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The investing masses generally are notoriously short-termed focused. We know this dynamic to be true because data regarding stock ownership has gone down significantly, and hundreds of billions of dollars have been pulled from U. Much of the negativity that has dominated investor behavior over the last decade can be explained by important behavioral biases.
Originally, the amygdala triggered the instinctual survival flight response for lizards to avoid hungry hawks and humans to flee ferocious lions. Given this backdrop, how can these gargantuan gains be maintained or improved upon when investors are continually draining money out of riskier stocks and pouring cash into more conservative bonds?
There are several major factors that can explain the colossal gains in the face of a stock investor exodus:. Just as important as these supply related issues are to the stock market, demand related issues are important as well. Money goes where it is treated best. Theoretically, the best treatment could be in U. Much like a trip to the grocery store, global money flows search for the best deals. Shoppers will now buy more chicken and less beef.
Similarly, when Japanese year bonds are yielding 0. As long as this phenomenon remains intact over the medium term, stocks could continue to significantly outperform bonds. What the almost year bull market teaches us is that our behavioral shortcomings can be a drag on performance and stock values, but the economic laws of supply and demand can play an even more significant role in the direction of the stock market.
IPOs will impact stock prices. Understanding these lessons will better prepare the masses in navigating through future bull and bear markets. This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter May 1, Subscribe on the right side of the page for the complete text.
No information accessed through the Investing Caffeine IC website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. May 3, at The backlash was swift, not only in Washington, but also from international trading partners. In response, Trump and his economic team attempted to diffuse the situation by providing temporary tariff exemptions to allied trading partners, including Canada, Mexico, the European Union, and Australia.
Nevertheless, financial markets sold off swiftly this month in unison with these announcements. The selloff did not necessarily occur because of the narrow scope of these specific announcements, but rather out of fear that this trade skirmish may result in large retaliatory tariffs on American exports, and ultimately these actions could blow up into a full-out trade war and trigger a spate of inflation.
These trade concerns are valid, but at this point, I am not buying the conspiracy theories quite yet. Often, the heated language is solely used as a first foray into more favorable negotiations. Beginning in early February, anxiety in the equity markets intensified as interest rates on the benchmark year Treasury note have now risen from a September-low yield of 2. While the direction of rate increases may be unnerving to some, both the absolute level of interest rates and the level of inflation remain relatively low, historically speaking see inflation chart below.
It is true that rates on mortgages, car loans, and credit cards might have crept up a little, but from a longer-term perspective rates still remain significantly below historical averages.
Even if the Federal Reserve increases their interest rate target range another two to three times in as currently forecasted, we will still be at below-average levels, which should still invigorate economic growth all else equal. In car terms, if the current strategy continues, the Fed will be moving from a strategy in which they are flooring the economic pedal to the medal, to a point where they will only be going 10 miles per hour over the speed limit.
The strategy is still stimulative, but just not as stimulative as before. At some point, rising interest rates will slow down or choke off growth in the economy, but I believe we are still a long way from that happening. Why am I not worried about runaway interest rates or inflation? With the Japanese year government bond yielding 0. While either scenario is possible, given the lack of rising inflation and the slack in our employment market, I believe scenario 2 is more likely to occur than scenario 1.
Privacy, Politics, and Facebook: A lot has recently been made of the 50 million user profiles that became exposed and potentially exploited for political uses in the presidential elections. How did this happen, and what was the involvement of Facebook Inc. The genesis of this particular situation began when Aleksandr Kogan, a Russian American who worked at the University of Cambridge created a Facebook quiz app that not only collected personal information from approximatelyquiz-takers, but also extracted information from about 50 million Facebook friends of the quiz takers data scandal explained here.
Kogan believed to be in his early 30s allegedly sold the Facebook data to a company called Cambridge Analytica, which employed Steve Bannon as a vice president. This is the same Steve Bannon who eventually became a senior adviser for the Trump Administration. Now, the CEO Chief Executive Officer of Facebook, Mark Zuckerberg, faces an appointment in Washington DC, where he will receive tongue lashings and be raked over the coals, so politicians can better understand the breakdown of this data breach.
It is certainly possible that a large amount of data was compromised for political purposes relating to the presidential election.
Even if there are defectors, where will all these renegades go, Instagram? Well, if that were the case, Instagram is owned by Facebook. Financial markets move up and financial markets down. The first quarter of reminded us that no matter how long a bull market may last, nothing money-related moves in a straight line forever.
