People love rules of thumb.
Sometimes, mental shortcuts are helpful. Other times they are not. When it comes to investing, seasonal shortcuts are not uncommon. In fact, January boasts two:
The January Effect explains why U.S. smaller company stocks tend to outperform the market in January. The original theory held that tax-loss harvesting pushed stock prices lower in December, making shares more attractive to investors in January. An article published in International Journal of Financial Research explained the effect could also owe something to the optimism that accompanies a new year, as well as year-end cash windfalls.
In his book, A Random Walk Down Wall Street, Burton Malkiel described the January Effect this way, “…the effect is not dependable in each year. In other words, the January ‘loose change’ costs too much to pick up, and in some years it turns out to be a mirage.”
The January Barometer suggests the performance of stocks during the first month of the year offers insight to the direction of stocks for the year as a whole.
Last week, the Standard & Poor’s 500 Index (S&P 500) was up 2.5 percent. If the Index finishes this month higher, then the January Barometer suggests it should finish the year in positive territory.
Of course, you need look no further than 2018 to see the January Barometer is not completely accurate. In January 2018, the S&P 500 gained 5.6 percent, and it finished the year in negative territory.
According to Fidelity, the theory is flawed because, while stocks move higher for the year a significant percentage of the time after gaining value in January, they also move higher for the year a significant percentage of the time after losing value in January.
This is why mental shortcuts are often poor investment guides.
There is one rule of thumb investors may want to consider adopting: A well-allocated and diversified portfolio that aligns with long-term financial aspirations to help meet goals along with periodic reviews with their financial professional.
Investors will think of the last quarter of 2018 for years to come, but they won’t remember it fondly. The Economist described it like this,
“After a rotten October and limp November, the S&P 500 tumbled in value by 15 percent between November 30th and December 24th. Despite an astonishing bounce of 5 percent the day after Christmas, the index finished the year 6 percent below where it started...”
Last quarter’s volatility and the slide in share prices owed much to uncertainty about economic growth. Investors were concerned about a variety of issues, including:
As anxiety rose during the fourth quarter of 2018, some investors rushed to the perceived safety of bonds. High demand pushed the yield on 10-year Treasury bonds lower. It dropped from 2.99 percent to 2.69 percent during December, according to Yahoo! Finance.
While increasing bond exposure may have been a prudent portfolio adjustment for investors who were taking more risk than they could bear, those who moved out of stocks on fear missed out. The Standard & Poor’s 500 Index and the Dow Jones Industrial Average posted their biggest one-day point gains on record on December 26, reported Emily McCormick for Yahoo! Finance.
At this point, some investors feel overwhelmed and worried about their ability to reach personal financial goals. If you’re one of them, please give us a call. Sometimes, reviewing life and financial goals, and the reasoning behind portfolio choices, may be reassuring. We look forward to hearing from you.
Investing during the month of December was like traversing an icy mountain stream. It delivered a staggering shock to the senses that triggered the instinct to, “Get Out!”
When it comes to investing, that instinct is called loss aversion. For many people avoiding a loss is more important than realizing a gain. Simply put, not losing $100 is more important than gaining $100.
Erica Goode of The New York Times talked with psychologists Daniel Kahneman and Amos Tversky about a series of experiments they had conducted to measure loss aversion. The pair found relatively few people would bet money on a flip of a coin unless they stood to win at least twice as much as they might lose.
The desire to avoid losses is the reason many people sell stocks when the value of the stock market is declining. Unfortunately, it may be a poor choice for a variety of reasons. For example,
While past performance is no guarantee of future results, understanding the history of gains and losses in bull and bear markets is critical because it can help investors avoid potentially costly mistakes.
However, if you’re experiencing a high level of discomfort as the stock market fluctuates, it may be important for you to re-evaluate your risk tolerance and make any changes necessary to your asset allocation.
One of the most important aspects of our work as financial advisors has little to do with asset management or investment selection. It has everything to do with helping our clients make better financial decisions. We try to provide information and advice – coaching, if you will – that may help our clients avoid mistakes that may make it more difficult to achieve their goals. We also encourage clients to embrace choices which are likely to help them work toward their goals.
