual funds from one of two distinct camps. On one side were growth funds, which bought only the most dynamic stocks with the fastest-rising revenues and profits. On the other were value funds, which hunted the bargain bin for stocks with cheap prices relative to their earnings. Today, just like more people are choosing neither Coke nor Pepsi, investors are pulling out of both growth and value stock funds. Instead, they’re pouring cash into broad index funds and other options that don’t pigeonhole themselves into one of the two investing philosophies. The moves are the result of several trends that are reshaping the investment industry. Chief among them: People are looking for ever-simpler ways to invest, and they’re opting for index funds that track the broad market. So, instead of holding a small-cap growth fund plus a large-cap value fund plus a mid-cap growth fund, more investors are holding just one fund that tracks the entire stock market. The numbers bear out the change in preference. Investors pulled a net $36.2 billion from U.S. growth stock mutual funds and exchange-traded funds in the 12 months through January, according to Morningstar. Another $42.6 billion left U.S. value stock funds. At the same time, $12.5 billion went the opposite direction, into “blend” funds, which own a mix of both growth and value stocks. The trend isn’t as strong with foreign stocks, where investors are still putting money into growth and value stock funds. And even with U.S. stocks, growth and value funds still command big piles of dollars. Together, they control $2.9 trillion, more than the $2.7 trillion that sit in blend funds. But the trend is moving toward U.S. blend funds eventually overtaking their growth and value rivals. One reason for the shift is that investors are tired of picking which philosophy will do best. Or, rather, they got tired of getting it wrong when they tried to pick which would do best. Growth and value stocks tend to take turns at the top, with growth leading for some years before ceding leadership to value. Growth stocks, for example, were in favor during the dot-com boom of the late 1990s. Investors at the time were excited about the “new economy” and were more interested in companies attracting “eyeballs” than in those making profits. After getting burned by the dot-com bust, chastened investors turned back to value stocks. For seven years, the value stocks in the broad Russell 3000 index beat their growth counterparts, from 2000 through 2006. After that, growth stocks regained the lead and had better returns in five of the following seven years. So instead of guessing whether growth stocks will do better than their value counterparts, investors are simply buying broad-market funds that own both groups. Perhaps the biggest reason for the trend is the migration into index funds generally, says Alina Lamy, a senior analyst at Morningstar. After seeing the majority of actively managed stock mutual funds fail to keep up with indexes, investors have been streaming into options that merely try to match the index rather than beat it. Some index funds focus on just growth or value stocks. But the most popular ones cover broad swaths of the market and include both. Vanguard’s Total Stock Market Index fund, for example, has $385.9 billion in assets and tracks the entire U.S. stock market. It’s also more than 10 times as big as Vanguard’s Value Index fund and eight times as big as its Growth Index fund.

