Monday, November 12, 2018

How Are You Feeling About the Financial Markets?



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.

Monday, November 5, 2018

Markets Tend to Perform Well, Regardless of Midterm Elections





As Americans prepare to go to the polls in what is likely to be one of the heaviest turnouts ever for a midterm election, mutual fund company Oppenheimer released a research note regarding midterm elections and their effects on the market.  They note that midterm elections rarely favor the political party of the sitting President.  Their research notes the party of the President almost always loses House and Senate seats in the first midterm election, even if the President is relatively popular.  Many investors fear that if Republicans lose control of the House it would derail President Trump’s pro-business agenda and bring an end to the current historic bull market.  However, the Oppenheimer report showed that of the 15 times that the House changed the party in control at midterm elections, 12 (or 80%) of the following years were positive, and that overall 78% of the years following midterm elections were positive.

 

Here’s an Unexpected Retirement Saving Trick



If you’re concerned your adult children are not saving enough for retirement, send them a photo of themselves that’s altered so they appear to be older, perhaps age 60 or 70. (You can do this for yourself, too.)

One reason Americans don’t begin saving early enough, or save as much as they should for retirement, is ‘present bias.’ When asked to choose between two possible rewards, research shows that people tend to choose the one that will be received sooner.

For instance, imagine you have chocolate and fruit salad. Which will you choose to eat today and which will you choose to eat next week? Researchers found that 83 percent of people chose chocolate today and fruit salad next week.

Try this one.

You can watch one movie today and another movie tomorrow. Your choices include ‘Anchorman,’ ‘Clear and Present Danger,’ ‘The Piano,’ and ‘Schindler’s List.’ What movie will you watch today? Which will you watch tomorrow?

Researchers found a higher percentage of participants chose to watch lighter films on the day they were asked and more intellectually taxing films later.

When presented with the choice to vacation today or save for retirement, it’s little surprise many people choose the former. The rewards associated with retirement are often far into the future. As a result, until a person is within a decade or so of retirement, it’s easy to rationalize spending on other things and not setting aside money for the future.

There is a way to overcome present bias. When people ‘get to know’ their older selves by spending time looking at altered photos, they tend to save more for the future.

Mid-Term Market Uncertainty?



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:

“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.

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.”

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.”

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.”

Higher interest rates are expected to keep inflation in check by slowing economic growth.

Despite Friday’s stumble, major U.S. stock indices finished the week higher.