What Investors Can Learn From Sports Betting + Financial Market Update + 10.12.21

What Investors Can Learn From Sports Betting + Financial Market Update + 10.12.21

FINANCIAL MARKET UPDATE 10.12.2021

AUTHOR: JOSH JENKINS, CFA

STORY OF THE WEEK

WHAT INVESTORS CAN LEARN FROM SPORTS BETTING

A major criticism that active stock-pickers levy against a broadly diversified approach is something I’ll call the ‘no losers rule.’ Proponents of active stock-picking contend that if you are fully diversified, you are forced to own all companies, including the unattractive ones. Through their careful analysis, these managers claim the ability to improve returns, in part, by identifying and excluding those bad companies. Admittedly, this argument appears to be extremely compelling. Unfortunately, this claim ignores some key features of the stock market, which essentially eliminates its usefulness.

To understand why this is the case, let’s consider the example of college football betting. Each week there are dozens of games where an avid football fan could confidently predict the winner. There are usually even a handful of games where a casual fan could do so. Let’s look at an example. In early September, the Alabama Crimson Tide hosted the Mercer Bears. Anyone with a pulse knew Alabama was going to win that game. If you wanted to bet on Alabama to win with even odds, you would have had a tough time finding someone to take the other side. To encourage gamblers to bet against the favorite, the sportsbooks can adjust the odds. Through this process, the favorite is handicapped to the point where the expected payoff is roughly even regardless of which team the bettor selects.

There are a variety of ways to handicap a matchup, including the use of a point spread. The spread was set at 54 points for the Mercer vs. Alabama game. For a bettor to make money on Alabama, they didn’t just have to win; they had to win by more than 54 points. That’s a high hurdle to clear, even for a team like Alabama.

Source: Covers.com

While Alabama was the obvious choice in a straight-up contest, simply knowing which team was better was not enough to help you make money. The betting markets updated the odds and, therefore, the expected payoff of the decision. The clearly superior Alabama program won the game but did not cover the spread, losing money for anyone that went with the favorite.

The stock market is loaded with Mercer Bears. These companies are nowhere near as good as the Crimson Tides of the business world (Apple, Amazon, Google, etc.). They might be slower growing, less profitable, less scalable, and/or more capital intensive. Frankly, you’ve probably never even heard of them. That does not mean these ‘losers’ are bad investments, however. Like the sportsbooks in Vegas, the stock market is an incredibly efficient handicapping mechanism. Through changes in price, the market can ensure every company appears to offer a reasonable return on equity given their degree of exposure to a variety of risk factors.

Investors bid up the price of popular stocks. In doing so, the bar is raised on the results those companies must deliver in order to justify their price. Similarly, as investors shun the ‘losers,’ their price can fall to the point where even mediocre results can lead to a stellar return. An active stock picker cannot hope to achieve superior results by simply identifying the best and worst companies for the same reason a bettor won’t win simply by knowing who the best and worst teams are. What matters are the spreads on the games and the prices of the stocks. Neither is likely to be exactly right, but they do represent the best possible estimates at any point in time.

WEEK IN REVIEW

  • Last Friday, the Bureau of Labor Statistics published its updated jobs report for the month of September. For the second month in a row, the number of new jobs added in the economy disappointed. Nonfarm payrolls increased by 194k vs. expectations of 500k. The figure was held lower by a 123k decrease in government jobs, mostly attributable to public schools. The unemployment rate fell to 4.8% from 5.2%, reflecting a combination of the payroll increase as well as people dropping out of the labor force.
  • Earnings season is slated to kick off this week for S&P 500 companies. After nearly doubling on a YoY basis last quarter, investors will be looking for continued growth to justify elevated equity market valuations. According to the WSJ, analysts are expecting a 28% growth rate for the 3rd quarter. Investors will be paying close attention to the degree that rising input costs and supply chain bottlenecks are pressuring margins.
  • Notable data to be published this week includes inflation data and the minutes from the last FOMC meeting on Wednesday, jobless claims and producer prices Thursday, and finally retail sales, consumer sentiment, and business inventories on Friday.

