Weekly Commentary September 28th, 2015

The Markets

Oh, the uncertainty!

Investors are keeping one eye on the Federal Reserve and the other on politicians trying to determine what may happen during the last quarter of the year.

The Fed, which is the central bank of the United States, is responsible for conducting monetary policy with an eye toward full employment and stable prices. If, as St. Louis Fed President James Bullard told Reuters, the economy is near full employment and inflation is sure to rise, then why didn’t the Fed raise rates in September?

Reuters reported voting members of the Federal Open Market Committee (FOMC) decided uncertainty in global markets had the potential to negatively affect domestic economic strength. Mr. Bullard believes the decision puts an October increase in doubt, too, according to Nasdaq.com. Mr. Bullard told reporters:

“For the committee, it's always hard to have made a big decision at one meeting and come back at the next meeting. The key question will be what kind of data did you get during the intervening period that changed your mind, and it's not that clear what data we will have in hand in October that we would be able to cite to support my position, relative to what we had at the September meeting. But it is possible.”

Regardless, Chairwoman Janet Yellen made it clear last week she expects to see a rate hike before year-end. That might have helped settle markets, except Speaker of the House John Boehner resigned soon after Yellen spoke. The Speaker’s resignation made a government shutdown this week less likely, according to Barron’s. However, fiscal policy issues haven’t been resolved. A meeting of the political minds this week would set the stage for a mid-December showdown and that’s data the Fed will have to consider if the December FOMC meeting occurs amidst a government shutdown and debt-ceiling crisis.

No one seemed to be happy with the state of affairs this week, and stock markets were awash in red ink.

what will they say? Soon, cars will be able to talk with one another. Vehicle-to-vehicle communication (V2V) has been tested in Ann Arbor, Michigan, a relatively mild and polite Midwestern town. Now, V2V is being rolled out in New York City, along with technology that allows traffic signals to contribute their two cents. Just imagine what a New York cab might have to say to another New York cab that changes lanes without signaling.

Okay, it’s nothing like that.

The idea is to reduce traffic accidents. If a dangerous situation arises an alert sounds. Gizmodo.com described it like this:

“These sensors send out signals over a specific wireless spectrum band and also receive them from other vehicles, creating a network of communicating sensors that ping when there’s danger… A secondary form of the technology, called Vehicle-to-Infrastructure, does the same thing – but with sensors embedded in stop signs, traffic lights, and other pieces of road infrastructure.”

Soon, people will be able to install V2V on smartphones so they can ping a warning to approaching cars as well.

While V2V seems like a good idea, pinging a warning to a distracted driver moments before a crash and expecting them to respond appropriately may be asking too much. The Economist suggests that automation – giving vehicles the ability to take over – cannot be far behind. “Depending on how you look at it, that’s a good thing – or terrifying… opening cars and buses up to computerized control also means opening them up to hackers… Imagine the fun they could have if thousands more vehicles could be controlled from computers or smartphones.”

Ultimately, intelligent transportation systems are expected to optimize the number of vehicles that can use roadways, helping save money that would otherwise be spent on expanding infrastructure to accommodate population growth.

 

Weekly Focus – Think About It

“Forgiveness is the fragrance that the violet sheds on the heel that has crushed it.

--Mark Twain, American writer

Weekly Commentary September 21st, 2015

The Markets

As Tom Petty often sang, “The waiting is the hardest part.”

Whether it’s waiting for college acceptance letters, medical test results, employment offers, or Federal Reserve monetary policy changes, waiting can produce a lot of anxiety. A 2012 research paper written by Associate Professor Kate Sweeney and Graduate Fellow Sara Andrews of the University of California, Riverside, explained it like this:

 “…Although waiting for inevitable events such as the arrival of a bus or one’s turn in line may be irritating…the combination of uncertainty about the outcome and waiting for that outcome can be particularly excruciating. In fact, waiting may be more anxiety provoking than actually facing the worst case scenario…”

That may go a ways toward explaining why markets didn’t rally when the Federal Reserve decided to leave rates unchanged last week. The Federal Open Market Committee’s statement indicated they were concerned, “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.”

On the face of it, continued low rates should have been good news for assets like stocks, according to Barron’s. However, any positive aspects to the news were mitigated by the fact everyone expects the Fed to begin raising rates soon. Investors are waiting for it to happen, and they’re uncertain how economies and markets will react when it does.

Heightened anxiety may be one of the reasons investors responded the way they did last week. On Friday, after mulling the Fed’s decision, national stock market indices around the world – in the United States, England, Germany, France, and Japan – fell significantly, according to Yahoo! Finance.

