The Markets
We’re only three weeks into the New Year and already some very interesting trends have developed in the markets. Consider these four:
1. The worst performing stocks in 2011 have been the best performing in 2012. Bespoke Investment Group did an analysis and discovered that the 50 worst performing stocks in the S&P 500 in 2011 were up a whopping 11.2 percent YTD 2012 as of last Wednesday. By contrast, the 50 best performing stocks in 2011 were up only 2.1 percent so far in 2012. What a difference a “turn of the calendar” makes!
2. U.S. Treasury securities are off to their worst start in nine years. With improvements in the employment situation, housing sales hitting an 11-month high and a reprieve in the European debt problem, investors have less need for conservative treasuries and a bigger appetite for riskier stocks, according to Bloomberg and CNBC. At the moment, investors seem to be saying, “risk on.”
3. U.S. stocks rose for the third consecutive week and are near a six-month high. Despite a decidedly mixed start to the 4thquarter earnings season, stocks have roared out of the gate this year and are now up 20 percent from the October 2011 low, according to Reuters. Of course, too much euphoria could lead to disappointment later.
4. The CBOE Volatility Index (VIX) declined nearly 22 percent in the first three weeks of this year. The big decline in the VIX suggests investors are less fearful about near-term market volatility, according to CNBC. In fact, the VIX is down to a seven-month low, according to Reuters. While the markets may be calm now, we’re not complacent.
Trends come and go in the market, but one thing that stays constant is our diligence in helping you reach your goals.
|
Data as of 1/20/12 |
1-Week |
Y-T-D |
1-Year |
3-Year |
5-Year |
10-Year |
| Standard & Poor’s 500 (Domestic Stocks) |
2.0% |
4.6% |
02.55% |
17.8% |
-1.6% |
1.6% |
| DJ Global ex US (Foreign Stocks) |
3.9 |
5.4 |
-12.3 |
14.6 |
-4.2 |
5.3 |
| 10-year Treasury Note (Yield Only) |
2.0 |
N/A |
3.5 |
2.4 |
4.8 |
4.9 |
| Gold (per ounce) |
1.1 |
5.0 |
22.9 |
24.7 |
20.9 |
19.3 |
| DJ-UBS Commodity Index |
0.5 |
0.4 |
-12.3 |
8.6 |
-2.6 |
4.8 |
| DJ Equity All REIT TR Index |
2.5 |
3.7 |
11.2 |
32.2 |
-1.5 |
10.6 |
Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable or not available.
WHY IS IT THAT CONSERVATIVES TEND TO WATCH FOX NEWS and those with more liberal leanings tend to watch MSNBC? Psychologists would tell us it’s because of what they call “confirmation bias.” Confirmation bias is the tendency of humans to seek information that confirms an already held belief or opinion and to avoid or discount information that might contradict an existing belief or opinion.
This concept also applies to investing and it’s very important to avoid it as much as possible.
For example, let’s say we’re really bullish on the U.S. stock market. If we let confirmation bias cloud our judgment, then during our research, we would tend to read the reports that support our bullish view of the market and let that reinforce our decision to be bullish. By contrast, we would tend to avoid reading the reports that are bearish, or, if we do read them, we would come up with reasons why they were wrong.
When we’re under the spell of confirmation bias, it’s easy to miss turning points because we’re stuck on our current belief or opinion and won’t change even when we see contradicting evidence. That, of course, would be bad for your long-term wealth.
How strong is the confirmation bias pull?
A 2009 meta study published by the American Psychological Association reviewed 91 studies in the area of confirmation bias and concluded that people were nearly two times as likely to seek information which supported their existing view than to seek information which contradicted their current view. That’s a strong pull!
How do we overcome this pull?
Here are two keys that could help:
- Acknowledge that confirmation bias exists. Knowing that it exists helps us try to avoid falling into its trap.
- Actively seek contradictory opinions. This is another way of asking what could go wrong with an investment and then doing our best to ensure we understand the “other side of the coin.”