Main Street holds up as Wall Street struggles

NEW YORK (AP) — Wall Street is hurting, and Main Street doesn’t care. It’s got burgers and cars to buy. Big losses in stock markets around the world this year have the wingtip-set fretting, but regular consumers across the United States are confident enough to open their wallets and spend more. It’s an about-face from the early years of the economic recovery, which began in 2009, when stocks and big banks were soaring but many on Main Street felt like they were getting left behind. “It’s almost like a stock market is a different animal,” says Earl Stewart, who owns a Toyota dealership in North Palm Beach, Florida, far from the roiling markets in New York, Frankfurt and Shanghai. “We’re not seeing any of the negativity.” The stock market’s malaise hasn’t affected his customers, at least not yet. Sales for the past year have been the best since 2007, and he had record profits in 2015. The divergence underway between Main Street and Wall Street highlights the difference between the U.S. stock market and the economy. The stock market’s worries are centered on things like the strength of foreign economies, such as how much China’s sharp slowdown will hurt exporters and businesses in other countries. Low oil prices are crushing the shares of big energy companies and the big banks that lend to them — but leaving consumers with more money to spend after they fill up their car with cheap gasoline. These forces have dragged the Standard & Poor’s 500 index down 12.5 percent from its peak in May. Foreign stocks have lost double that. Hedge funds, which cater to the wealthiest and biggest investors, are also struggling. They lost money in January and got off to their worst start of a year since 2008, according to Hedge Fund Research. Economists say the split trends between Main Street and Wall Street can continue, but only up to a point. If profits fall sharply enough, for example, it could push CEOs to once again cut swaths of jobs in order to shore up their earnings. If stock prices fall deep enough, the panic in the headlines could traumatize consumers whether or not they have a 401(k), and spending could slow. For now, though, Main Street continues to trend upward. Only 13 percent of the U.S. economy depends on exports, and the rest of it — which is mostly consumer spending — is still growing, albeit slowly. “Down here, as a small business owner, you don’t feel connected to Wall Street at all,” says Jon Sears, a co-owner of four bars and restaurants in Columbia, South Carolina. “When I talk to people in Columbia, I can’t think of a conversation I’ve had about the stock market in the past two or three weeks.” His business depends instead on the nearby University of South Carolina. Revenue growth at his locations has held up this year, at his cheapest bar and his more upscale restaurant that serves local, organic foods. Retailers around the country are seeing something similar. Shoppers bought more autos, clothes and other items last month, even though the S&P 500 in that span had its worst week in more than four years. U.S. retail sales rose 0.2 percent during the month, beating analyst expectations. Consumer sentiment did show a dip in early February. But confidence still remains near its average for last year and well above where it was for every other year of the recent bull market. Among the reasons that Main Street is feeling relatively confident while Wall Street stumbles: • The job market is getting better. Employers continue to add jobs, particularly in the retail and health care industries, and the unemployment rate is at an eight-year low. Job growth did slow last month, but economists say that just balances out the big surge in hiring at the end of last year, and they’re still forecasting more gains. Even more importantly, wages are trending higher. That means workers are feeling more secure in their jobs and in their finances. Just over 3 million workers quit their jobs in December, the highest number in nearly a decade. That’s an optimistic sign because people generally quit when they have a higher-paying job offer in hand. • Bills are getting a bit easier to pay. The plunging prices of gasoline, natural gas, heating oil and other commodities are getting lots of attention, but prices are low across the economy. Prices for meat, poultry, fish and eggs also fell in December from a year earlier. So did prices for clothes and airfares. There is a fear that the economy may get too much of a good thing. If prices fall too sharply, it could lead to a vicious cycle in which customers wait longer to make purchases, which forces businesses to cut jobs. • Home values are rising. “More people care still care about the value of their homes than the value of their stocks,” says Diane Swonk, an independent economist. That’s because for many Americans, their home is their biggest if not only investment. And that investment is doing well, regardless of the stock market’s struggles. Home prices nationwide are nearly back to peak levels from before the Great Recession, and they’re already at a record in San Francisco and several other cities. It may just be Main Street’s time in the sun, says Bob Doll, chief equity strategist at Nuveen Asset Management. He says economic recoveries have long been split into two phases. “The first half of an economic cycle is when markets tend to best, and that’s when Wall Street gains on Main Street,” Doll says. “The second half is when labor gets an increasing share of GDP, and that’s just starting.” Associated Press Auto Writer Tom Krisher contributed from Detroit.

Companies lose billions buying back their own stock

NEW YORK (AP) — If you think your stocks are doing poorly, check out the performance of some of the most sophisticated investors, the ones with more knowledge about what’s going on inside businesses than anyone else: Companies that buy their own shares. The companies losing money on these bets are down a collective $126 billion over the past three years, a decline of 15 percent. Many corporations would have been better off investing that cash in an index fund instead of their own stock. The overall market rose 39 percent over the same period. The companies could also have distributed that cash as dividends to shareholders, allowing them to spend what is, in the end, their money. And it’s not just a few big corporate losers accounting for all the pain. The group includes 229 companies in the Standard and Poor’s 500 index, nearly half of the companies in the study prepared by FactSet for The Associated Press. When a company shells out money to buy its own shares, Wall Street usually cheers. The move makes the company’s profit per share look better, and many think buybacks have played a key role pushing stocks higher in the seven-year bull market. But buybacks can also sap companies of cash that they could be using to grow for the future, no matter if the price of those shares rises or falls. And the recent losses highlight another criticism: Companies may be good at finding oil or selling bathroom trinkets, but they aren’t always smart stock investors. Some corporations bought ever more of their own shares even as prices tripled from financial-crisis lows and several measures showed the market was overvalued. “Whenever you see a buyback, the company always says, ‘We think our stock is cheap,’” says Nicholas Colas, chief market strategist at brokerage ConvergEx Group. They are sometimes so confident that they take out enormous loans just to buy more and more shares. That those shares have now plunged in value is something Colas calls a “great irony” of the bull market. Among the companies with the biggest paper losses are struggling ones that bought after their stock fell, only to watch prices drop even more. Macy’s, the beleaguered retailer, is down $1.5 billion on its purchases, a 26 percent loss. American Express has lost $4.1 billion, or 34 percent. As the price of oil plunged, driller Chevron racked up $2.8 billion in paper losses, or 28 percent. The losses are also piling up in unexpected places, such as at companies that have generated solid earnings through most of the bull market, suggesting that there is danger when stocks of even top performers climb too high. Starwood Hotels & Resorts Worldwide and Ford Motor have each lost hundreds of millions on their buybacks, more than a fifth each of what they spent. Defenders of buybacks say they are a smart use of cash when there are few other uses for it in a shaky global economy that makes it risky to expand. Unlike dividends, they don’t leave shareholders with a tax bill. Critics say they divert funds from research and development, training and hiring, and doing the kinds of things that grow the businesses in the long term. “The company doing the most buybacks is often not investing enough in its business,” says Fortuna Advisor CEO Gregory Milano, a consultant who has written several studies criticizing the purchases. He says most buybacks are “financial engineering” and a waste of money. The study looked at 476 companies in the S&P 500 index, leaving out the index members that split off parts of their businesses during the period. Among the findings: $100 million club Nearly a third of the companies studied, 153 in all, lost $100 million or more on their purchases in three years. Not just about oil Four of the top 10 biggest dollar losers are energy companies. But big losses are hitting a variety of companies, including insurers and banks, retailers, technology companies, airlines and entertainment giants. Biggest winner, biggest loser MasterCard has the biggest paper gains from buybacks: $7.9 billion. IBM has the biggest paper losses: $9.8 billion. IBM says it isn’t neglecting long-term investments and notes that the money it spent on R&D, big projects and acquisitions last year was triple what it spent buying its stock. Gainers help, sort of When the companies that have profited from buybacks over the last three years are included with the losers, the paper losses narrow to $11 billion. Total spent on buybacks by all companies: $1.43 trillion, more than the annual economic output of all but 12 of 193 countries in the world, according to the World Bank. Stocks may bounce back, of course, turning losses into gains. But the history of buybacks isn’t encouraging. Companies often buy at the wrong time, experts say, because it’s only after several years into an economic recovery that they have enough cash to feel comfortable spending big on buybacks. That is also when companies have made all the obvious moves to improve their business — slashing costs, using technology to become more efficient, expanding abroad — and are not sure what to do next to keep their stocks rising. “For the average company, it gets harder to increase earnings per share,” says Fortuna’s Milano. “It leads them to do buybacks precisely when they should not be doing it.” And, sure enough, buybacks approached record levels recently even as earnings for the S&P 500 dropped and stocks got more expensive. Companies spent $559 billion on their own shares in the 12 months through September, according to the latest report from S&P Dow Jones Indices, just below the peak in 2007 — the year before stocks began their deepest plunge since the Great Depression. Bernard Condon can be reached at twitter.com/BernardFCondon.