If you find yourself debating whether to hold your investments or sell them, please give us a call before you do anything. We welcome the opportunity to talk with you about what’s happening and offer some context which may help set your mind at ease.
If changes are necessary, we can help you identify options and weigh the pros and cons of each. Our goal is to help you work toward your goals.
It never feels good when the stock market heads south, and that’s what happened last week. The Standard & Poor’s 500 Index (S&P 500), Dow Jones Industrial Average, and Nasdaq Composite all moved into correction territory, which means the indices have fallen 10 percent or more from their previous peaks.
If you look at corporate earnings, the decline in U.S. stock values may seem a bit of a head scratcher. During the third quarter of 2018, almost four-fifths (78 percent) of companies in the S&P 500 were more profitable than analysts expected, according to FactSet Insight. Earnings grew by 25.9 percent – the fastest growth rate since 2010.
When you remember the stock market is a leading indicator, the mystery is resolved. Share prices reflect what investors expect will happen in the future, and third quarter earnings are in the past.
So, what moved the market last week? Investors’ concerns included slowing global economic growth. Dave Shellock of Financial Times reported:
“World equities closed out the week on a soft note as disappointing economic reports out of China and the eurozone heightened concern over the outlook for global growth…the big focus was on China, where activity and spending data confirmed that the country’s economy had a dismal November.”
Monetary policy and geopolitical issues, including the possibility of a U.S. government shutdown and ongoing Brexit follies, contributed to investor pessimism. The American Association of Individual Investors Sentiment Survey showed a 17-point decline in bullish sentiment and an 18.4-point increase in bearish sentiment.
When stock markets leave you feeling like Santa dropped coal in your stocking, it may be helpful to remember the words of Warren Buffett, “Be fearful when others are greedy and greedy when others are fearful.”
We’re off to a slow start.
December is usually the best month of the year for the stock market. It has been since 1950, according to Randall Forsyth of Barron’s, but not so far this year.
Two issues made investors particularly uncomfortable last week which helped trigger a sell-off that pushed major U.S. stock indices lower.
Historically, these maturities have inverted seven times. In one instance, the country was already in recession. On the other six occasions, recession didn’t occur for more than two years. Barron’s reported the Standard & Poor’s 500 Index gained an average of 20 percent over the 24-month periods following these inversions.
Investors’ negative response to last week’s news may have been overdone. Financial Times reported European and Asian markets firmed up a bit Friday “…as buyers stepped back in after some savage falls on Thursday.”
Hold on to your hats!
Recently, stocks have delivered a wild ride. During Thanksgiving week, U.S. stock markets took investor uncertainty on the chin, suffering a 3.8 percent drop, which was the worst performance in eight months. Then, last week, stocks reversed course. The Standard & Poor’s 500 Index and the Nasdaq Composite delivered their strongest weekly gains in seven years, reported Ben Levisohn of Barron’s.
So, what changed?
Two things appear to have influenced investors last week:
“Powell on Wednesday said that rates were ‘just below’ the level that would be neutral for the economy – meaning they would neither speed up nor slow down economic growth. The comment diverged from a previous remark from Powell that rates were a ‘long way’ from the bank’s aimed neutral level.”
Some analysts have pondered whether recent rate hikes have been a mistake that will lead to recession.
“The best case that can be reasonably expected is for a truce to be declared between the United States and China, to allow talks to continue over the thorny issues of trade barriers and intellectual property. And, equally important, to avoid the consequences of the imposition of even more draconian tariffs on the world economy.”
There is little doubt volatility feels a lot better when share prices move higher than when they move lower. While uncertainty remains elevated, we may see additional jolts up and down. It may be a good idea to ensure your portfolio is well allocated and diversified. Holding diverse assets and investments won’t prevent losses during downturns but it can help minimize losses as investors pursue of long-term financial goals.
It was a turkey of a week.
