The Mark Twain Effect?
Historically, economic theory was based on the idea that financial decisions were grounded in rational thought. In recent years, behavioral economists have recognized that people don’t always behave rationally. In fact, research has found that investors like shortcuts that help simplify decision-making. While rules of thumb can be helpful, it’s important to use common sense. Some investment theories are a bit wacky, such as:
This year, U.S. stocks moved lower in October. Last week, the Standard & Poor’s 500 and Nasdaq 500 Composite Indices both entered correction territory, reported Connor Smith of Barron’s. A correction occurs when an Index (or stock) drops 10 percent to 20 percent from its previous high. In general, corrections are normal adjustments as stocks trend higher. On occasion, a correction can mark the start of a bear market, reported the Corporate Finance Institute.
No one likes to see a negative return on an account statement. Sometimes, when markets have moved lower, investors are tempted to make portfolio changes to minimize losses. This is rarely a good idea. Timing the market is exceptionally difficult. Missing just a few days of returns can dramatically affect long-term performance. A better choice is to have a well-diversified portfolio that is invested according to your long-term financial goals and then make changes when your goals change, or you experience a life transition.
Last week, major U.S. stock indices moved lower, and yields on most longer-term U.S. Treasuries finished the week lower.
Stay calm and consider the big picture.
Today, investors have a myriad of worries that are creating tremendous uncertainty. A September Investopedia survey found investors are concerned about how their investments may be affected by:
Now, they’re also concerned about war in the Middle East.
Sometimes, in the midst of uncertainty, it can be helpful to take a step back and look at the bigger picture. Consider the historical performance of the Standard & Poor’s (S&P) 500 Index. The current version of the Index debuted in 1957. That year, its average closing price was 44.42. Last week, the Index closed at 4,224.16.
The S&P 500 didn’t travel in a straight line; a lot happened over that 66-year period. The United States experienced 10 recessions. The world witnessed dozens of wars, uprisings and regime changes. The Berlin Wall was built and torn down. Neil Armstrong walked on the moon. Russia defaulted on its debt and recovered. China and the U.S. normalized relations. The Chinese economy grew rapidly, as did the economies of many emerging countries. Americans experienced hurricanes Katrina, Sandy, Harvey and Irma, the savings and loan bailout, the global financial crisis, the Great Recession, 9/11, the COVID-19 pandemic, and so much more.
Some events roiled financial markets while others had little effect. When events have led to the S&P 500 losing value, the Index recovered. Sometimes it recovered quickly, sometimes it took more time. For example:
In each case, the Index recovered and moved higher over time. Of course, past performance is not indicative of future results.
Investor concerns about geopolitical events and market volatility can lead to poor decision-making, including investors selling stocks or moving to cash at times when they might be better off holding onto their portfolio or adding to it. The goal of investing is to buy low and sell high, but that takes enormous discipline. When investors see the value of their portfolios falling, they may become fearful and sell.
That can lock in losses and cause investors to miss out when the market rebounds.
Falling share prices can create opportunities to buy sound companies at attractive prices. If you would like to discuss opportunities in the current market or if you have concerns about the performance of your savings and investments, please get in touch. Together, we’ll review your financial goals, risk tolerance and portfolio allocation.
Last week, U.S. stock and bond markets headed lower after Federal Reserve Chair Jerome Powell indicated the fight against inflation is not over and rates are likely to stay higher for longer, reported Connor Smith for Barron’s. Yields on U.S. Treasuries moved higher.
Markets were resilient.
Last week, investors had a lot to process – geopolitics, inflation, consumer sentiment, the possibility of government shutdown – and markets were volatile. Toward the end of the week, some investors were reassured when earnings season kicked off with reports showing major banks posted stronger-than-expected profits during the third quarter. Here’s a brief look at what happened during the week:
War in Israel. Hamas terrorists attacked Israel, and Israel declared war. The human toll has been high and continues to increase. The conflict has potential to spread across the region. While economics is a lesser concern, the war may disrupt energy supplies, keeping inflation – and interest rates – higher for longer, according to Ziad Daoud, Galit Altstein and Bhargavi Sakthivel of Bloomberg.
U.S. inflation proved persistent. In September, the Consumer Price Index (CPI) showed prices rose 3.7 percent year-over-year. When volatile food and energy prices were excluded, inflation was 4.1 percent year-over-year. Inflation has fallen a long way from its June 2022 peak of 8.9 percent, but the decline has stalled, and inflation remains well above the Federal Reserve’s two percent target. That reinforces the idea that the U.S. Federal Reserve may leave rates higher for longer, reported Chris Anstey of Bloomberg.
Consumers were less optimistic. Inflation is affecting the finances of individuals and businesses, according to the University of Michigan’s Surveys of Consumers Director Joanne Hsu. The October consumer sentiment survey found, “Assessments of personal finances declined about 15%, primarily on a substantial increase in concerns over inflation, and one-year expected business conditions plunged about 19%. However, long-run expected business conditions are little changed, suggesting that consumers believe the current worsening in economic conditions will not persist.”
U.S. budget negotiations remained stalled. Congress has about a month left to negotiate and pass the appropriations bills necessary to fund the U.S. government for fiscal 2024. However, the House of Representatives currently cannot proceed without an elected Speaker of the House. On November 17, stop-gap funding measures end. Without additional funding measures a government shutdown is possible, reported David Morgan, Richard Cowan, and Moira Warburton of Reuters.