Aetna lays out concerns about ACA exchange business

Aetna has joined other major health insurers in sounding a warning about the Affordable Care Act’s public insurance exchanges. The nation’s third-largest insurer said Monday that it has been struggling with customers who sign up for coverage outside the ACA’s annual enrollment window and then use a lot of care. This dumps claims on the insurer without providing enough premium revenue to counter those costs. The ACA provides an annual enrollment window that gives people several weeks starting every fall in which they can buy coverage for the next year. The law established that window to prevent people from waiting until they become sick to buy insurance. But insurers say it has become too easy for customers to sign up outside of this window. Customers are allowed to buy coverage outside that time frame if they lose a job, get divorced or have a child, among other reasons. Insurers want the federal government, which processes coverage applications in 38 states, to take a closer look at whether people actually qualify for these special enrollment periods when they apply for coverage. Both Aetna and UnitedHealth Group Inc. said the exchange customers they get outside the annual enrollment window use more health care than those who sign up within it. This includes some cases where it appears that a customer bought coverage, used it and then dropped it. “Insurance systems tend to get stressed when people can buy coverage when they know they need it and then drop it when they know they don’t,” Chief Financial Officer Shawn Guertin told The Associated Press. The Centers for Medicare and Medicaid Services recently outlined several changes it said it was making to help shore up exchange enrollment windows. Aetna is a big player in the ACA’s state-based exchanges. It has enrolled about 750,000 people and is selling coverage in 15 states this year. It lost more than $100 million last year on its exchange business, which makes up a small part of its overall enrollment. “We continue to have serious concerns about the sustainability of the public exchanges,” Aetna Chairman and CEO Mark Bertolini said Monday. Blue Cross-Blue Shield insurer Anthem Inc. also is paying close attention to how the government deals with special enrollment periods as it judges how sustainable the exchange business will be in the future, CEO Joseph Swedish said recently. UnitedHealth Group has said it will decide this year whether to participate in the public exchanges in 2017. Aetna leaders, who have publicly supported the exchanges in the past, say they are still committed and not ready yet to make that kind of call. “It would be premature frankly to declare victory or defeat at this stage in the process,” Guertin said. Federal officials announced last month that they would end several narrow special enrollment windows that focused on consumers like non-citizens with incomes below the federal poverty level who experienced processing delays. Customers will still be able to use special enrollment periods to shop for coverage if they lose their insurance for more common reasons like a move, a marriage or divorce or the loss of a job. But the government plans to clarify guidelines on those remaining windows so customers understand them better. That includes clarifying that an enrollment period cannot be used for a temporary move, and people who do not provide accurate information on their insurance application could be penalized. HealthCare.gov CEO Kevin Counihan said in a Jan. 19 blog post that special enrollment periods will not be available for “the vast majority of consumers.” HealthCare.Gov operates public insurance exchanges in 38 states. “For example, special enrollment periods are not allowed for people who choose to remain uninsured and then decide they need health insurance when they get sick,” he wrote. Insurers are also making adjustments. Aetna has left exchanges in markets like Kansas where it incurred high costs. It also has raised rates and done other things to shore up a business that only contributes about 5 percent of its total enrollment. Guertin said the company hopes its exchange business will move closer to breaking even next year.