ECONOMIC CALENDAR

Source: MarketWatch

HOT READS

Markets

  • September’s Jobs Creation Comes Up Short With Gain of Just 194,000 (CNBC)
  • A Record 4.3 Million Workers Quit Their Jobs in August, Led by Food and Retail Industries (CNBC)
  • IMF Cuts Global Growth Forecast Amid Supply-Chian Disruptions, Pandemic Pressures (WSJ)

Investing

  • Two Stories From Nature That Teach Us a Few Things About Investing (Morgan Housel)
  • An SEC Rule Was Meant to Protect Individual Investors. Chaos Ensued. (WSJ)
  • Reading the Tea Leaves Why Technical analysis is dumb (Jonathan Clements)

Other

  • A Huge Subterranean ‘Tree’ Is Moving Magma to Earth’s Surface (Wired)
  • How to Remember What you Read (Farnam Street)
  • 1 Billion TikTok Users Understand What Congress Doesn’t (The Atlantic)

MARKETS AT A GLANCE

Source: Morningstar Direct.

Source: Morningstar Direct.

Source: Treasury.gov

Source: Treasury.gov

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Do you want to receive financial market updates in your inbox? Sign up here! 

ABOUT THE AUTHOR

402.763.2967

jjenkins@lutz.us

LINKEDIN

JOSH JENKINS, CFA + CHIEF INVESTMENT OFFICER

Josh Jenkins is the Chief Investment Officer at Lutz Financial. With 12+ years of relevant experience, he specializes in assisting clients with portfolio construction, asset allocation, and investment risk management. He is also responsible for portfolio trading, research and thought leadership as well as analytics and operational efficiency for the Firm's Financial division. He lives in Omaha, NE.

AREAS OF FOCUS
  • Asset Allocation
  • Portfolio Management
  • Research & Data Analytics
  • Trading System Operation & Execution
AFFILIATIONS AND CREDENTIALS
  • Chartered Financial Analyst®
  • Chartered Financial Analyst Institute, Member
  • Chartered Financial Analyst Society of Nebraska, Member
EDUCATIONAL BACKGROUND
  • BSBA, University of Nebraska, Lincoln, NE

P: 402.827.2300 | F: 402.827.2319 | E: contact@lutzfinancial.com | 13616 California Street | Suite 200 | Omaha, NE 68154

All content © 2017 Lutz Financial  | Important Disclosure Information |  Privacy Policy

FORM CRS RELATIONSHIP SUMMARY

What Investors Can Learn From Sports Betting + Financial Market Update + 10.12.21

The Fed Announcement Explained + Financial Market Update + 9.28.21

FINANCIAL MARKET UPDATE 9.28.2021

AUTHOR: JOSH JENKINS, CFA

STORY OF THE WEEK

THE FED ANNOUNCEMENT EXPLAINED

Last week was headlined by the Federal Reserve announcement that followed the September meeting. There were several developments that came from the official post-meeting statement and press conference that have been in the news. Today we’ll break down and provide some background on a few of the larger storylines.

Rates Left Unchanged

As expected, the committee left its benchmark federal funds rate (FFR) unchanged. The FFR is the primary tool used by the Federal Reserve for setting monetary policy, representing the rate at which commercial banks can borrow or lend their excess reserves to each other on an overnight basis. As a part of the Federal Reserve’s accommodative monetary policy response to the COVID-19 pandemic, the FFR has been set to a range of 0.00% – 0.25% since March of 2020. The chart below provides some historical context to this benchmark rate. A few things to notice:

  • The nearly 20% rate level in the 1980s as the Federal Reserve battled high inflation
  • The prolonged period of near 0% interest rates following the Financial Crisis of 2007-08
  • The gradual trend higher beginning in 2015, before ultimately falling back to the zero-bound during the pandemic

Something that tends to confuse people is how the financial media discusses interest rate moves daily, despite the Fed leaving rates unchanged near zero for the last 18 months. There are a couple of nuances to understand with this. First, short-term interest rates, in general, are heavily influenced by the FFR but fluctuate due to changes to supply and demand in the marketplace. Additionally, they are often higher than the FFR to reflect a premium to compensate the lender for additional liquidity and credit risks. Long-term interest rates are also impacted, although less directly. Long-term rates can be thought of as short-term rates plus an additional premium to compensate the lender for the longer term, lower liquidity, the potential difference in credit quality, and risk of inflation.

