Much
like elementary school children trying to capture the attention of someone they
have a crush on, the American economy sent lots of mixed signals last week.
Conflicting
reports emerged about consumer sentiment during the week. The Conference Board,
a non-profit research organization, reported consumers remained somewhat
pessimistic about the direction of the economy. In contrast, the University of
Michigan’s consumer sentiment survey rose to a six-year high, according to ABC
News. The Index moved from 76.4 in April to 83.7 in May indicating consumers
are feeling more confident about the economy.
On
the employment front, more people filed first-time unemployment claims last
week than had filed the week before; however, claims remained well below the
levels experienced from mid-2008 to 2011. Additionally, data shows during the
past six months the average length of unemployment has dropped, the number of
hours worked has risen, and earnings have increased.
Messages
from the Federal Reserve were more consistent than economic data. Members of
the Philadelphia, Dallas, and San Francisco Federal Reserve Banks suggested it may
be time to begin slowing quantitative easing. Currently, the Federal Reserve’s
quantitative easing efforts have it buying about $85 billion of Treasuries and
mortgage-backed securities each month as it works to support the economy. According
to reports, quantitative easing could slow to a stop during 2013. Fed comments helped
push yields on 10-year Treasuries higher for the week.
Stock
markets remained undaunted by uncertain economic conditions and the prospect
that quantitative easing may end soon. The Dow Jones Industrial Average and the
Standard & Poor’s 500 Indices surged to new highs last week. Markets
rallied across the pond, as well, with some major European stock indices reaching
levels last seen five or more years ago, according to Reuters.
Heuristic is
just another name for a shortcut. When academics
look to psychology and economics to explain why people make financial decisions
the way they do, it’s called behavioral finance. This field of study describes
a phenomenon called “heuristics.” In general, a heuristic is a mental shortcut
that lets someone solve a problem using a rule of thumb. Heuristics may be handy,
but they may not take you exactly where you mean to go. For example, consider
some of the shortcuts investors have developed to predict the direction of the
stock market. You may have heard of the:
- Hemline Index: In 1926,
George Taylor suggested the length of women’s skirts was a useful market
predictor. Short hemlines were a positive predictor while long hemlines were
a negative predictor. Taylor later became Professor of Industrial
Relations at Wharton and became known as the father of American Arbitration.
- Super Bowl Indicator: Washington
and Lee professor George Kester introduced the idea the Super Bowl winner could
predict market performance. His theory was the market would move higher for
the year when an original National Football League team won the Super Bowl
and lower when an original American Football League team won.
- Presidential Election Cycle Theory: The idea
behind this gem is the stock market follows a predictable pattern during
each American President’s term. The year after an election produces the
weakest stock market performance while the third year offers the
strongest.
Anyone who remembers The Chicago Daily Tribune’s headline, Dewey Beats Truman, or CNN and Fox News’
headlines indicating the Supreme Court struck down the individual mandate,
knows predicting the future can be challenging. In general, it’s a good idea to
remember that the drivers of market performance tend to be economic factors,
investor sentiment, and company fundamentals.
Weekly Focus – Think
About It
“The
pursuit of truth and beauty is a sphere of activity in which we are permitted
to remain children all our lives.”
--Albert Einstein, theoretical physicist
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