The United States and China continued to spar over trade and other issues. An expert from Moody’s told Frank Tang of the South China Morning Post (SCMP) the United States-China dispute will not be easily resolved:
“Look at the speech Vice President Pence gave in Papua New Guinea at the Apec conference. He didn’t just talk about trade, but also intellectual property, the South China Sea, forced technology transfers. So there’s a whole long list of issues the U.S. administration is now raising…”
Financial Times reported the Organization for Economic Coordination and Development (OECD) anticipates global economic growth could stumble if trade tensions escalate.
SCMP reported investors are hoping for greater clarity around trade issues when President Donald Trump meets with China’s President Xi Jinping at next week’s G-20 Summit.
The climate report added a new dimension to uncertainty about economic growth last week, reported Fortune. Black Friday shoppers may have missed it, but the U.S. government released the 4th National Climate Assessment on Friday. Ed Crooks of Financial Times summarized some of the report’s economic findings:
“The largest costs of climate change for the United States this century were expected to come from lost ability to work outdoors, heat-related deaths, and flooding…If [greenhouse gas] emissions are not curbed it warns, ‘it is very likely that some physical and ecological impacts will be irreversible for thousands of years, while others will be permanent.’”
Major U.S. stocks indices finished the week lower. It was the biggest drop during Thanksgiving week since 2011, according to CNBC.com.
Americans are hard working and generous. Take a guess: How many hours do Americans work each year relative to Europeans?
Here are a few hints provided by The Economist and Expatica:
So, how many hours do Americans work relative to our European counterparts?
In a typical year, Americans work 100 hours more than the British, 300 hours more than the French, and 400 hours more than the Germans, on average. The Economist reported:
“In 2017 the average American took 17.2 days of vacation. That was a slight rise on the 16 days recorded in 2014 but still below the 1978-2000 average of 20.3 days. Around half of all workers do not take their full allotment of days off, which averages around 23 days. In effect, many Americans spend part of the year working for nothing, donating the equivalent of $561 on average to their firms.”
That’s pretty generous.
There is a case to be built for the importance of taking more vacation time, according to the Harvard Business Review. “Statistically, taking more vacation results in greater success at work as well as lower stress and more happiness at work and home.”
Food for thought as you consider New Year’s Resolutions.
Weekly Focus – Think About It
“When you are inspired by some great purpose, some extraordinary project, all your thoughts break their bonds: your mind transcends limitations, your consciousness expands in every direction, and you find yourself in a new, great, and wonderful world. Dormant forces, faculties, and talents become alive, and you discover yourself to be a greater person by far than you ever dreamed yourself to be.”
--Patanjali, Hindu author and philosopher
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https://www.ft.com/content/e563446e-ed0e-11e8-89c8-d36339d835c0 (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/11-26-18_FinancialTimes-US-China_Trade_War_Risks_Heavy_Toll_on_Growth-Footnote_2.pdf)
https://www.ft.com/content/216b5ed2-ef68-11e8-89c8-d36339d835c0 (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/11-26-18_FinancialTimes-Climate_Change_Could_Cost_US_Billions-Footnote_5.pdf)
https://www.economist.com/business/2018/11/24/americans-need-to-take-a-break (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/11-26-18_TheEconomist-Americans_Need_to_Take_a_Break-Footnote_7.pdf)
* These views are those of Carson Group Coaching, and not the presenting Representative or the Representative’s Broker/Dealer, and should not be construed as investment advice.
* This newsletter was prepared by Carson Group Coaching. Carson Group Coaching is not affiliated with the named broker/dealer.
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Keep your eyes on the horizon.
Motion sickness happens when your body receives conflicting signals from your eyes, ears, and other body parts. One way to manage the anxiety and queasiness that accompany the condition is by keeping your eyes on the horizon.
The motion of the stock markets has been causing some investors to experience similar symptoms. Surprisingly, the remedy is the same: Keep your eyes on the horizon – your financial planning horizon.
A planning horizon is the length of time over which an investor would like to achieve his or her financial goals. For instance, perhaps you want to pay off student loans by age 30, fund a child’s college tuition when they reach age 18, or retire at age 60.