 

The Dot Plot

Once a quarter, the Federal Reserve publishes its Summary of Economic Projections (SEP), which reflects the median forecast of the committee members for a variety of economic variables. The table below summarizes the current estimates vs. the previous ones published in June. The revisions were generally unfavorable for the current year (2021):

  • Real GDP was lowered
  • The unemployment rate was increased
  • Inflation was increased

Summary of Economic Projections. Source: Federal Reserve, released 9/22/2021. 1) For each period, the median is the middle projection when the projections are arranged from lowest to highest. When the number of projections is even, the median is the average of the two middle projections. 4) Longer-run projections for Core PCE inflation are not collected.

 

Although the GDP growth rate was revised lower for this year, it was increased for both 2022 and 2023. The projected path of the federal funds rate was also revised, with the median estimate now calling for the first hike to come in 2022 as opposed to the previously estimated 2023. The expectation that rate hikes may come sooner was likely related to the sharp increase in the inflation estimate. Though the inflation estimate returns toward the Fed’s 2.0% target by 2022, it seems the high inflation readings of the past few months have proved more persistent than what the Fed originally expected. The projected path of the FFR is better illustrated in the ‘Dot Plot’ below.

Source: Federal Reserve, released 9/22/2021

Note that while the market tends to fixate on the Dot Plot, Fed Chair Jerome Powell frequently cautions against putting too much weight on the estimates. He contends the figures represent individual forecasts, some of which are made by non-voting members of the committee and do not reflect an actual plan by the committee. I would expect these warnings from Powell are largely ignored by the market. The expectation that rate hikes may be coming sooner could be the catalyst for the roughly 0.20% increase to the 10-year Treasury yield that has occurred over the last week.

 

Fed Taper Coming Soon

In March 2020, the Federal Reserve launched a quantitative easing (QE) program to provide additional stimulus above and beyond lowering the FFR to 0.00% – 0.25%. This program consisted of the Fed purchasing $80 billion of Treasury bonds and $40 billion of mortgage-backed bonds each month. The goal of the program was to put additional downward pressure on longer-term interest rates by introducing additional demand for bonds of longer maturities through their purchases. Similar programs were used following the Financial Crisis of 2007-08.

When the Federal Reserve went to unwind the previous QE program in the Spring of 2013, the market was caught off guard. As a result, long-term interest rates shot dramatically higher over the remainder of the year, and the episode of volatility was dubbed the ‘taper tantrum.’ This time around, the Fed took extra efforts to ensure it was providing enough forward guidance to allow the market to price in changes to the program in a more orderly fashion.

For the entirety of 2021, the Fed has suggested that it will continue its pace of purchases until “substantial further progress has been made toward the Committee’s maximum employment and price stability goals.” In the post-meeting statement released last week, the Fed added language stating, ‘moderation in the pace of asset purchases may soon be warranted.’ Shortly after the release of the official statement, Chairman Powell gave his customary post-meeting press conference, saying, “the purpose of that language is to put notice out that that could come as soon as the next meeting.”

The general expectation is that the Fed will begin steadily reducing the amount of bonds it purchases each month until the program is eliminated by the middle of next year. The Fed has suggested that they would not begin to increase rates until bond purchases were completely halted and that the bar for raising interest rates is much higher than it is for tapering. Still, given the dot plot, it may not be unreasonable to expect rate increases as early as the second half of next year.

