Tag Archives: stock market

Not “If;” “When”

You’re starting to hear people talk about “if” there’s a bear market during the Trump Administration, when the real truth is they should be talking about “when.”  And it won’t necessarily be triggered by a poorly-worded tweet, a global-trade-stopping new tariff regime or tax and entitlement reform.  Every presidential cycle has its share of market drawdowns, seemingly regardless of presidential policies.

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2016 Year End Report

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You know you’re deep into a longstanding bull market when you see things like average pedestrians keeping one eye on the market tickers outside of brokerage houses to see when the Dow Jones Industrial Average has finally breached the 20,000 mark.  Who would have imagined record market highs at this point last year, when the indices ended the year in negative territory?  Or when new year 2016 got off to such a rocky start, tumbling 10% in the first two weeks—the worst start to a year since 1930?

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Higher Rates: The Tempest in the Teapot

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Anybody who was surprised that the Federal Reserve Board decided to raise its benchmark interest rate this week probably wasn’t paying attention.  The U.S. economy is humming along, the stock market is booming and the unemployment rate has fallen faster than anybody expected.  The incoming administration has promised lower taxes and a stimulative $550 billion infrastructure investment.  The question on the minds of most observers is: what were they waiting for?

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A Market High—But Is It a Market Top?

 

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In case you hadn’t noticed, the S&P 500 index reached record territory yesterday, and the Nasdaq briefly crossed over the 5,000 level before settling back with a more modest gain.  At 2,137.6, the S&P 500 finished above the previous high of 2,130.82, set on May 21, 2015.

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Irrelevant Ups and Downs 

downloadThe U.S. stock market gained 2.05% recently, the biggest one-day gain for the S&P 500 index since early September.  Of course, this comes after the same index was down 1.1% (Wednesday) and 1.4% (Thursday).

What’s going on?

Of course, no person alive knows exactly what drives the psychology of millions of investors, despite the confident analyses you read in the papers and see on cable financial news channels.   Yes, on Wednesday and Thursday, some investors may have been disappointed that the European Central Bank provided only the stimulus to the European economies that it had promised—when everybody seemed to be expecting more.  Analysts said that the rally on Friday was due to the encouraging jobs report issued by the Labor Department, which told us that 211,000 net jobs had been created in November, rather than the 200,000 that had been forecast.

But does any of this make sense?  Stimulating the European economy means more potential buyers for American goods and potentially more euros to buy them with.  Shouldn’t that cause American stocks to be MORE valuable than they were before?  The jobs data, meanwhile, means there will be more competition for workers, which often leads to higher wages and correspondingly diminished corporate profits.  Above and beyond that, the reassuring employment picture means that the Federal Reserve Board is now nearly certain to allow short-term interest rates to rise on December 16.  Shouldn’t that cause stocks to be less valuable?

The truth is that none of these events causes stocks to change their real intrinsic value in the least, and you should be skeptical every time you hear journalists draw links between headlines and stock movements.  The magnitude of the shifts should be a clue; how can a company—let alone a basket of 500 companies—be worth 2% more one day than it was yesterday?  Did they all win the lottery?  Did they all get caught making significant accounting errors that understated their earnings?  How much more likely is it that investors have to make guesses—sometimes wild ones—as to the value of companies, getting it more or less right over time, but constantly over- and under-shooting in their daily guesses?  If you follow this line of reasoning, it is helpful to note that the value of U.S. stocks, despite all this back and forth action, was essentially unmoved for the week, and pretty much unmoved for the year.

The markets may go back down on Monday, or they might soar.  This year may or may not end with a net gain.  None of that matters to your portfolio, which is slowly increasing in value to the extent that the companies you own are building value in ways that have nothing to do with the headlines.  If the world comes to an end, that will have an impact on the markets that we can measure with some precision.  Short of that, short-term market movements, and particularly the explanations that writers and pundits attach to them, are entertainment—and not especially entertaining at that.

Our recommendation?  Go watch a movie instead.

About the Author: Bob Veres has been a commentator, author and consultant in the financial services industry for more than 20 years.  Over his 20-year career in the financial services world, Mr. Veres has worked as editor of Financial Planning magazine; as a contributing editor to the Journal of Financial Planning; as a columnist and editor-at-large of Dow Jones Investment Advisor magazine; and as editor of Morningstar’s advisor web site: MorningstarAdvisor.com.

Mr. Veres has been named one of the most influential people in the financial planning profession by Investment Advisor magazine and Financial Planning magazine, was granted the NAPFA Special Achievement Award by the National Association of Personal Financial Advisors, and most recently the Heart of Financial Planning Distinguished Service Award from the Denver-based Financial Planning Association. 