Banks did well in the third quarter. Earnings season got off to a good start last week. Major U.S. banks were the first to report, and some saw profits rise significantly in the third quarter. One large bank reported its profit was 35 percent higher, year-over-year.
Major U.S. stock indices finished a volatile week higher. Bond markets produced mixed results with yields on longer maturities of U.S. Treasuries moving lower.
Financial markets lost ground during the third quarter.
While year-to-date returns for the Standard & Poor’s (S&P) 500 Index remain above the historic average, which was 10.24 percent, including dividends, from 1973 to 2022, the rally in U.S. stocks stalled during the third quarter of 2023, reported Lewis Krauskopf, Ankika Biswas and Shashwat Chauhan of Reuters.
Early in the quarter, U.S. stocks gained, driven higher by better-than-expected corporate earnings, falling inflation and optimism that the Federal Reserve (Fed) might be near the end of its rate-hiking cycle. Since March of 2022, the Fed has lifted the Federal Funds effective federal funds rate from near zero to 5.33 percent and reduced its bond holdings by $1 trillion through quantitative tightening, reported Michael S. Derby of Reuters.
The Fed’s actions are designed to bring inflation lower by slowing economic growth and reducing demand for goods and services. However, the U.S. economy continues to hum along. The labor market has been particularly resilient. Last week’s employment data showed the number of jobs created in September was almost double the Dow Jones consensus estimate, reported Jeff Cox of CNBC. The U.S. unemployment rate remained near historically low levels, and the labor force participation rate increased over the quarter.
The strong economy has been a source of significant uncertainty. Some economists believe it is an indication the Fed has engineered a soft landing and inflation will reach targeted levels without a recession, although 60 percent of the economists surveyed by Bloomberg continue to say a recession is ahead, reported Rich Miller, Molly Smith and Kyungjin Yoo.
Government turmoil also has created uncertainty. In early August, Fitch Ratings surprised financial markets by lowering its rating on U.S. Treasuries from AAA to AA+. The company indicated that “a high and growing general government debt burden, and the erosion of governance” were the impetus for the downgrade.
In September, when Congress debated whether to approve the necessary appropriations bills to fund the U.S. government for fiscal 2024, Moody’s Investors Service – the only remaining major credit rating agency to award U.S. Treasuries a AAA rating – warned that a government shutdown would be a “credit negative” event, reported Matt Phillips of Axios. Congress temporarily avoided a government shutdown by passing a continuing resolution that provides funding through mid-November.
By the end of the quarter, optimism that the end of the Fed’s tightening cycle was near had faded amid uncertainty about the strength of the economy, the possibility of a government shutdown, and a growing number of labor disputes. In late September, the Fed released its economic projections, making it clear that an additional rate hike was possible in 2023, and rate cuts were unlikely before 2024.
The Fed’s hawkish outlook helped push stock and bond markets lower. In late September, the S&P 500 Index was down about 7 percent from its July high. From August through September, the yield on the 10-year U.S. Treasury note rose from 4.05 percent to 4.59 percent. Bond prices fall as yields rise.
Last week, despite the strong jobs report bolstering the likelihood of another Fed rate hike, the S&P 500 and Nasdaq Composite Indices moved higher. The Dow Jones Industrial Index lost ground. Yields on U.S. Treasuries generally moved higher over the week.
Inflation is slowing but consumers aren’t feeling it.
In August, for the first time in two years, inflation (excluding volatile food and energy costs) dropped below four percent. Last week, one of the Federal Reserve (Fed)’s favored inflation measures – the Personal Consumption Expenditures (PCE) Price Index – indicated that prices rose 3.9 percent, year-over-year, in August 2023. That’s an improvement from January, when prices rose by 4.9 percent, year-over-year, but it remains above the Fed’s target of 2 percent.
While slowing inflation is good news, many Americans are not feeling relief. “Even as the Federal Reserve’s favored measure of price gains eases, the cost of food, gasoline, car insurance and other essentials is still elevated after two years of persistent increases…It costs $734 more each month to buy the same goods and services as two years ago for households who earn the median income,” according to a source cited by Mark Niquette, Jarrell Dillard and Michael Sasso of The Washington Post.
Ongoing pain in the pocketbook is due, in part, to higher oil prices, which are not included in core inflation numbers. The price of crude oil rose to the highest level in more than a year last week, before falling slightly. Rising prices resulted from low inventories and reduced production levels among OPEC+ (the Organization of Petroleum Exporting Countries plus 11 other non-OPEC members) that reduced global oil supply, reported Lee Ying Shan of CNBC. In August, the cost of gasoline, lubricants, and other oil-related products rose, reported Jeffry Bartash of MarketWatch.
Regardless of oil prices, investors were hopeful last week that the Fed might not raise rates again in 2023. Revised economic data from the Bureau of Economic Analysis showed the economy grew at a slightly slower pace in the second quarter of 2023 than it did in the first quarter. In addition, consumer spending, which is the primary driver behind economic growth in the United States, cooled. The data suggest the Fed is making progress – reducing price pressures by slowing economic growth and lowering demand for goods.
Stocks moved higher on Thursday before reversing course. The Dow Jones Industrial Average and Standard & Poor’s 500 Index finished the week lower, according to Barron’s. Yields on longer-term U.S. Treasuries moved higher over the week.