WEEK IN REVIEW

  • The main event last week was the conclusion of the Fed meeting. The FOMC voted to leave its benchmark fed funds rate unchanged, they signaled the beginning of tapering soon, and the dot plot revealed that two additional committee members penciled in at least one rate hike in 2022, which bumped the median estimate up to one hike for the year from none.
  • Data published on Monday showed that new orders for durable goods rose a healthy 1.8% in August, which was higher than expectations. Business investment used in the calculation for GDP comes from the shipments of non-defense capital goods excluding aircraft figure, which grew 0.7% in August. Business investment is on pace to be a nice tailwind for GDP in Q3 and is currently growing at an annualized 8.6% rate vs. the previous quarter.
  • Other notable economic data to be published this week includes jobless claims and the next revision of Q2 GDP on Thursday. On Friday, we will see realized inflation, expected inflation, manufacturing activity, and consumer sentiment. Typically the jobs report is published on the first Friday of every month. Since this month’s 1st Friday is on 10/1, the publication has been pushed back to the following week to provide time to compile the report.

ECONOMIC CALENDAR

Source: MarketWatch

HOT READS

Markets

  • US Core Capital Goods Orders, Shipments Rise Strongly in August (CNBC)
  • Congress Must Raise Debt Limit By Oct 18, Treasury Secretary Yellen Warns in New Letter as Default Looms (CNBC)
  • Fed Chair Powell to Warn Congress that Inflation Pressures Could Last Longer than Expected (CNBC)

Investing

Other

  • Much of What You’re Going to Do or Say Today is Not Essential (Farnam Street)
  • Justin Tucker and the Data Behind the NFL’s Record 66-Yard Field Goal (WSJ)
  • Everything Amazon Announced – Including a Cute Security Robot (Wired)

MARKETS AT A GLANCE

Source: Morningstar Direct.

Source: Morningstar Direct.

Source: Treasury.gov

Source: Treasury.gov

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Do you want to receive financial market updates in your inbox? Sign up here! 

ABOUT THE AUTHOR

402.763.2967

jjenkins@lutz.us

LINKEDIN

JOSH JENKINS, CFA + CHIEF INVESTMENT OFFICER

Josh Jenkins is the Chief Investment Officer at Lutz Financial. With 12+ years of relevant experience, he specializes in assisting clients with portfolio construction, asset allocation, and investment risk management. He is also responsible for portfolio trading, research and thought leadership as well as analytics and operational efficiency for the Firm's Financial division. He lives in Omaha, NE.

AREAS OF FOCUS
  • Asset Allocation
  • Portfolio Management
  • Research & Data Analytics
  • Trading System Operation & Execution
AFFILIATIONS AND CREDENTIALS
  • Chartered Financial Analyst®
  • Chartered Financial Analyst Institute, Member
  • Chartered Financial Analyst Society of Nebraska, Member
EDUCATIONAL BACKGROUND
  • BSBA, University of Nebraska, Lincoln, NE

P: 402.827.2300 | F: 402.827.2319 | E: contact@lutzfinancial.com | 13616 California Street | Suite 200 | Omaha, NE 68154

All content © 2017 Lutz Financial  | Important Disclosure Information |  Privacy Policy

FORM CRS RELATIONSHIP SUMMARY

What Investors Can Learn From Sports Betting + Financial Market Update + 10.12.21

Panic Selling + Financial Market Update + 9.21.21

FINANCIAL MARKET UPDATE 9.21.2021

AUTHOR: JOSH JENKINS, CFA

STORY OF THE WEEK

PANIC SELLING

Equity markets have been under pressure recently, with the S&P 500 closing lower in nine of the thirteen trading sessions so far in September. While the Index is only about 4% from a recent record-high, volatility tends to make investors antsy. As Mike Tyson famously said, ‘everyone has a plan until they get punched in the mouth.’ A recent research paper published by a group of MIT professors analyzed the propensity of investors to engage in ‘Panic Selling’(1). The conclusions of the paper are worth considering in light of recent market gyrations.