Sources:

Indexes Erase Thursday Loss; Ulta, Alaska Lead IBD 50

Stocks rallied across much of the session Friday, as a strong November jobs report overpowered a sharp pullback in oil prices and many energy stocks. The Nasdaq and the S&P 500 both popped 2.1%. Preliminary data showed those moves carrying in weak trade.

AP News – ECB stimulus falls short of hype, causing market plunge

FRANKFURT, Germany (AP) – The European Central Bank on Thursday ramped up efforts to stimulate the sluggish eurozone economy, but the measures fell far short of what investors had expected and stocks took a painful tumble.

Jobless rate stays at 5% in November, clearing way for Fed

Bloomberg 12/4/2015 Victoria Stilwell Employers added more jobs than forecast in November, underscoring Federal Reserve Chair Janet Yellen’s confidence that the U.S. economy is strong enough to withstand higher borrowing costs. The 211,000 increase in payrolls followed a 298,000 gain in October that was bigger than previously estimated, a Labor Department report showed Friday.

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How to Read the Panicky Market

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Some of the most entertaining times to be a long-term investor are those periods when short-term investors are looking over their shoulders for an excuse to sell.  They’re convinced that the market is going to go down before they can get out, and so they jump on any bad news that comes across their Bloomberg screen.

And, of course, Friday was a marvelous time to see this in action.  With all the economic drama playing out in the world, there were plenty of opportunities to panic.  The Greek Prime Minister has resigned!  Sell!  China devalued its currency a few days ago by 2%!  Head for the hills!  Chinese stocks are tanking yet again!  Get out of American stocks while you can!  The Fed might raise short-term interest rates from zero to very nearly zero!  It’s the end of the world!

Of course, a sober analyst might wonder whether a change in governance in a country whose GDP is a little less than half the market capitalization of Apple Computer Corp. is really going to move the needle on the value of U.S. stocks—especially now that Greece seems to have gotten the bailout it needs to stay in the Eurozone.  Chinese speculators are surely feeling pain as the Shanghai Composite Index goes into free-fall, but most U.S. investors are prohibited from investing in this tanking market.  If the market value of PetroChina, China Petroleum & Chemical and China Merchants Bank are less valuable today than they were a week or a month ago, does that mean that one should abandon U.S. stocks?  Does it mean that American blue chips are somehow less valuable?

What makes this dynamic entertaining—and sometimes scary—is the enhanced volatility around very little actual movement.  You see the market jump higher and faster, lower and faster, but generally returning to the starting point as people realize a day or two later that the panic was an overreaction, and so was the false exuberance of realizing that the world isn’t going to come to an end just because we’re paying less at the gas pump than we were last year.  Despite all the jitters investors have experienced over the past nine months, despite the drop on Friday, the S&P 500 is only down about 4% for the year, and was in positive territory as recently as August 19.

If you want a broader, more rational picture of our current economic situation, read this analysis by a long-term trader who now refers to himself as a “reformed broker” in Fortune magazine: http://fortune.com/2015/08/20/american-economy-worries/  He talks about the “terrible news” that it hasn’t been this cheap to fill your gas tank in over a decade, and business that rely on energy to manufacture their goods are now forced to figure out what to do with the excess capital they’re not spending on fuel.

Oh, but gets worse.  American corporations are struggling under the burden of enormous piles of cash they don’t have a use for.  They may have no choice but to return some of that money back to shareholders in the form of record dividends.  Of course, you read about the risk to corporate profit margins.  It seems that unemployment is so low that wages for American workers are going up, and that could raise consumption and demand for products and services.

Meanwhile, contributions to 401(k) and other retirement plans are up dramatically, housing starts and the construction sector are booming, America’s biggest global economic competitor (China) is reeling, and the Federal Reserve might decide that it no longer has to keep short-term interest rates low because the emergency is over and the economy has recovered.  The author apologizes (tongue in cheek) for bringing us all this terrible news, but hey, we can always sell our stocks and get out until conditions improve.

Right?

Nobody would be surprised if the U.S. stock market suffered a 10% or even a 20% short-term decline, this year, or perhaps next year.  But what can you do with that information?  Nobody would have been surprised if this had happened at any point in the long bull market that doubled your stock investments, and nobody can predict whether Friday was a signal that the market will take a pause, or if Monday will bring us another wave of short-term euphoria measured mostly in sighs of relief.  And if you don’t know when to sell in this jittery market, how will you know when to buy back?