ExxonMobil’s 4Q and annual profit drop to 2002 level

DALLAS (AP) — The big plunge in crude prices is taking a toll on Big Oil. Exxon Mobil Corp. said Feb. 2 that fourth-quarter profit fell 58 percent to $2.78 billion. It was the oil giant’s smallest profit since the third quarter of 2002. Exxon’s core exploration and production business lost money in the U.S. and international earnings plummeted by nearly two-thirds. One of the few bright spots, Exxon’s refining operation, was more profitable than a year ago. That helped Exxon avoid the fate of rival Chevron Corp., which lost money in the fourth quarter. Britain’s BP said Feb. 2 that its profit tumbled more than 90 percent. Exxon shares fell $2.12, or 2.8 percent, to $74.17 in afternoon trading. They began the day down 2 percent so far in 2016. The amount of oil on the market remains at extraordinarily high levels and producers, with prices so low, continue to drill just to earn what they can. Exxon’s production rose nearly 5 percent. In 2015, the company pumped oil and natural gas equal to 4.1 million barrels a day. Lower oil prices are causing producers to cut back on new investments. Exxon slashed fourth-quarter capital and exploration spending by 29 percent compared with a year earlier, and it plans to cut that spending by one-fourth, or about $8 billion, in 2016. Still, Exxon expects to start six new projects this year, from Alaska to Australia. The company believes those projects make sense over the long term. Exxon was paid about $34 a barrel for U.S. crude in the fourth quarter, down from $63 a year earlier, and a couple dollars more for oil overseas. The price it got for natural gas fell by about half. Jeff Woodbury, the company’s vice president of investor relations, said that the oversupply of crude — it’s about 1.5 million barrels a day more than demand — will shrink in the second half as seasonal demand grows. But there are still huge stockpiles of oil, and Woodbury declined to predict when crude prices might increase. CEO Rex Tillerson called it a “challenging environment,” but said the company is generating enough cash to continue investing in the business. Exxon’s profit fell from $6.57 billion a year earlier, when oil prices were already beginning to tumble. The Irving, Texas, company was still able to put up per-share earnings of 67 cents, which was 3 cents better than Wall Street had expected, according to a survey by Zacks Investment Research. Revenue fell to $59.81 billion, beating the $50.85 billion according to a poll by the data firm FactSet. Exxon’s profit would have been thinner but for a lower tax bill. The company’s effective rate in the fourth quarter was just 13 percent compared with 34 percent for the full year. A company spokesman said the decline was largely due to reduced earnings and favorable resolution of past tax issues that were booked in the fourth quarter. For all of 2015, Exxon earned $16.15 billion, or about half what it earned in 2014. Tillerson, who has been CEO and chairman since 2006, will reach Exxon’s retirement age of 65 in March 2017. In December, the company named Darren Woods president and gave him a board seat, which made him the heir apparent in the eyes of investors. On a conference call Feb. 2, an analyst asked Woodbury when Tillerson will step down. Woodbury said that is up to the board. Tillerson’s predecessor, Lee Raymond, stayed until age 67.