Now, we’re back to waiting.

If anxiety remains high, markets may be volatile.

It’s official. the IGs are in. Ignoble is a word rarely heard in everyday conversation. Merriam-Webster defines it as meaning, “of low birth or common origin, or characterized by baseness, lowness, or meanness.”

The 25^th First Annual Ig^® Nobel Prize Ceremony was held last week at Harvard University. Improbable.com reported, “Winners traveled to the ceremony, at their own expense, from around the world to receive their prizes from a group of genuine, genuinely bemused Nobel Laureates…” Winners completed research that made people laugh and then caused them to think.

·         The Management Prize went to Gennaro Bernile, Vineet Bhagwat, and P. Raghavendra Rau, authors of ‘What Doesn't Kill You Will Only Make You More Risk-Loving: Early-Life Disasters and CEO Behavior.’ They examined the link between CEOs’ early-life exposure to major fatal disasters and the financial and investment policies adopted by their companies. They found, “CEOs who experience fatal disasters without extremely negative consequences lead firms that behave more aggressively, whereas CEOs who witness the extreme downside of disasters behave more conservatively.”

·         The Economics Prize was awarded to the Bangkok Metropolitan Police, which implemented a new policy in an effort to reduce bribery. They pay a bonus to police officers who refuse to accept bribes, even though the officers are required by law not to accept bribes. (It’s a concept that may resonate with parents.)

·         The Literature Prize went to Mark Dingemanse, Francisco Torreira, and Nick J. Enfield, who presented evidence and arguments supporting the idea that ‘huh?’ is a word, and that it “is found in roughly the same form and function in spoken languages across the globe.”

If you’re interested in learning about the ignoble undertakings of other winners (who documented chicken walking like dinosaurs, created bee sting pain indices, and completed other thought-provoking experiments), visit www.Improbable.com.

 

Weekly Focus – Think About It

“A day without sunshine is like, you know, night.”

--Steve Martin, American

Weekly Commentary September 14th, 2015

The Markets

The market is as streaky as a slice of bacon.

U.S. stock markets have been sliding higher. They’ve been sliding lower.

Barron’s reported the Standard & Poor’s 500 Index has tumbled from gains to losses and back again for 10 weeks in a row. The Dow Jones Industrial Index has tagged along with nine weeks of flip-flops. You’d almost think they were running for office.

There are market optimists. There are market pessimists.

The American Association of Individual Investors (AAII) weekly survey of investor sentiment reported 34.6 percent of respondents were bullish. That’s up from the previous week. Thirty-five percent of respondents were bearish. That’s also up from last week. What’s down? Neutral sentiment. More people are forming opinions about the possible direction of the market.

There are questions that need to be answered.

Will the Federal Reserve begin to raise rates this week? Some say yes. Some say no. Barron’s said it’s too close to call. There is no clear consensus, Fed officials have given mixed signals, and the bond market has not priced in a rate hike. If the Fed does raise rates, experts cited by Barron’s said markets could get ugly for a little while or they could remain calm. A lot depends on the wording of the Fed’s statement.

Have Chinese markets stabilized? MarketWatch reported the Shanghai Composite Index finished last week higher. It was the first positive weekly outcome in a month. Chinese authorities, once again, are taking steps to stabilize markets. The Economist offered this thought, “As China’s financial markets develop, its stock market will become less bumpy. For now, investors must remember that many things are bigger in China, including the daily ups and down of its stock market.”

Will the U.S. government shut down again? It’s in the hands of our elected officials.

Are we seeing the big picture? It’s safe to say many people are worried about whether economic growth – in the United States and abroad – will be stifled by changing monetary policy in the United States. As a result, all eyes have been on the Federal Reserve, which is expected to begin raising the Fed funds rates sometime soon.

However, the Federal Reserve’s monetary policy isn’t the only game in town. Fiscal policy – the actions taken by our government – can also have a profound effect on economic growth. A July Brookings’ blog post ‘Fiscal Headwinds are Abating,’ reported:

“Tight fiscal policy by local, state, and federal governments held down economic growth for more than four years, but that restraint finally appears to be over… Fiscal policy is no longer a source of contraction for the economy, but neither is it a source of strength.”

The blog post discusses the reasons that government spending has held back economic growth. At the federal level, contraction was attributed to “…tight caps on annually appropriated spending and the automatic spending cuts known as sequestration.” The organization’s Federal Impact Measure (FIM), which estimates the effect of federal, state, and local spending (and taxes) on gross domestic product growth, suggests federal spending caused economic growth to be 0.35 percentage points lower per year, on average, between 2011 and 2013.