Suffice it to say, next month will likely introduce new concerns, but one thing I do not need to worry about is an empty Easter basket. It will take me much longer than a month to work through all the jelly beans, chocolate bunnies, and marshmallow Peeps.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter April 2, Please read disclosure language on IC Contact page. April 2, at 3: And that is exactly what we saw. This explanation holds little water if you take into account interest rates on the Year increased from roughly 1. The good news, at least for now, is the stock correction has been contained or mitigated. A significant chunk of the latest double-digit loss has been recovered, resulting in stock prices declining by a more manageable Despite the monthly loss, the subsequent rebound in late February has still left investors with a gain of 1.
Whenever the market drops significantly over a short period of time, as it did this month, conspiracy theories usually come out of the woodwork in an attempt to explain the unexplainable.
When human behavior is involved, rationalizing a true root cause can be very challenging, to say the least. It is certainly possible that technical factors contributed to the pace and scale of the recent decline, as has been the case in the past. Currently no smoking gun or fat finger has been discovered, however some pundits are arguing the popular usage of leveraged ETFs Exchange Traded Funds has contributed to the accelerated downdraft last month.
Leveraged ETFs are special, extra-volatile trading funds that will move at amplified degrees — you can think of them as speculative trading vehicles on steroids. Regardless of the cause for the market drop, long-term investors have experienced these types of crashes in the past.
Technology, or the lack thereof circuit breakershelped contribute to these past crashes. Sincethe networking and trading technologies have definitely become much more sophisticated, but so have the traders and their strategies. Another risk I highlighted last month, which remains true today, is the potential for the new Federal Reserve chief, Jerome Powell, to institute a too aggressive monetary policy.
During his recent testimony and answers to Congress, Powell dismissed the risks of an imminent recession. He blamed past recessions on previous Fed Chairmen who over enthusiastically increased interest rate targets too quickly. Regardless of short-term inflation fears, common sense dictates Powell will not want to crater the economy and his legacy by slamming the economic brakes via excessive rate hikes early during his Fed chief tenure.
Despite the heightened volatility experienced in February, I remain fairly constructive on the equity investment outlook overall. The recently passed tax legislation Tax Cuts and Job Act of has had an undeniably positive impact on corporate profits see chart below of record profit forecasts — blue line. When you marry these stellar earnings results with the latest correction in stock prices, historically this combination of factors has proven to be a positive omen for investors.
Despite the rosy profit projections and recent economic strength, there is always an endless debate regarding the future direction of the economy and interest rates. This economic cycle is no different. When fundamentals are strong, stories of spiking inflation and overly aggressive interest rate hikes by the Fed rule the media airwaves. On the other hand, when fundamentals deteriorate or slow down, fears of a financial crisis enter the zeitgeist. The same tug-of-war fundamental debate exists today.
The stimulative impacts of tax cuts on corporate profits are undeniable, but investors remain anxious that the negative inflationary side-effects from a potential overheating economy could outweigh the positive economic momentum of a near full-employment economy gaining steam. Rather than playing Goldilocks with your investment portfolio by trying to figure out whether the short-term stock market is too hot or too cold, you would be better served by focusing on your long-term asset allocation, and low-cost, tax-efficient investment strategy.
Unsurprisingly, the low-cost index fund trounced the hedge fund managers. During scary blips like the one experienced recently, lessons can be learned from successful, long-term billionaire investors like Warren Buffett, but lessons can also be learned from my mother.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter March 1, Sidoxia Capital Management SCM and some of its clients hold positions in certain exchange traded funds ETFsbut at the time of publishing had no direct position in any other security referenced in this article.
March 1, at 3: This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter February 1, Economic growth accelerated inthe unemployment rate is sitting at a year low, housing prices are up significantly, Consumer Confidence is near the highs ofcorporations are doing cartwheels thanks to tax cut legislation, and the stock market has recently set new records. Not a bad start to the year, eh?
The strength of the economy, coupled with the optimism of business and consumers, has resulted in a financial boon for Americans, as shown in the chart below. Not only have financial assets and real estate gone up significantly since the Financial Crisis, but household debt has also remained relatively stable.
Given the sharp appreciation in value, casual observers might expect a flood of new investors to pile into stocks and equity mutual funds…not true. Actually, this buying phenomenon has yet to occur. There is no theoretical limit on the number of potential market moving events. The stock market could temporarily get rattled by another North Korean nuclear test, a terrorist attack, a geopolitical standoff, an inflammatory tweet, an infinite number of other unforeseen events, or stock prices could simply go down due to profit-taking i.
Regardless, the economic momentum is palpable and the president did not waste any time at the recent State of the Union address to remind Americans. Currently, there are limited signs of euphoric stock buying, but there will be a point in time, as in all economic cycles, when investment excesses will overwhelm demand and will therefore lead to a recession.
How can this counterintuitive money exodus transpire during a bull market? All this corporate stock purchase activity has offset the money flowing out of funds, which has helped catapult stock prices higher. History tells us, that before this long-term bull market that started in ends, flows into U.
