EMOTION VS. DATA
Investors are suffering from Post Traumatic Stress Disorder (PTSD) following the market collapse in 2008. This was a key point and one that I strongly support. The fear of further losses trapped the average investor in selling low and then remaining on the sidelines as markets recovered strongly.
Technology is leading to major improvements in the economy. There is a revolution taking place in technological innovation. One example Brian provided is the incredible advancement in 3-D printing. In case you are not familiar with this new technology, companies are now able to scan an object and then print a three dimensional copy in a matter of hours or minutes. The materials used are polymers and even organic materials. Applications in manufacturing and medicine are growing every day. Other examples highlighted were cloud computing and smart phone technology.
Demographic trends are working in our favor. Of the major world countries, only the US and India will experience labor force growth by 2050. According the Census Bureau estimates, by 2050 India’s population will be 73.8% larger, the US will be 42.4% larger, Brazil will be 29.1% larger (but the rate of growth will be declining), while China’s labor force will decline by 9.8%, Western Europe will decline by 15.6%, Russia’s labor force will fall by 23.9%, and Japan will lose a staggering 43.5% of its population. These numbers have a major influence in supporting economic growth in each country.
Additionally, Brian addressed some of the key issues facing the economy today.
Stocks are higher because earnings have grown, not because of Fed stimulus. After-tax corporate profits are at all-time highs and this is what has propelled the stock market, not quantitative easing (QE).
QE has not held interest rates down. Brian reported that following each round of QE, interest rates were/are actually higher then when each round of QE began.
The more government spends, the higher unemployment rates are. Brian reviewed economic data going back to 1960 and suggested that if you overlay government spending as a percent of GDP (Gross Domestic Product) and compare that to the unemployment rate, there is a high correlation between these important statistics. His conclusion from the data is that the more the government spends within the total economy, unemployment increases, and the weaker the economy is.
This brings me back to the idea of emotion versus data. It is understandable to feel less than optimistic about what is happening today when you take in the daily headlines. Both traditional news and business news headlines are scary and imply the end of American prosperity as we know it. Both political parties have taken their rhetoric to new lows as they try to shape events to their advantage. While I do not dismiss the importance of political actions on the overall strength of the country, I do believe that investors who focus on the data and not the noise will have an advantage over those who let their heart rule their portfolios. And those who regularly read my Market Update and Commentary know, this is precisely what I have been talking about for the past several years. The technical research provided by Dorsey Wright & Associates has guided my guidance without regard to the headlines. I have been consistent in my views that US stocks should be favored, and international stocks—especially developed countries, are also strong. Bonds are next, and I have been avoiding most commodities lately. Please do not confuse this statement with the idea that it is always smoothing sailing, it is not. However, investors have been rewarded for investing in stocks over the past four years. Finally, I must say that risk management is more important than ever. Risk must be managed and be consistent with each individual’s situation.
It is critical to take emotion out of investment decisions and focus on the data.
Barring an unexpected compromise, it looks more and more likely that Congress will not reach a funding agreement for the Federal government beyond Monday at midnight. As it stands on Sunday afternoon, the Senate is not expected to vote on the latest spending bill passed by the House until sometime Monday afternoon. There is little evidence to show that the Senate will pass the bill and if they did, the President has promised to veto the bill. The political drama is high and markets do not appreciate this kind of last minute brinksmanship. I am anticipating that markets will react negatively if Washington cannot get its act together quickly.
It could be a challenging time in the markets this week.
My next Update and Commentary will be published in two weeks.
Paul L. Merritt, MBA, AIF®, CRPC®
NTrust Wealth Management
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Past performance is not indicative of future results and there is no assurance that any forecasts mentioned in this report will be obtained. Technical analysis is just one form of analysis. You may also want to consider quantitative and fundamental analysis before making any investment decisions.
Information in this update has been obtained from and is based upon sources that NTrust Wealth Management (NTWM) believes to be reliable; however, NTWM does not guarantee its accuracy. All opinions and estimates constitute NTWM's judgment as of the date the update was created and are subject to change without notice. This update is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security. Any decision to purchase securities must take into account existing public information on such security or any registered prospectus.
Emerging market investments involve higher risks than investments from developed countries and involve increased risks due to differences in accounting methods, foreign taxation, political instability, and currency fluctuation. The main risks of international investing are currency fluctuations, differences in accounting methods, foreign taxation, economic, political, or financial instability, and lack of timely or reliable information or unfavorable political or legal developments.
The commodities industries can be significantly affected by commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions. Past performance is no guarantee of future results. These investments may not be suitable for all investors, and there is no guarantee that any investment will be able to sell for a profit in the future. The Dow Jones UBS Commodities Index is composed of futures contracts on physical commodities. This index aims to provide a broadly diversified representation of commodity markets as an asset class. The index represents 19 commodities, which are weighted to account for economic significance and market liquidity. This index cannot be traded directly. The CBOE Volatility Index - more commonly referred to as "VIX" - is an up-to-the-minute market estimate of expected volatility that is calculated by using real-time S&P 500® Index (SPX) option bid/ask quotes. VIX uses nearby and second nearby options with at least 8 days left to expiration and then weights them to yield a constant, 30-day measure of the expected volatility of the S&P 500 Index.
TIPS are U.S. government securities designed to protect investors and the future value of their fixed-income investments from the adverse effects of inflation. Using the Consumer Price Index (CPI) as a guide, the value of the bond's principal is adjusted upward to keep pace with inflation. Increase in real interest rates can cause the price of inflation-protected debt securities to decrease. Interest payments on inflation-protected debt securities can be unpredictable.
The NYCE US Dollar Index is a measure that calculates the value of the US dollar through a basket of six currencies, the Euro, the Japanese Yen, the British Pound, the Canadian Dollar, the Swedish Krona, and the Swiss franc. The Euro is the predominant currency making up about 57% of the basket.
Currencies and futures generally are volatile and are not suitable for all investors. Investment in foreign exchange related products is subject to many factors that contribute to or increase volatility, such as national debt levels and trade deficits, changes in domestic and foreign interest rates, and investors’ expectations concerning interest rates, currency exchange rates and global or regional political, economic or financial events and situations.
Corporate bonds contain elements of both interest rate risk and credit risk. Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest, and if held to maturity, offer a fixed rate of return and fixed principal value. U.S. Treasury bills do not eliminate market risk. The purchase of bonds is subject to availability and market conditions. There is an inverse relationship between the price of bonds and the yield: when price goes up, yield goes down, and vice versa. Market risk is a consideration if sold or redeemed prior to maturity. Some bonds have call features that may affect income.
The bullish percent indicator (BPI) is a market breath indicator. The indicator is calculated by taking the total number of issues in an index or industry that are generating point and figure buy signals and dividing it by the total number of stocks in that group. The basic rule for using the bullish percent index is that when the BPI is above 70%, the market is overbought, and conversely when the indicator is below 30%, the market is oversold. The most popular BPI is the NYSE Bullish Percent Index, which is the tool of choice for famed point and figure analyst, Thomas Dorsey.