How Are You Feeling About Financial Markets?

How Are You Feeling About Financial Markets?

Heritage Insider Weekly November 12, 2018

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.
Let’s take a look at some performance figures…

Data as of 11/9/18
1-Week
Y-T-D
1-Year
3-Year
5-Year
10-Year
Standard & Poor’s 500 (Domestic Stocks)
2.1%
4.0%
7.6%
10.2%
9.4%
11.7%
Dow Jones Global ex-U.S.
-0.3
-11.7
-9.4
3.2
0.3
4.7
10-year Treasury Note (Yield Only)
3.2
NA
2.3
2.3
2.8
3.8
Gold (per ounce)
-1.7
-6.6
-5.7
3.6
-1.1
4.9
Bloomberg Commodity Index
-1.2
-6.0
-5.2
-0.5
-7.7
-4.4
DJ Equity All REIT Total Return Index
3.5
2.3
1.2
8.2
9.6
13.9
S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.
 
is A Zeal of zebras a better investment than a blessing of unicorns? 
Collective nouns are the names we use to describe collections or significant numbers of people, animals, and other things. The Oxford English Dictionary offered a few examples:
 
  • A gaggle of geese
  • A crash of rhinoceros
  • A glaring of cats
  • A stack of librarians
  • A groove of DJs
 
In recent years, some investors have shown great interest in blessings of unicorns. ‘Unicorns’ are private, start-up companies that have grown at an accelerated pace and are valued at $1 billion.
 
In early 2018, estimates suggested there were approximately 135 unicorns in the United States. Will Gornall and Ilya A. Strebulaev took a closer look and found some unicorns were just gussied-up horses, though, according to research published in the Journal of Financial Economics.
 
The pair developed a financial model for valuing unicorn companies and reported, “After adjusting for these valuation-inflating terms, almost one-half (65 out of 135) of unicorns lose their unicorn status.
 
Clearly, unicorn companies must be thoroughly researched. There is another opportunity Yifat Oron suggested deserves more attention from investors: zebra companies.  Oron’s article in Entrepreneur explained:
What is a unicorn company?
 
“Zebra companies are characterized by doing real business, not aiming to disrupt current markets, achieving profitability and demonstrating it for a while, and helping to solve a societal problem…zebra companies…are for-profit and for a cause. We think of these businesses as having a ‘double bottom line’ – they’re focused on alleviating social, environmental, or medical challenges while also tending to their own profitability.”
 
Including both types of companies in a portfolio seems like a reasonable approach.
 
If you were to choose a collective noun to describe investors, what would it be? An exuberance? A balance? An influence?
 
Weekly Focus – Think About It
 
“In his learnings under his brother Mahmoud, he had discovered that long human words rarely changed their meanings, but short words were slippery, changing without a pattern…Short human words were like trying to lift water with a knife.”
–Robert Heinlein, American science fiction writer
 
Have a great week.

The Economy Will Survive this Presidential Election

The Economy Will Survive This Presidential Election

 

Americans see a threat in the election that doesn’t exist — except in the headlines

The Election. Many Americans are concerned about how the presidential election will turn out. But nowadays people’s gloom about the post-election economy and the financial markets is being unduly influenced by headlines.

Six of every 10 Americans say the outcome of the presidential election represents the biggest threat to the U.S. economy over the next six months. This according to a recent BankRate.com survey.

Moreover, this was the majority view regardless of major political party affiliation — Republican, Democrat, or Independent. It was shared by most of every demographic group studied. No matter the age, gender, income level, ethnicity, or level of education. Indeed, the number of people fixated on the election as the economy’s biggest threat was five times greater than the second-biggest concern, terrorism.

Truth is, people are sorely misjudging the short-term threat that any presidential election presents.

 

Markets and Economies

Markets and economies do not implode around elections. Yes, the presidential election brings plenty of uncertainty to the market. But whatever troubles you see looming won’t be coming to roost in the next six months. In all likelihood, it will take six months just to have an idea of the economic impact the election could have in the long term.

Do yourself a favor: resist the temptation to get so caught up in the round-the-clock news cycle that it blurs rational thought.

You hear about the election 24-7 but yet the unanswered questions about what’s going to change. The president can’t change everything overnight. Once that realization comes to light, the uncertainty and anxiety people feel today will greatly dissipate.

It’s not that people should adopt “Don’t Worry, Be Happy” as their theme song, it’s just that fears about the election blowing up the economy in the short run are misplaced. Acting on those fears as an investor would be a significant mistake.

For as much credit or blame as we want to give any president for the economic conditions during their tenure, there’s only so much the commander-in-chief actually controls.

The Role of the Federal Reserve

For example, plenty of people believe that the market and economy will suffer when the Federal Reserve raises interest rates. This is now widely expected to happen shortly after the election, regardless of which candidate wins.

If a rate hike makes the stock market stall, it’s not really related to the new occupant at 1600 Pennsylvania Avenue. Neither is either candidate likely to be able to talk the Fed governors out of a hike (if they even would want to).