There is talk of a government shutdown at the end of September. If it happens, it could have an effect on economic growth. The last time the government shut down was in 2013. Experts cited by the BBC reported the 2013 shutdown cost the U.S. economy about $24 billion and reduced quarterly economic growth by 0.6 percent. That shutdown lasted 16 days.

It is possible economic growth may slow for some period of time. It’s also possible monetary policy, fiscal policy, and other factors may be responsible.

 

Weekly Focus – Think About It

“My best friend is the man who in wishing me well wishes it for my sake.”

--Aristotle, Greek philosopher

Weekly Commentary September 8th, 2015

The Markets

Who’s the culprit?

Speculating on who or what is to blame for recent market weakness is a popular pastime right now. Last week, Barron’s said the search for someone to blame is a lot like a game of Clue. So far, the most common conclusions are “the People's Bank of China with a devalued currency in Beijing,” and “Janet Yellen with a potential interest-rate hike in Washington.”

The article pointed out those theories might be flawed. After all, China’s slowdown wasn’t a surprise. Analysts have been factoring slower growth into their calculations for some time. U.S. rate hikes are highly anticipated and, even though some fear they could tip the American economy into recession (and argue recent stock price movement supports the claim), relatively strong economic data casts doubt on the idea. Some analysts believe the stock market can help predict where a country’s economy is headed. A significant drop in stock prices could be indicative of a future recession and a significant increase could suggest future economic growth.

So, why have markets headed south? Barron’s offered an alternative answer: Investors with volatility trading strategies (and/or a case of nerves) across the globe. The article pointed out the CBOE Volatility Index (VIX), a.k.a. the fear gauge, popped from a low of 13 to a high of 53 between August 18 and August 24:

“That’s higher than when Standard & Poor's cut the credit rating of the United States in 2011, or at the peak of the European debt crisis in 2010, and seems extreme given the evidence. But volatility isn’t simply a measure of fear. It has been used to manage risk in portfolios that employ sophisticated trading schemes… Although each type of fund adjusts to market changes at a different speed, they all respond in the same way – by selling stocks… Don’t just blame the professionals. For months now, there have been warnings about overcrowding in the market’s best-performing stocks. And, when the market started to tumble in August, these stocks were among the hardest hit…”

So, who caused the market downturn? Take your pick.

the travails of emerging markets. Just a few years ago, emerging markets were the toast of the town. In general, emerging countries recovered much faster than developed countries following the financial crisis and global recession. The MSCI Emerging Markets Index delivered pretty remarkable (and highly volatile) performance during the past decade. According to the MSCI fact sheet, annual returns have ranged from down 53.33 to up 78.51:

            Annual Returns (%)

               2005        34.00

               2006        32.14

               2007        39.42

               2008       -53.33

               2009        78.51

               2010        18.88

               2011       -18.42

               2012        18.22

               2013         -2.60

               2014         -2.19

Through September 4, the Emerging Markets Index was down 17.54 percent. While that’s a significantly smaller swing than some we’ve experienced during the past 10 years, any double-digit dip demands attention. The Wall Street Journal explained the downturn like this:

“China’s economic slowdown is having broad implications, hitting regional economies like Taiwan, Malaysia, and Vietnam where manufacturing data showed declines for August. Emerging markets are also nervous about the possibility of an interest-rate increase in the United States, which would encourage global investors to invest more there. China’s Shanghai Composite Index is down 39 percent after hitting a seven-year high in June.”

Indeed, money is moving back into the United States. Experts cited by The Economist said about $44 billion has been pulled from emerging markets since mid-July.

Christine Lagarde, Managing Director of the International Monetary Fund (IMF), indicated the IMF’s outlook for global growth was likely to be revised downward, in part, because emerging economies are at risk of being negatively affected by commodity price weakness, China’s slowdown, and America’s monetary policy.

How bad will it get in emerging markets? The IMF’s July projection was that emerging market and developing countries would grow by 4.2 percent in 2015 and 4.7 percent in 2016. Developed economies, on the other hand, were expected to grow by 2.1 percent in 2015 and 2.4 percent in 2016. 

Please keep in mind, international investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.  These risks are often heightened for investments in emerging markets.

 

Weekly Focus – Think About It

“I never blame myself when I'm not hitting. I just blame the bat and if it keeps up, I change bats. After all, if I know it isn't my fault that I'm not hitting, how can I get mad at myself?”

--Yogi Berra, Baseball player