So, in addition to making a “rational” case for an investment, we have to make sure we avoid letting psychological biases get in the way.
Weekly Focus – Think About It
“If you take emotion – would be, could be, should be – out of it, and look at what is, and quantify it, I think you have a big advantage over most human beings.”
–John W. Henry, trading advisor, principal owner of Boston Red Sox
Are You a Bull or a Bear?
March 20th, 2012At its most basic level, a trade takes place when a buyer is willing to buy at a certain price and a seller is willing to sell at that price. Both parties could be smart, experienced, and looking at the same data, yet somehow one party thinks it’s a good price to buy and the other thinks it’s a good price to sell.
Last week, several news items represented good examples of how investors could look at the same data and draw different conclusions. Consider these:
1. Gross domestic product rose at a 2.8 percent pace in the October through December period.
Bullish investors say that’s up from 1.8 percent the previous quarter and the fastest pace in a year and a half.
Bearish investors say it’s less than the 3.0 percent growth expected by economists and most of the growth was due to inventory accumulation.
Source: MarketWatch
2. The International Monetary Fund (IMF) cut its forecast for global economic growth in 2012 and 2013.
Bullish investors say fears are overblown as private-sector economic activity in the 17-nation euro zone showed small, but unexpected, growth in January and durable-goods orders were up a strong 3.0 percent in December in the U.S. – the third straight increase.
Bearish investors say just heed the IMF’s warning, “Global growth prospects dimmed and risks sharply escalated during the fourth quarter of 2011, as the euro-area crisis entered a perilous new phase.”
Source: MarketWatch
3. Spanish and Italian bond yields dropped dramatically lately.
Bullish investors say the drop in yields and the strong demand in January’s bond auctions suggest the euro zone crisis is easing.
Bearish investors say the Portuguese bond market is now imploding, the Greek restructuring could fall apart, and the European Central Bank’s December offer of unlimited three-year loans to banks has simply delayed the inevitable day of reckoning.
Source: The Wall Street Journal
It’s differences of opinion like this that make markets. Thanks to the free market, there always seems to be a buyer for every seller – at a price.
Like Joni Mitchell who sang, “I’ve looked at life from both sides now,” we look at the markets from both the bullish and bearish sides and, ultimately, make decisions which we think will best position you to meet your long-term goals and objectives.
Data as of 1/27/12
1-Week
Y-T-D
1-Year
3-Year
5-Year
10-Year
0.1%
4.7%
3.1%
15.9%
-1.5%
1.5%
1.9
5.4
-12.2
14.5
-3.8
5.5
1.9
N/A
3.4
2.5
4.9
5.1
4.4
9.6
29.3
24.4
21.8
20.0
3.8
-8.1
9.9
-1.8
5.2
3.0
6.8
10.3
29.7
-1.5
10.9
Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable or not available.
The top two items are not really a surprise, but what’s revealing is how low some “important” issues ranked. Taxes, recession, social security, gas prices, education affordability, and the divide between rich and poor (think Occupy Wall Street) all pulled just 2 percent. The stock market and interest rates barely made the list at 1 percent each and ranking 21st and 25th, respectively, out of 26 on the full list.
Interestingly, if we can resolve the two biggest items on the list – the jobs and debt situations – it would most likely also resolve the third item on the list – continuing economic decline.
Do you think the politicians are listening?
(Note: responses total more than 100 percent due to multiple answers.)
Weekly Focus – Just for fun: How to Turn a Watch into a Compass
Let’s assume that you are lost in the wilderness, but you have a watch that still works. You can easily find the cardinal points by pointing the hour hand at the sun. Then form an imaginary line directly through the center of the “wedge” that is created between the hour hand and 12 o’clock. This is your south-north line. The height of the sun in the sky and the time of day will then show you which end of the line is north and which is south, remembering that the sun sets in the west and rises in the east. Try this at home first!
–Bear Grylls, survivalist, TV host, adapted from his 2008 book, “Man vs. Wild”
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