As the rest of the world dumps Chinese stocks, some wade in

NEW YORK (AP) — While the rest of the world scrambles to get out of the crumbling Chinese stock market, a trickle of investors is heading straight into the wreckage. Managers of Chinese stock mutual funds have seen huge drops many times before, and they even find things to like about them. Instead of taking cover, and preserving cash in their portfolios, this time these managers say they are buying stocks of companies set to take advantage of how the Chinese government is reshaping the economy. This most-recent plummet has been even swifter and sharper than past ones, but managers of Chinese stock funds say it’s also brought down share prices enough that they’ve been buying companies that they thought were too expensive just a few months ago. “With a volatile market like China, buy it when the world hates it and sell when no one’s worried,” says Jim Oberweis, who runs the Oberweis China Opportunities fund. “That’s worked pretty well over the last 20 years in China, and now sure seems to me like a period where everyone hates it.” Only time will tell if he and other Chinese stock fund managers are right. They could have made the same argument after each of the Chinese market’s many sell-offs the last five years, and it wouldn’t have netted them much, if anything. The MSCI China index has had seven declines of at least 10 percent over the last five years, including the 19 percent tumble since late October, which itself followed a 34 percent plunge from April into September by just weeks. After all those ups and downs, the MSCI China index has lost 12 percent over the last five years and is close to its lowest level since the summer of 2009. That’s why fund managers say an investment in Chinese stocks will require lots of patience, maybe even a decade. Oberweis’ fund, for example, has lost 15.9 percent over the last year, even though it’s been one of the top performers in its category. But over the past 10 years, it’s returned an annualized 8.9 percent, better than the S&P 500’s 6.1 percent annual return. What’s causing the panic China’s economy grew last year at its slowest pace in a quarter century, and economists expect it to slow even more this year. Part of that is by design. The Chinese government is steering the economy toward consumer spending and away from exports and investments in infrastructure. It hopes that will yield a more sustainable, though slower, rate of growth. The government is also pushing anti-corruption measures and efforts to make the country’s huge state-owned banks and telecom communications companies more efficient. The goal is to try to slow growth without stopping it. The worry is that the government will lose control of the slowdown, and the economy will fall hard. “It’s painful at the moment, and there could be some more pain to come,” says Jasmine Huang, manager of the Columbia Greater China fund. “Eventually it will be good for the economy.” Huang is avoiding companies from what’s known as “Old China” and owns no raw-material producers and few companies in the industrial and energy sectors. But instead of hiding out in cash, she has been investing in “New China.” She has been focusing on e-commerce companies, where she expects revenue to grow even if the overall economy stumbles because more Chinese shoppers are going online. She also sees big growth for health care companies. They make up only about 2 percent of the MSCI China index, and she says they could grow to become the 10 or 20 percent of the market that health care represents in developed markets. Why this decline is different Andrew Mattock, lead manager at the Matthews China fund, understands if investors are feeling gun-shy about Chinese stocks. “For five years now, if you’ve made money, it’s been hard to get, and you’ve lost it quickly in these sell-offs,” he says. But the most recent drops for Chinese stocks have brought them close to their cheapest level since the financial crisis, relative to their earnings. The MSCI China index was recently trading at about 8.5 times its expected earnings per share over the next 12 months. That’s down from a price-earnings ratio of nearly 10 at the start of the year and approaching the 6.8 ratio of 2008. Mattock, like Huang, has steered his fund toward stocks that he sees profiting from China’s shift toward consumer spending. His top holdings at the start of the year included Tencent, which operates the popular WeChat social media service, and JD.com, one of China’s largest e-commerce sites. “This time, I think, is different because there’s actually change going on now,” Mattock says of the economic reforms underway in China. “There are doubts about whether they can do it, but what they’re trying to do is positive.”

Investors stay steady on retirement savings

Panic is so passé. Investors are keeping their cool — and keeping their hands off of their retirement accounts — despite huge swings in the stock market that sent it careening to its worst start to a year ever. “They are just plugging away through the ups and downs of the stock market,” said Sarah Holden, director of retirement and investor research at the Investment Company Institute, an association of regulated funds. It can be nerve-wracking to see retirement balances plunge with the market, conjuring fears of spending the golden years in a cardboard box. Retirement account administrators say they see a sharp uptick in phone calls when the market stumbles, and this downturn has been no different. But then, sensibly, they don’t do much, says John Sweeney, executive vice president of investing strategies at Fidelity, one the largest administrators of 401(k) accounts. Retirement savers have come to understand that they need to think long term. Many lived through the far more unsettling years of the financial crisis, then saw the market get back to its earlier peak in about 5 years. That sure felt like a long time then, but even those who retire this week can reasonably expect to live another 20 years, long enough for the riskiest parts of any saver’s portfolio to recover. “They aren’t really worried about timing the market but having time in the market,” Holden says. Vanguard, which oversees $3 trillion in assets, says that while the S&P 500 sank 8 percent during the first 11 days of the year there was no perceptible change in participant trading compared with the same period in the past two years. “There are a few that panic and they are harming themselves when they choose to sell equities at a low,” said Jean Young, a senior research analyst with the Vanguard Center for Retirement Research. “But by and large we aren’t seeing a lot of activity.” And this is while retirement savers at nearly every age group are putting more of their next egg into stocks, as advisers recommend. Vanguard says every age group under 60 has increased the portion of their investments allocated to equities between 2007, the pre-crash peak, and 2014. The change was most dramatic for people under 25, who now have 87 percent of their portfolios in stocks, up from 67 percent in 2007. The figures for 2015 are not complete but Vanguard expects the trend to continue. The median allocation for equities across all age groups is 83 percent, up from 80 percent in 2007. So where’s all this cool-headed confidence amid the chaos coming from? As much from automation as from steely nerves or deep wisdom. Funds based on an investor’s expected retirement date and other professionally managed products that allow investors to go on autopilot have become much more popular in recent years. These don’t require the investor to make as many judgment calls, leaving it up to professionals to adjust the risk based on when the investor plans to quit the daily grind and buy a Winnebago. Vanguard said about 48 percent of its plan participants are in a professionally managed product, up from less than 20 percent in 2007. This has helped greatly reduce the number of people with extreme positions, such as holding all equities or no equities at all. Also, employers have increasingly been enrolling employees automatically, and increasing the number of participants. That leaves many investors unaware of exactly how much they hold in stocks, or unconcerned. Some are simply more confident in the concept that equities are long-term investments. And even in a bad stock market, people tend to continue to contribute to their retirement plan. That helps them buy stocks at lower prices, setting them up for bigger gains later. That’s how those with long time horizons weathered the recession without much bruising — and it should help today’s hands-off investors recover too. “People didn’t know what to do, so they didn’t do anything, which worked to their advantage,” Young said.

