When it comes to money and investing, we’re not always as rational as we think we are – which is why there’s a whole field of study that explains our sometimes-strange behavior. Where do you, as an investor, fit in? Insight into the theory and findings of behavioral finance may help you answer this question.
One bias we harbor is sometimes described as “availability bias”. In this case, investors overstate the probabilities of recently observed or experienced events because the memory is fresh. Recent news is capable of clouding investors’ perspective even if its effects are minor or inconsequential.
FOR THE TIME BEING, WE RECOMMEND YOU KEEP AN EYE ON THE “HEAT MAP” (BELOW) WHICH SERVES AS AN EXCELLENT TOOL TO KEEP THINGS IN PERSPECTIVE OVER A LONGER PERIOD.
Most of the time, the U.S. stock market looks to 3 factors (call them the “pillars” which support the stock market) to support its upward trend – let’s grade each of the pillars.
CONSUMER SPENDING: This grade equals B+ (very favorable). Gasoline prices continue to drop. Imports have become cheaper due to the strength of the U.S. dollar. Low interest rates will help real estate, an important component for the consumers’ wealth effect. These trends put more money in the pockets of Americans coming into the all-important Holiday shopping season.
THE FED AND ITS POLICIES: We continue to grade this factor an A+ (extremely favorable) because the FED cannot do much more than it is doing to support the stock market and asset prices. The FED kept interest rates unchanged last week. The next big milestone is Fed meeting will occur Oct 27-28.
BUSINESS PROFITABILITY: This factor’s grade is a C (average).
OTHER CONCERNS: The “Heat Map” is indicating the U.S. stock market is in OK shape ASSUMING no international crisis. On a scale of 1 to 10 with 10 being the highest level of crisis, we rate these international risks collectively as a 6 due to continued signs of a slowdown in China. These risks deserve our ongoing attention.
Last week, Bonds, U.S. Stocks and Foreign Stocks all decreased. During the last 12 months, BONDS outperformed STOCKS.
Returns through 9-25-2015
1-week
Y-T-D
1-Year
3-Years
5-Years
10-Years
Bonds- BarCap Aggregate Index
-.2
.8
2.5
1.6
3.1
4.6
US Stocks-Standard & Poor’s 500
-1.3
-4.8
-.3
12.6
13.3
6.9
Foreign Stocks- MS EAFE Developed Countries
-3.0
-4.5
-8.9
5.0
4.1
3.3
Source: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized excluding dividends.
The show airs on WDIY Wednesday evenings, from 6-7 p.m. The show is hosted by Valley National’s Laurie Siebert CPA, CFP®, AEP®. This week, Laurie and guest host Daniel Banks of Silver Crest Insurance will discuss: “Medicare Annual Enrollment Period – what you need to know?”
Laurie and Daniel will take your calls on these topics and other inquiries this week. This show will be broadcast at the regular time. Questions may be submitted early through www.yourfinancialchoices.com by clicking Contact Laurie. WDIY is broadcast on FM 88.1 for reception in most of the Lehigh Valley; and, it is broadcast on FM 93.9 in the Easton and Phillipsburg area; and, it is broadcast on FM 93.7 in the Fogelsville and Macungie area – or listen to it online from anywhere on the internet. For more information, including how to listen to the show online, check the show’s website www.yourfinancialchoices.com and visit www.wdiy.org.
Equities sank last week, as markets continue to be roiled by the Federal Reserve’s Sept. 17 decision to hold interest rates at zero, and the ensuing uncertainty about the timing of a rate rise.
The broad market fell 1.4%, with the selloff intensifying Friday, when biotech stocks tumbled sharply in the afternoon. There was no particular catalyst beyond the deterioration in sentiment and a desire by some investors to take down exposure to riskier assets, like small-caps and biotechs, traders say.
Affirmation of a hike this year by Fed Chair Janet Yellen—in a speech after the market closed Thursday—gave stocks a brief boost Friday, but the impetus petered out. Additionally, a strong earnings report from Nike (ticker: NKE), a component of the Dow Jones Industrial Average, pushed the Dow to a gain on Friday.
Last week, the Dow lost 0.4%, or 70 points, to 16,314.67, and the Standard & Poor’s 500 index fell 27, to 1931.34. The Nasdaq Composite dropped 3% to 4686.50.
The market is suffering from the aftershocks of the Fed’s decision, says David Lefkowitz, senior equity strategist at UBS Wealth Management Americas: “It’s still trying to digest what the Fed is trying to communicate.”
In her remarks, the Fed chair suggested overseas developments wouldn’t be important enough to have an impact on the decision to hike later this year, seemingly backpedaling from the Fed’s previous statement.
From week to week, the Fed’s message seems to be different, creating uncertainty, adds Rick Seto, a managing director at Flaherty & Crumrine. Investors need greater clarity to make fundamental investment decisions. “The only people making money now are day traders,” he adds.
“The U.S. is not a zero fed-funds-rate economy now,” says David Seaburg, head of sales trading at Cowen. Friday, the Commerce Department revised its estimate of second-quarter gross-domestic-product growth to 3.9% from 3.7%. The fed funds rate—the overnight lending rate banks charge one another for funds maintained at the Fed—is currently 0% to 0.25%.
“Rate liftoff would give confidence in the American economy. The Fed needs to move in December,” Seaburg says.