Another relevant, recent example involves Brexit. Brexit was the vote in Great Britain to leave the European Union. While the move itself has direct links to the British economy, it upset the market only for a matter of hours before it was shrugged off. We will see if the real economic consequences will be settled in the months or even years to come.

But the real reason for investors to avoid acting on nerves is that the timing is off. “There is some validity to the idea that there is a threat to the economy, but it is more in the post-election year. This essentially means the time frame that people are worried about is wrong.

In post-election years — regardless of which party wins — there is a sell-off after the inaugural ball. A lot of it has to do with the way whoever comes into office is going to try to push through their most difficult and unsavory policy initiatives. I have to admit that I feel the same kind of nervousness as everyone else. But, if the election is going to lead to trouble for the economy, it’s going to be further out.

The President’s Effect

No president can put the brakes on the market, nor wants to. Whoever wins in November inherits a market that has a long bull rally and the potential to keep going. If only because Wall Street tends to climb a proverbial wall of worry.

Moreover, no winning candidate in this year’s election is going to trigger any sort of market euphoria. The market’s long-term trends typically are unaffected by which party holds the White House. Post-election years tend to be a bit worse when a Republican has been elected. That trend is seen reversing in mid term years.

You can understand why everyone is worried about it, but you have to hope people act rationally. All of the talk and all of the news  don’t have people acting on anything right now. That would be how the election becomes a real problem, and not just a worry.

 

Investment & Wealth Management

Stock Markets and Election Years

Can Presidential Election Years Forecast Stock Market Movement?

 

Stock Markets and election years go together like oil and water. Super Bowl winners, Triple Crown Winners, and Sports Illustrated covers. All of these have been used to develop theories about the direction in which stock markets may be headed. Presidential elections and terms have also inspired a significant number of theories.

 

Rational and not-so-rational decision making

Historically, economists believed people’s financial decisions were grounded in rational thought and a single-minded pursuit of their best interests. Theories about the economy were built on the notion that people unconsciously understand probabilities and make rational decisions.

 

Psychologists and sociologists however weren’t convinced people were as rational as economists believed. Sociologists have found that having limited time and brainpower meant many people did not make well-informed decisions. Instead, they developed rules of thumb that helped simplify their decision-making.

 

Election-related rules of thumb

When it comes to investing, there are an abundance of rules of thumb. Since it’s an election year, you’ve probably encountered at least one article discussing the ways in which elections may affect stock markets and the economy.

Let’s take a look at some of the stock markets strangest theories.

Presidential Election Cycle Theory

Suggests stock markets tend to be weaker during the first two years of a presidential term and stronger during the last two. This is because before an election, politicians tend to promote a pro-business agenda. This is done so the economy is strong, the stock market is moving higher, and voters are feeling optimistic. Analysts who have tirelessly crunched the data have found that U.S. stock markets tend to hit bottom during the second year of a president’s term. Although that is not always the case. There have been some notable exceptions in recent years during the final years of the Clinton and G.W. Bush presidencies. While history does suggest that the performance in years three and four of a presidential cycle are indeed stronger, many pundits argue that the true driver of performance is the overall macro economy.

 

Party Affiliation Theory

Suggests that stock markets perform better following the election of a Democratic candidate. In 2003, research published in the Journal of Finance indicated large company stocks did better under Democratic administrations. Later research from the Federal Reserve showed the difference in large company stock returns under Democratic and Republican administrations was negligible after you controlled for risk.

Political Party Convention Theory

Puts forth the idea stock market performance during political conventions may reflect investors’ expectations. This theory is very difficult to prove accurate without factoring in other data that can move the markets. The state of the economy and the stance of the Federal Reserve’s monetary policy is also worth considering.

 

Presidential Approval Rating Theory

Is sometimes misunderstood. The theory states that as the stock market increases, the president’s popularity ratings tend to improve. Others have interpreted this theory to say that stocks rise and fall with a president’s approval rating, and not the other way around.

 

Presidential Election Anxiety Theory

Believes that fluctuation of the S&P 500 index increases as the probable winner of the presidential election becomes less uncertain. In other words, investors’ anxiety increases, causing markets to become more volatile. When they begin to wonder how the presumptive winner’s policies may affect the economy, we see that trickle into the markets.

 

Post-Election Stock Market Performance Theory

Suggests stock market performance following a presidential election correlates to gross domestic product (GDP) growth. This provides little data for investors since economic growth does not always translate into strong stock returns. In part, this is because economic growth may be the result of new businesses forming rather than existing ones growing.

Clearly, a lot of thought has been given to the influence of presidential cycles on the stock market. Some theories that inform rules of thumb are clearly better researched than others. Regardless, none appear to provide actionable information that has the potential to benefit long-term investors. In fact, it is our opinion investors would be better served by selecting an investment strategy that meets their long-term financial goals. Chasing returns based on political outcomes is not a game worth playing.

http://www.nydailynews.com/life-style/presidential-election-years-forecast-stock-market-movement-article-1.2638350