Oil keeps falling, and falling — How low can it go?

DALLAS (AP) — The price of oil keeps falling. And falling. And falling. It has to stop somewhere, right? Even after trending down for a year and a half, U.S. crude has fallen another 17 percent since the start of the year and is now probing depths not seen since 2003. “All you can do is forecast direction, and the direction of price is still down,” says Larry Goldstein of the Energy Policy Research Foundation, who predicted a decline in oil in 2014. On Jan. 12 the price fell another 3 percent to $30.44 a barrel, its lowest level in 12 years. Oil had sold for roughly $100 a barrel for nearly four years before beginning to fall in the summer of 2014. Many now say oil could drop into the $20 range. The price of crude is down because global supplies are high at a time when demand for it is not growing very fast. The price decline, already more dramatic and long-lasting than most expected, deepened in recent days because economic turmoil in China is expected to cut the growth in demand for oil further. Lower crude prices are leading to lower prices for gasoline, diesel, jet fuel and heating oil, giving drivers, shippers, and many businesses a big break on fuel costs. The national average retail price of gasoline is $1.96 a gallon. On Jan. 12 the Energy Department lowered its expectations for crude oil and most fuels for this year and next. The department now expects U.S. crude to average $38.54 a barrel in 2016. But layoffs across the oil industry are mounting, and oil company bankruptcies are expected to soar. BP announced layoffs of 4,000 workers on Tuesday. Fadel Gheit, an analyst at Oppenheimer & Co, says as many as half of the independent drilling companies working in U.S. shale fields could go bankrupt before oil prices stabilize. There’s lots of oil A boom in U.S. oil production thanks to new drilling technology helped push global supplies higher in recent years. Other major oil producers and exporters in the Middle East and elsewhere have declined to reduce their own output in an attempt to push prices back up. Iran, trying to emerge from punishing economic sanctions, is looking to increase exports in the coming months, which could add further to global oil stockpiles. The Energy Department said U.S. crude oil inventories “remain near levels not seen for this time of year in at least the last 80 years.” It says global supplies exceed global demand by about 1 million barrels per day on average. Economists at the Federal Reserve Bank of Dallas believe excess inventories won’t begin falling until 2017. The higher supplies and lower prices haven’t stimulated a sharp rise in demand. Most of the increase in world oil demand over the past several years has come from China, but signs are pointing to much slower economic growth there, which in turn reduces demand for fuels made from crude. Disappointing reports last week about China’s manufacturing sector and a fall in the yuan’s value triggered a global stock sell-off and an even more dramatic decline in the price of oil and other commodities. The first five days of the year marked the worst start of a year for oil in history, according to S&P Dow Jones Indices, and oil has only fallen further since. Winners and losers Motorists are saving every time they fill up. The Energy Information Administration figures that the average U.S. household saved $660 on gasoline in 2015 compared the year before, and gasoline is expected to fall another 16 percent in 2016. On Jan. 12 the EIA forecast that gasoline will average $2.03 a gallon for 2016, the lowest since 2004, from $2.43 last year. Airlines, big users of jet fuel, have posted record profits, and shippers and other businesses are also saving from cheaper energy. But workers in the oil patch have paid the price. About 17,000 oil and gas workers in the U.S. lost their jobs in 2015, but if you include oilfield support jobs the number is about 87,000, according to Michael Plante, an economist at the Dallas Fed who has written about the effect of oil prices on the economy. Even so, economists say low oil prices are still a net benefit for the U.S. economy. “Consumers have more money in their pocketbooks,” says Amy Myers Jaffe, an energy consultant who teaches at the University of California, Davis. And for businesses, “I can hire more people or buy new equipment because I no longer have to spend that money on energy.” When does it end? Oil traders and Wall Street analysts expect further declines in oil prices in the coming weeks. Several have predicted that prices will fall below $30 a barrel and even approach $20 a barrel. But prices are expected to rise sooner or later. Tension between Saudi Arabia and Iran has increased in recent weeks, and Middle East turmoil often causes prices to rise because traders worry about a potential disruption in supplies in the world’s most important oil region. And just as $100 oil encouraged the new production that contributed to this plunge in prices, $30 oil is discouraging the big investment needed for exploration and production for the future. The number of rigs drilling for oil in the U.S. has fallen by more than two-thirds, to 516 last week from an October 2014 peak of 1,609, according to a closely-watched count by the drilling services company Baker Hughes. Eventually, analysts say, the supply will fall below demand and prices will rise. Oppenheimer’s Gheit thinks oil will eventually rise and settle into a range between $50 and $70 a barrel — but not anytime soon. “The longer it remains low, the more violent the reaction to the upside is going to be,” he says.

