Category Archives: Market Outlook

Is It Worth Betting on the ‘September Swoon’?

People have an understandable interest in patterns in stock market returns.  As we head into September, we can expect the inevitable articles about the so-called ‘September swoon.’  If you look at the period since 1926, the average return in September has been negative.  A 2011 paper in the Journal of Applied Finance concluded that the historical occurrence of negative returns for the stock market in September is so strong and consistent that it cannot easily be explained away.  There are a range of other so-called ‘calendar effects’ in which a specific time of the year, month, or week has historically delivered returns that are markedly different from the average across all periods.  There are no conclusive explanations for these effects and, in a rational world, these types of anomalies should not persist—but they do.  If they expect stock prices to decline in September, savvy speculators should start to sell in August in anticipation of this drop and this selling should dilute the eventual drop in September.  Over time, this type of effect should, in theory, disappear to investor anticipatory buying or selling.  Nonetheless, these effects remain prominent in historical stock prices. Continue reading

A Thoughtful Outlook for 2013

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

Managing Your Portfolio’s Exposure to Interest Rates

Today, the yields on ten-year Treasury bonds are at a fifty-year low, and no period prior to the last few years reflects yields that even come close.  From 1962 to 2005, the lowest the 10-year Treasury bond yield ever got to was just below 4%, more than twice the current yield.

The chart below shows how unusual our current environment is.  The vertical axis is the yield from 10-year Treasury Bonds and the horizontal axis is time and we are looking at a period from 1962 to present.  From 1980 to today, we have seen the yield of 10-year Treasury bonds go from about 12% per year to below 2%.  The 10-year Treasury yield is considered a benchmark measure of bond yield and interest rates.  The Fed funds rate and the 10-year bond yield are very closely tied to one another.  For another illustration of how interest rates, the Fed funds rate and 10-year bond yield are related, see here. Continue reading

Cheap Money + Share Buybacks = Bull Market?

The market rally of the past twelve months may appear somewhat baffling in light of the fact that individual investors have been pulling money out of the market.  The S&P 500 is up 22.5% in the last year, while September marks the 17th consecutive month during which investors took money out of equity mutual funds.  The outflows from equity mutual funds are not simply due to investors moving from mutual funds to ETFs.  A recent analysis by Bianco Research demonstrates that including ETF flows does not change the results. Continue reading

Sector Watch: Retail REITs

Real Estate Investment Trusts (REITs) are companies that own and, typically, manage real estate investments to generate income.  REITs may also invest in mortgage securities (these are called mortgage REITs or mREITs).  REITs may specialize in specific types of properties.  The Folio Investing Retail REIT Folio holds equal-weight allocations to the largest publicly-listed REITs that own and manage shopping centers, outlet malls, and urban retail property.  Retail stores lease space from the REITs and the leases are the primary source of income. Continue reading

Unemployment: Part of the Economic Cycle or Secular Shift?

Bob Huebscher just published an outstanding article on the sustained high level of unemployment in the United States.  The question that he seeks to address is whether we are in the recovery phase of a major recession or we are actually in the midst of a long-term shift in the economy.  The article calls these two possible explanations ‘cyclical’ and ‘structural.’  It is worth understanding the key factors that have resulted in the current persistent unemployment levels in order to put the recent modest reduction in unemployment into context.  Are we seeing signs of the long-awaited recovery that will bring us back to full employment or is the recent growth in employment simply variability around a long-term shift in the U.S. economy in which unemployment will remain well-above historical levels? Continue reading

Sector Watch: Spotlight Telecommunications Stocks

The telecommunications industry is evolving quickly.  Recent data suggests, for example, that half of all adults in the United States have a tablet or smartphone.  There are many countries that have an average of more than one cell phone line per person.  In the developing economies, cell phones have allowed much broader access to voice and data services than would have been possible if the traditional fixed-line infrastructure needed to be built.  Ten years ago, Nigeria had only 100,000 phone lines.  Today, Nigeria has 100 Million cell phone accounts.  The ways that people use telecommunications are also expanding.  For people with little or no access to banking, mobile money services can provide the essential roles of banking.  The continued convergence of banking with telecommunications has substantial implications for both. Continue reading

The End of ‘The Cult of Equity’?

One of the defining features of the last twenty years has been a persistent and fairly continuous belief that investing in the stock market was something of a sure road to wealth.  The downturns in the stock market in the aftermath of the Tech bubble and, more recently, in the financial crisis, have shaken investors’ faith in the maxim that stocks are inevitably a good bet.  The tendency of people to take it as an article of faith that equities will, ultimately, deliver high returns has been referred to as ‘the cult of equity.’  Two recent articles by experts that I respect propose that this phenomenon is dead or dying. Continue reading

The Power of Effective Diversification: Part II

Last week, I posted an article discussing how diversification is one of the most misunderstood concepts in investing. In today’s post I continue with the second half of this two-part series titled, “The Power of Effective Diversification.”

In Part I of this article, I discussed the difference between naive diversification (holding lots of stuff in a portfolio) and real diversification (combining assets in a portfolio to create risk offsets).  I also showed how a well-diversified portfolio can maintain the ability to participate in market rallies while still mitigating risk.  In Part II, we will explore what an effectively diversified portfolio looks like today. Continue reading

Tax Loss Harvesting: Share Your Pain with Uncle Sam

Summer is winding down. And believe it or not, 2012 is more than half way over, which means it’s a good time for investors to start thinking about the year-end tax implications of their portfolios.

We invited Steve Thorpe, Founder of Pragmatic Portfolios, LLC to share some insights on Tax Loss Harvesting. Enjoy.

Tax Loss Harvesting: Why Should You Care?

Would you invest a few hours to reduce this year’s taxes by $1,000 or more?

For investors with taxable investment accounts, this is often possible by taking advantage of tax loss harvesting (TLH). This perfectly legal strategy makes lemonade from lemons, allowing Uncle Sam to share part of the pain of the losses inevitably experienced by investors at some points during their investing career.

Between now and Continue reading