Curse of Chucky, Scream 2, Final Destination 5,
Freddy vs. Jason… You know Halloween is nearly upon us when you can’t surf
channels without exposing yourself to or relishing in a multitude of horror flick
sequels.
Propagating alarming situations seems to be all the
rage in Washington, too. Last week, a last-minute deal raised America’s debt
ceiling, saving us from a debt default and ending the government shutdown – until
next January. In the meantime, hoping to avoid a sequel just three months down
the road, the members of Congress agreed to put their heads together and produce
a 10-year budget plan by mid-December.
Like the hero or heroine of many a terror-filled
fantasy, stock markets generally have proved resilient despite facing
formidable challenges. Just last week, the Standard & Poor’s 500 Index hit
a new all-time high. According to Barron’s:
“Since the rally
began, in March 2009, there has been the flash crash, the Greek default drama,
the U.S. debt-ceiling debacle, the Standard & Poor's credit-rating
downgrade of the U.S., the sequester, and the great taper scare. Each of these,
we were told, could have ushered in a new bear market. Instead, the S&P 500
squirmed out of the traps and headed higher. And, for its latest trick, the
market had to avoid the double whammy of a government shutdown and a potential
default.”
The short-term resolution of budget and debt-ceiling
issues doesn’t mean markets have escaped the (choose one: axe-wielding maniac,
flesh-eating demon, Stay-Puffed Marshmallow Man) quite yet. Looking ahead,
they’ll have to confront the menace of potentially contentious budget
negotiations, the possible end of quantitative easing, and the phantasm of
resolute fiscal policy.
it may be the holy grail of investing… If you could accurately
predict how share prices would move, you’d probably be quite wealthy. If you could
offer insight that helps analysts and investors do a better job predicting such
things, you might win the Nobel Prize. That’s what happened last week when American
economists Eugene Fama and Lars Peter Hansen from the University of Chicago,
and Robert Shiller from Yale University, jointly received the Sveriges Riksbank
Prize in Economic Sciences in Memory of Alfred Nobel 2013. They were recognized
for their empirical analysis of asset prices.
Eugene Fama is best known
for his work on the efficient frontier which demonstrated stock prices are
extremely difficult to predict over the short term because new information is
incorporated into prices very quickly. His research not only influenced future
research, many credit the emergence of Index-linked investments to his
theories.
Robert Shiller, a student of
behavioral economics, challenged Fama’s efficient markets hypothesis with the
belief that markets are driven by human psychology which can and does create
large and sustained pricing errors. Shiller established when the ratio of
prices to dividends for stocks is high, prices tend to fall, and when the ratio
is low, prices tend to increase.
Lars Peter Hansen
developed
the Generalized Method of Moments, or GMM, which proposed a “straightforward
way to test the specification of the proposed model… Hansen’s work is
instrumental for testing the advanced versions of the propositions of Fama and
Shiller… If you want to do serious analysis of whether changing risk premia can
help rationalize observed asset price movements, Hansen’s contributions will
prove essential.”
According
to the Nobel committee, “There is no way to predict the price of stocks and
bonds over the next few days or weeks. But, it is quite possible to foresee the
broad course of these prices over longer periods, such as the next three to
five years… The Laureates have laid the foundation for the current
understanding of asset prices. It relies in part on fluctuations in risk and
risk attitudes, and in part on behavioral biases and market frictions.”
Weekly Focus – Think About It
“Many
men go fishing all of their lives without knowing that it is not fish they are
after.”
--Henry David Thoreau, American naturalist and author
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