What 2016 will do to your checkbook: Rent, food, gas, raises

Wondering how you will fare financially in 2016? Below are what experts think next year will hold for financial matters close to home: Raises, rent, gas, food and health. Will I get a raise next year? Maybe. Wage growth has been perhaps the job market’s biggest weakness since the recession ended. Pay increases have been both slow and uneven, highly dependent on your field of employment. And for many, it has not been enough to keep pace with the cost of living. In November, average hourly earnings climbed 2.3 percent from a year earlier, according to the government’s most recent report. But that is only about two-thirds the roughly 3.5 percent typically seen in a strong economy. Many economists are optimistic Americans’ pay will start growing faster soon because hiring has been good and layoffs have been low. But that’s been the case for a while, and wages haven’t taken off yet. Joseph LaVorgna, chief U.S. economist at Deutsche Bank, is not expecting major gains ahead. He notes that measures that include a broader mix of compensation beyond hourly wages show there’s even less growth in pay than it seems. “I’m not convinced things are going to grow as much as I would like them to,” he said. Will my rent go up? Yes, most likely. It’s been a tough few years for U.S. renters because demand has outpaced supply, causing prices to rise. Rents increased 4.5 percent in October, 5.3 percent in September and 6.2 percent in August, according to real estate data firm Zillow. The median rental payment nationwide was $1,382 in October, roughly 30 percent of the median U.S. family income and high enough for the government to consider it financially burdensome. Over the past decade, that number of renters spending over this threshold on rent has jumped from 14.8 million to 21.3 million, or 49 percent of all renters. There are more rent increases anticipated ahead. “Rents are expected to rise in virtually all major cities in 2016,” said Hessam Nadji, senior executive vice president with commercial real estate services firm Marcus & Millichap. Some small consolation: While rents will still rise, the pace of rent growth will slow modestly from the exceptional levels set in 2015 as new construction creates more housing competition, Nadji says. Will gas prices stay low? Yes, most likely. Oil prices have plummeted over the last year, a result of high global supplies and weaker demand than expected. U.S. drivers are paying less than $2 a gallon on average for the first time since the Great Recession. Seasonal factors and volatile oil prices will push prices up and down throughout the year, but overall prices are expected to remain low compared with recent years. The Energy Department forecasts an average of $2.37 a gallon next year, which would be the lowest annual average since 2009. Tom Kloza, head of energy analysis at the Oil Price Information Service, said drivers should expect lower lows and higher highs at the pump in the year ahead, but he doesn’t expect the price of a gallon of gasoline to go over $3 at any time in 2016. “Nationally we are looking at a year that is very similar to the year we are ending,” Kloza said. What about food? New year, same dish. Food prices should rise at a rate near the historical average, according to the USDA’s forecasts. The United States Department of Agriculture’s Economic Research Service anticipates the price for food will be up 2 to 3 percent for 2016, same as 2015 and in line with the 20-year historical average of 2.6 percent. That includes food people consume at home and out at restaurants. Annemarie Kuhns, an economist at the ERS, said that certain food prices were off this year due to unusual events, such as the avian influenza that led to the death of millions of birds and sent egg prices up roughly 15 percent. Looking ahead, she and fellow economists anticipate these prices may level off in 2016 — assuming cooperation from Mother Nature. Will my health insurance cost more? Probably. People buying their own coverage through the exchanges created by the Affordable Care Act should see premiums go up faster in 2016 than in previous years, said Cynthia Cox, associate director of health reform and private insurance at the Kaiser Family Foundation. According to Kaiser research, if you do not shop around and let your plan passively renew, the premiums for the lowest silver level plan —the most popular on the exchange — will increase 15 percent on average next year. If you are willing to switch, premium increases are expected to be zero to 1 percent. This is because the exchange is set up to encourage shopping around. These increases apply only to people who are receiving subsidies to help pay for the insurance. For those who do not, the increase is expected to be 6 percent. Cox added that shoppers should also update any personal information — such as changes to your family size or income — which can impact what they pay. “It’s very important to go back online and shop every year,” Cox said. “This is still an evolving market — there are new insurers coming in and other insurers leaving. The only way to find (the best price) is to go online or navigate through a broker.” Employer-sponsored plans premiums increased about 4 percent this year. And while Kaiser does not forecast employer-sponsored plan price changes, it does not anticipate any unusual hikes in health care costs that tend to push up insurance prices. However, employees may end up paying more out of pocket for deductibles, copayments and other expenses they are responsible for, depending on their employer’s plan.