These short-term swings provide entertainment, but very little useful information for a mature investor.  If you aren’t entertained by watching people sell in a panic and then panic-buy their way back in when they realize things aren’t as dire as the headlines made them out to be, then you should probably watch a movie instead.

About the Author: Bob Veres has been a commentator, author and consultant in the financial services industry for more than 20 years.  Over his 20-year career in the financial services world, Mr. Veres has worked as editor of Financial Planning magazine; as a contributing editor to the Journal of Financial Planning; as a columnist and editor-at-large of Dow Jones Investment Advisor magazine; and as editor of Morningstar’s advisor web site: MorningstarAdvisor.com.

Mr. Veres has been named one of the most influential people in the financial planning profession by Investment Advisor magazine and Financial Planning magazine, was granted the NAPFA Special Achievement Award by the National Association of Personal Financial Advisors, and most recently the Heart of Financial Planning Distinguished Service Award from the Denver-based Financial Planning Association. 

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Devaluation Panic

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Investors across the globe were sent into a panic recently when the Chinese Central Bank devaluated the nation’s currency, the yuan. The U.S. market lost more than 1% of its total value, oil prices fell and global shares plummeted on news that China decided to make its currency two percent cheaper than it was before.

You actually read that right. Headlines raised the prospect of a global currency war, and there were hints in the press that nations might resort to trade barriers, which would slow down global trade in all directions. If you’re following the story, you probably didn’t read that the Chinese yuan, even after the devaluation, was actually more valuable against global currencies than it was a year ago in trade-weighted terms. Nor that China actually intervened in the global markets to make sure the devaluation didn’t go any further in open market trading.

The background for the devaluation is China’s slowing economic growth and its recent stock market volatility. The country is on track for a 7% growth rate this year—three times the U.S. rate, but sluggish by recent Chinese standards, and quite possibly unacceptable to the country’s leaders. You probably already know that the Chinese stock market climbed to impossibly high levels earlier this year and then fell just as far in a matter of weeks. As you can see from the accompanying chart, the Chinese government marched into the chaos with a heavy hand, outlawing short sales, banishing hedge funds to the sidelines, suspending margin calls and even buying stocks directly in an effort to put a floor on prices. The theory was that the devaluation was part of this intervention, since it would make exports cheaper and boost sales, raising profit margins of those companies whose stocks were recently free-falling.

 

A more nuanced view of the situation is that the recent depreciation is a small step to keep the yuan’s value in line with those of its peers, not a dramatic shift in exchange-rate policy or a part of the Great Shanghai Market Panic. Indeed, if you look at the accompanying chart, you can see that China’s percentage of world exports has been steadily growing for this entire century, without any need to add the stimulus of a weaker currency.

A scarier scenario, which nobody seems to be talking about, is that China’s endgame goal is to make the yuan the reserve currency for global trade—replacing the U.S. dollar. China is already lobbying to join the list of reserve currencies recognized by the International Monetary Fund. The new exchange rate is more in line with basic economic fundamentals, strengthening the argument that the yuan is not under the total control of an interventionist central government. But so long as China imposes strict limits on the amount of its currency that can flow into and out of the country, and attempting to manipulate its own stock market, this will be a difficult argument to make.

Sources:

http://www.economist.com/news/finance-and-economics/21661018-cheaper-yuan-and-americas-looming-rate-rise-rattle-world-economy-yuan-thing?fsrc=scn/tw/te/pe/ed/yuanthingafteranother

http://www.bloombergview.com/quicktake/chinas-managed-markets

http://finance.yahoo.com/news/global-markets-china-devaluation-hits-165238168.html

http://www.bloomberg.com/news/articles/2015-08-13/china-citigroup-agree-there-s-no-need-for-big-yuan-devaluation

About the Author: Bob Veres has been a commentator, author and consultant in the financial services industry for more than 20 years.  Over his 20-year career in the financial services world, Mr. Veres has worked as editor of Financial Planning magazine; as a contributing editor to the Journal of Financial Planning; as a columnist and editor-at-large of Dow Jones Investment Advisor magazine; and as editor of Morningstar’s advisor web site: MorningstarAdvisor.com.

Mr. Veres has been named one of the most influential people in the financial planning profession by Investment Advisor magazine and Financial Planning magazine, was granted the NAPFA Special Achievement Award by the National Association of Personal Financial Advisors, and most recently the Heart of Financial Planning Distinguished Service Award from the Denver-based Financial Planning Association. 

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