During the first four months of 2018, U.S. stocks have experienced not one, but two, 10 percent declines. These short-term reversals are known as corrections. They occur relatively often, helping to wring out investor exuberance and, sometimes, to create buying opportunities as share prices drop.
The current set of corrections appears to have created a fair amount of uncertainty, according to Barron’s bi-annual Big Money Poll of professional investors. The ranks of the bullish have diminished, and the bearish remain relatively unchanged, but the number of those who are ‘neutral’ has swelled:
|Fall 2017||Spring 2018|
|Bullish||61 percent||55 percent|
|Bearish||12 percent||11 percent|
|Neutral||27 percent||34 percent|
Professional investors say their clients are also unsure about stock markets. They indicated 60 percent of clients were neutral about stocks, while 23 percent were bullish and 17 percent were bearish.
When asked about market valuations, a majority thought U.S. stocks were fairly valued (57 percent) after the corrections. Thirty-five percent believe stocks remain overvalued, and 8 percent believe stocks have become undervalued.
If either ‘political/policy missteps’ or ‘rising interest rates’ was your answer to the biggest threat to U.S. stocks, then you’re thinking like a professional investor. Their list of worries included:
|Political/policy missteps||35 percent|
|Rising interest rates||32 percent|
|Earnings disappointments||7 percent|
|Geopolitical crises||7 percent|
Last week, the Dow Jones Industrial Average gained 1.8 percent, the Standard & Poor’s 500 Index was up 2.0 percent, and the NASDAQ Composite rose 2.8 percent.
Key points for the week
- Inflation and interest rate risk continue to rise.
- Consumer Price Index numbers indicate inflation pressure continues.
- Odds of four hikes are now nearly 40 percent.
Source: Carson Group Coaching
The personal consumption expenditures (PCE) index continues to climb toward the Fed’s stated 2 percent inflation target. For the month of March, core PCE rose 1.96 percent from a year ago. Another underlying inflation gauge, the Consumer Price Index (CPI), increased 2.4 percent from a year ago, the largest increase since February 2017. Producer prices, health care, and rent steadily increased in March, and the tight labor market will likely lead to increased wage inflation going forward. Based on the numbers, investors are pricing in the probability of a rate hike in June, and the odds of four hikes in 2018 rose to nearly 40 percent.
Clearly, the Fed is anticipating reaching its goal. Even though there has only been one month when inflation increased above 2 percent in recent years, the Fed has raised rates five times in the last 16 months. The Fed’s concern is leaving rates too low will encourage financial distortions that cause the next bear market.
What Does Your Playlist Say About You?
Your preference for pop, country, opera, classic rock, or some other type of music may provide clues to your personality, according to an article in Psychological Science entitled ‘Musical Preferences Predict Personality.’
Psychologists have been studying ‘personality’ for a long time. Their goal is to understand why people think, feel, and behave differently in the same situation. The prevailing personality model is called the ‘Big Five.’ It holds there are five factors that describe a broad range of personality traits and characteristics. No single factor describes personality by itself:
- Extroversion includes people on two ends of a spectrum, introverts and extroverts. Extroverts thrive on interactions with others while introverts thrive on solitude. This factor reflects a person’s tendency to be sociable, assertive, talkative, and friendly.
- Agreeableness describes how well people get along well with others. This factor encompasses altruism, trust, tact, and loyalty.
- Conscientiousness describes how well people control their impulses and act in socially acceptable ways. It encompasses persistence, ambition, energy, and resourcefulness.
- Neuroticism describes how comfortable and confident people are with themselves. It encompasses awkwardness, pessimism, insecurity, and wariness.
- Openness to experience describes willingness to try new experiences and think outside the box. This factor reflects perceptiveness, curiosity, insightfulness, and imagination.
As it turns out, musical preferences are pretty good predictors of some personality factors, especially openness, extroversion, and agreeableness. Openness is associated with a preference for ‘sophisticated’ music (classical, operatic, world, and jazz), extroversion is associated with ‘unpretentious’ music (country and folk), and, as you might expect, agreeableness is associated with liking all types of music.
It’s notable that musical preferences fail to predict conscientiousness.
Story of the week
A Shell gas station in Atlanta has decided to hire valets to pump gas for its customers. These 1950s-style valets will pump gas, wash windows, and even bring customers their receipts, while they wait in the comfort of their cars. Meanwhile, Oregon lawmakers recently passed a law to allow self-service gas stations in rural areas. Rural Oregonians used to valet service aren’t very happy about the law, which could lead to a new Oregon Trail leading right to Atlanta.
Weekly Focus – Think About It
"You can't think and hit at the same time."
~ Yogi Berra, Hall of Fame Baseball Player
"Never follow the line of least resistance. Practice the correct way, not the easy way. These attitudes overcome the opposition and bring victory."
~ Frank Leahy, American Football Coach
“Sometimes they would take two ropes and turn them as a single rope together, but you could separate them and turn them in like an eggbeater on each other. The skipping rope was like a steady timeline – tick, tick, tick, tick – upon which you can add rhymes and rhythms and chants. Those ropes created a space where we were able to contribute to something that was far greater than the neighborhood.”
~ Kyra Gaunt, Professor, Songwriter, Performer
Links & Disclaimers
RJFS and SPC do not offer or provide legal or tax advice. Tax services and analysis are provided by the related firm, S&M through a separate engagement letter with clients. Portions of this newsletter were prepared by Carson Group Coaching. Carson Group Coaching is not affiliated with RJFS, SPC or S&M. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. This information is not intended as a solicitation of an offer to buy, hold or sell any security referred to herein. There is no assurance any of the trends mentioned will continue in the future. Any opinions are those of the author and not necessarily those of RJFS. Any expression of opinion is as of this date and is subject to change without notice.
Opinions expressed are not intended as investment advice or to predict future performance. Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Past performance does not guarantee future results. Investing involves risk, including loss of principal. Consult your financial professional before making any investment decision. Stock investing involves risk including loss of principal. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock companies maintained and reviewed by the editors of the Wall Street Journal. The NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system. The "core" PCE price index is defined as personal consumption expenditures (PCE) prices excluding food and energy prices. The core PCE price index measures the prices paid by consumers for goods and services without the volatility caused by movements in food and energy prices to reveal underlying inflation trends. Please note direct investment in any index is not possible.
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