The latest inflation numbers are out from the Bureau of Labor Statistics and they show that consumer prices barely increased over the past twelve months. The most commonly-cited measure of consumer prices is the CPI-U, the Consumer Price Index for Urban consumers. The CPI-U is up 1.2% over the twelve months through November, and this is almost identical to the 1% 12-month rise in the data through October. The other major inflation measure, the Personal Consumption Expenditure index (PCE), is even lower because housing is a smaller component of PCE than CPI. Continue reading
Ben Bernanke, in a speech on November 19th, made it very clear that the Fed is likely to hold interest rates low for an extended period of time. This comes on the heels of similar comments by his likely successor at the Fed, Janet Yellen, during her confirmation hearings. On top of this, inflation numbers released on the morning of the 20th show almost no increases in consumer prices over the past year and existing home sales have just registered a drop. In related events, Larry Summers just gave a widely-noted presentation to the IMF in which he warned that the U.S. may be settling into a long-term economic malaise. Larry Summers, who was previously a contender to be the next Fed chairman, surely considered his comments to the IMF very carefully. Continue reading
The S&P500 has recently been hitting new all-time highs, which would seem to suggest that the economy is recovering and that the U.S. economy is back on track. The story does not look quite so rosy when you account for inflation, as Mark Hulbert has recently noted. The current level of the S&P500 is, in fact, still about 24% below its high in 2000 once inflation is considered. Economists and finance people would say that, measured in real terms, the S&P500 is 24% lower than it was at its 2000 peak. What this means is that the proceeds from the sale of a share of an S&P500 index fund purchases considerably less in real goods today than it did thirteen years ago. Continue reading
April is financial literacy month. I believe that lack of financial knowledge is one of the most critical problems that our country faces. Continue reading
In general, I ignore the spate of market predictions that experts issue at the start of each year. There are exceptions, and after reading Jason Hsu’s outlook for this year, I am pleased to recommend it to readers. Dr. Hsu is the Chief Investment Officer at global money management firm, Research Affiliates. I found his article both insightful and appropriately skeptical of all forecasts. How can you not appreciate a money manager who starts his prediction for the year ahead with John Galbraith’s quip that “the only function of economic forecasting is to make astrology look respectable”?
I am going to mention a few of the elements of Hsu’s outlooks and add some thoughts. Hsu first examines the drivers for bonds and then equities. I will follow this structure. Continue reading
Availability of timely data is at the core of effective financial and economic analysis. The Federal Reserve Economic Database (FRED) provides a vast array of economic time series via an intuitive graphical interface. If you want to get a read on the U.S. economy, FRED is an outstanding resource. The ability to quickly create customized charts makes it quick and easy to examine a wide range of data. In this article, I am going to show a number of these charts, while exploring the overall economic U.S. economic picture. Continue reading
One of the most important questions for investors and advisors is identifying a set of asset classes that will be considered for inclusion in a portfolio. Some people will decide that all they need or want is one broad stock market index fund and one bond fund. Others will choose to include Real Estate Investment Trusts (REITs) and commodities. There are well-thought-out arguments that inflation-protected government bonds (TIPS) are a major core asset class. It is also quite common for investors or advisors to break stocks out into value vs. growth and small cap vs. large cap. Continue reading
In this post, I continue the discussion of behavioral finance with examples of some of the key behavioral biases and where they can be seen in recent market behavior. The specific focus of this post is those biases that drive investment fads and bubbles.
It is almost invariably the risk that we ignore that really hurts us. The market today is, for the most part, discounting inflation risk. Historically, inflation has been a major threat, especially to bond investors. Today, with yields at historic lows, the implied inflation expectations are exceedingly low. The process by which the market comes up with rationales as to why a risk, that has historically done major damage, no longer matters is at the heart of every bubble. We have had the housing bubble (in which investors became convinced that houses were an infinite source of capital appreciation), the Tech bubble (in which investors decided that valuations based on earnings were irrelevant) and now the government debt bubble (in which investors are implicitly assuming that inflation risk is no concern). The bubbles get out of control largely because people assume that what has worked recently will continue to work. Continue reading
Guest post by Contributing Editor, Robert P. Seawright, Chief Investment and Information Officer for Madison Avenue Securities.
Barry Ritholz (of The Big Picture and a Sunday Business columnist at The Washington Post) recently contributed Investors’ 10 most common mistakes to The Washington Post Business Section quarterly investing section. It’s a commentary that he has been working on for a while — the ten topics are listed with links to longer discussions of each common mistake here. I created my own investing “checklist” (here) in response to Barry’s original list. For yet one more iteration of the theme, I offer my list of Investors’ 10 Most Common Behavioral Biases. There are a number of others, of course, and more will continue to be uncovered. But I think that these are the key ones. Continue reading
Financial theory suggests that risk and return go hand-in-hand:
Small company stocks tend to be riskier and outperform large company stocks. Long-term bonds tend to be riskier and outperform short-term bonds. Corporate bonds tend to be riskier than Treasury bonds (with comparable terms) and outperform Treasuries over time.
However, there is one group of stocks that has consistently defied this risk/return relationship: Low-beta stocks. A low-beta strategy involves selecting stocks that have a lower-than-average beta value. (Beta is a measure of the stocks’ volatility and adding low-beta stocks to your portfolio can help investors build a diversified portfolio.) The good news for investors here is that Continue reading