With emerging market stock funds, check what’s in the tin

NEW YORK (AP) — When you’re built different, in investing, you act different. That’s why it’s important to check what’s in your emerging-market stock fund — even if it’s an index fund. Emerging-markets index funds track different indexes, which can have very different exposure to different parts of the world. And as Brazil, India and other emerging market economies move in increasingly different directions, actively managed funds are looking more distinct as well. Some managers are avoiding broad swaths of the developing world, and they say their funds have never looked this different from their index-fund rivals. The big differences in composition can lead to big differences in returns. All of the 20 largest emerging-market stock mutual funds are down this year, but by anywhere from 3.9 percent to 21 percent, as of Wednesday. That gap of more than 17 percentage points is much wider than the 7.4 point gap in performance for the biggest funds in the largest category of U.S. stock funds. The changes in portfolio focus are occurring as more dollars head into emerging-market stock mutual funds and exchange-traded funds. More than $5 billion flowed into them in the first 10 months of the year, according to Morningstar, at a time when nearly $73 billion left U.S. large-cap stock funds. If you want to join the tide into emerging-market stock funds, it’s important to ask a few questions: • If it’s an index fund, what index does it follow? It may seem like a boring question, but it can make a difference, as a look at the two largest emerging-market stock ETFs shows. The iShares MSCI Emerging Markets ETF keeps nearly a sixth of its portfolio in South Korean stocks, such as Samsung Electronics and Hyundai Motor. The only country that accounts for a bigger percentage of its portfolio is China. Vanguard’s FTSE Emerging Markets ETF, meanwhile, doesn’t own a single Korean stock. That’s because the two ETFs track different indexes, which disagree on whether South Korea is an emerging market or a developed one. Despite the difference, the two ETFs have performed similarly this year: Both lost 11 to 12 percent, including dividends, as of Wednesday. But the ETFs are set to get even more different. The Vanguard ETF is in the process of adding small-cap emerging-market stocks to its portfolio, which are generally riskier than large-cap stocks but have the potential for bigger gains. The Vanguard fund is also bringing in so-called A-shares of Chinese companies. These shares are listed in Shanghai or Shenzhen, and the Chinese government has only recently begun loosening limits on foreign ownership of them. A-shares have had much sharper jumps up and down than the Hong Kong-listed shares that many emerging-market stock funds focus on. • If the fund is actively managed, what is it flocking to and avoiding? Emerging-market stock indexes tend to be full of state-owned companies in China and commodity producers in Brazil and Russia. These are precisely the stocks that many active managers say they’re most keen to avoid. China’s growth has slowed sharply, as the government tries to shift the economy away from industrial-led gains to one more dependent on consumer spending. That has helped send prices for metals and oil tumbling, which hurts Brazil and Russia. They’re big commodity producers, and both their economies are in the midst of recessions. That’s why Laurence Taylor, portfolio specialist at T. Rowe Price, says adhering to an index is akin to “investing in the history of emerging markets.” He prefers countries that are smaller players in emerging-market stock indexes, but where growth prospects look better, such as Indonesia and the Philippines. He also favors India, which is well represented in emerging-market indexes. Actively managed funds can also steer clear of places where politicians are making things difficult. When Russia, which makes up about 4 percent of emerging-market stock indexes, annexed Crimea in 2014, it led to an international uproar and sanctions that hurt Russian companies badly. Lee Rosenbaum, portfolio manager at the Loomis Sayles Global Equity and Income fund, which can invest anywhere around the world, sold the fund’s investment in the Russian Internet company Mail.ru after the upheaval. Now he says it’s safe to assume it won’t be buying another Russian stock again for a while. • What are the fees? As with investments in all funds, try to keep expenses low, regardless of whether you opt for a fund that tracks an index or is actively managed. Investing in emerging markets can be expensive in general, and the average expense ratio is 1.56 percent for mutual funds in the category. That means $15.60 of every $1,000 invested goes to cover fund manager salaries and other costs. A fund manager with higher costs will need to perform that much better just to match the after-fee returns of lower-cost funds.
Subscribe to RSS - AP Business Writer