When stock markets are volatile, an investor may receive conflicting signals from various sources, which may induce anxiety and queasiness. When you start to worry about the effects of market volatility on your portfolio, remember stock markets have trended higher, historically, even after significant downturns.
For instance, in 2008, during the financial crisis, the Dow Jones Industrial Average lost about 33 percent. It finished the year at 8,776. The drop sparked tremendous anxiety among investors who wondered whether their portfolios would ever recover.
Last week, the Dow closed at 25,413.
While stock markets have trended higher historically, there is no guarantee they always will. That’s why asset allocation and diversification are so important. A carefully selected mix of assets and investments can reduce the impact of any single asset class or investment on a portfolio’s performance. Keep in mind, of course, past performance is no guarantee of future results.
Last week, stock markets finished lower. MarketWatch reported U.S. stocks moved higher on Friday after President Trump indicated he might not pursue tariffs against China.
How are you feeling about financial markets?
Some votes are still being counted but investors appear to be happy with the outcome of mid-term elections. Major U.S. stock indices in the United States moved higher last week, and the American Association of Individual Investors (AAII) Sentiment Survey reported:
“Optimism among individual investors about the short-term direction of stock prices is above average for just the second time in nine weeks…Bullish sentiment, expectations that stock prices will rise over the next six months, rose 3.4 percentage points to 41.3 percent. This is a five-week high. The historical average is 38.5 percent.”
Before you get too excited about the rise in optimism, you should know pessimism also remains at historically high levels. According to AAII:
“Bearish sentiment, expectations that stock prices will fall over the next six months, fell 3.3 percentage points to 31.2 percent. The drop was not steep enough to prevent pessimism from remaining above its historical average of 30.5 percent for the eighth time in nine weeks.”
So, from a historic perspective, investors are both more bullish and more bearish than average. If Sir John Templeton was correct, the mixed emotions of investors could be good news for stock markets. Templeton reportedly said, “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.”
While changes in sentiment are interesting market measurements, they shouldn’t be the only factor that influences investment decision-making. The most important gauge of an individual’s financial success is his or her progress toward achieving personal life goals – and goals change over time.
Stocks recovered some ground last week and then stumbled over unemployment.
Major U.S. stock indices faltered Friday after the Bureau of Labor Statistics (BLS) reported on a popular ‘lagging’ economic indicator – unemployment. (Remember, lagging indicators describe what has happened in the past.) The BLS reported:1, 2, 3
“The unemployment rate remained at 3.7 percent in October, and the number of unemployed persons was little changed at 6.1 million. Over the year, the unemployment rate and the number of unemployed persons declined by 0.4 percentage point and 449,000, respectively.”
Reuters reported the number of Americans receiving unemployment benefits was at the lowest level in 45 years. That’s good news, but it’s old news. Again, unemployment is a lagging indicator and the report reflected what happened in October.4
The stock market, on the other hand, is a ‘leading’ economic indicator. It moves in response to investors’ expectations for the future – and recent gyrations suggest investors aren’t certain what to think. Barron’s Daren Fonda wrote, “The market’s 6.9 percent slide in October and the stock averages’ wild swings are testing everyone’s mettle.”2, 5
Economists are uncertain about what’s to come, too. Kevin L. Kliesen, in an Economic Synopses on the St. Louis Federal Reserve website, wrote, “Historically, a trough in the unemployment rate also tends to be a reliable predictor of a business recession…an economic analyst is nonetheless never sure that a trough has occurred. Indeed, the unemployment rate can move up and down over the expansion.”6
There is one thing many analysts think is likely. They expect the Federal Reserve to increase the Fed funds rate so the U.S. economy does not overheat. Paul Kiernan at The Wall Street Journal reported, “Robust hiring and wage gains last month leave the Federal Reserve all but certain to raise interest rates in December and on course to continue gradually lifting them next year.”7
Higher interest rates are expected to keep inflation in check by slowing economic growth.8
Despite Friday’s stumble, major U.S. stock indices finished the week higher.1