The study looked at the trading patterns within 600,000 individual brokerage accounts belonging to just under 300,000 households during the period between 2003 to 2015. The goal was to derive some insight into panic selling by individual investors, which they defined as a decline of 90% of a household account’s equity assets over the course of one month, where at least half of the decline was due to trading. Below are the main takeaways from the research.

Driven by Volatility

About 9% of the households analyzed panic sold during the period of analysis. The study showed that while panic sales occurred regularly over the thirteen-year observation period, they were overwhelmingly clustered around episodes of heightened volatility in the stock market.

Demographics of Panic the Sellers

Certain individual characteristics suggested a higher likelihood of panic selling. These include:

  • Male
  • Older than 45
  • Married
  • High number of dependents
  • Self-declared high level of investing experience/knowledge

These characteristics likely do not come as a surprise. Other behavioral studies have shown that men tend to struggle with overconfidence more so than women(2). Older investors may be closer to retirement and, therefore, might be more concerned about their portfolio’s ability to quickly recoup losses suffered in a downturn. The most interesting characteristic was the high level of investing experience and knowledge. This group apparently knew just enough to be dangerous, as they were substantially more likely to panic sell than the investors with limited/no investing experience/knowledge.

Panic Selling Hurt Performance

The study showed that when timed well, selling risky assets in the early stages of a large market downturn did, in fact, protect investor capital. The problem with this, however, is that it is impossible to know when you are in the early stages of a large downturn. Consequently, the median investor in the study earned a negative return following their panic sell. Interestingly, rather than being a function of exiting the market at the wrong time, most of the underperformance was due to waiting too long to get back into the market. In fact, nearly a third of the investors that panic sold in the study never reinvested in the stock market.

As we discussed (here), volatility is a normal and healthy feature of the market. Historically the S&P 500 has experienced a 5% or greater drawdown about three times per year on average. Thus far, in 2021, we have not had one. While we do not know if the current bout of volatility will take us there, rest assured there will be more 5%+ drawdowns in the future. This study serves as a good reminder that investors are best served by tuning out the noise and sticking with their long-term plan.

1. Elkind, Daniel and Kaminski, Kathryn and Lo, Andrew W. and Siah, Kien Wei and Wong, Chi Heem, When Do Investors Freak Out?: Machine Learning Predictions of Panic Selling (August 4, 2021). Available at SSRN: https://ssrn.com/abstract=3898940 or http://dx.doi.org/10.2139/ssrn.3898940

2. Brad M Barber and Terrance Odean. Boys will be boys: Gender, overconfidence, and common stock investment. The Quarterly Journal of Economics, 116(1):261–292, 2001.

WEEK IN REVIEW

  • This week will be headlined by the conclusion of the FOMC meeting Wednesday afternoon. The official committee statement will be released at 1 CT, followed shortly thereafter by a press conference by Chairman Jerome Powell. The consensus is that the Fed will leave interest rates unchanged at the zero-bound. What there is less agreement on is whether or not the Fed will announce its intention to begin ‘tapering’ its bond purchase program. There generally seems to be some agreement that they will begin to scale back purchases this year.
  • In addition to the press release, the Fed will publish its Summary of Economic Projections and the dot plot (which it does at the conclusion of every other meeting). The market pays close attention to the dot plot, as it illustrates each individual committee member’s expected path of interest rate movements over the next few years. The median estimate is often viewed as a proxy for the Fed’s expected path of interest rates (something that Powell repeatedly cautions against). The June dot plot surprised investors as two committee members penciled in two 0.25% hikes in 2023, despite no expected hikes per the March dot plot.
  • Other economic data to be published this week includes flash PMIs, jobless claims and the Index of Leading Economic Indicators on Thursday. Additionally, on Friday, several Fed officials are slated at various public speaking events.

ECONOMIC CALENDAR

Source: MarketWatch

HOT READS

Markets

  • Retail Sales Post Surprise Gain a Consumers Show Strength Despite Delta Fears (CNBC)
  • China’s Embattled Developer Evergrande is on the Brink of Default. Here’s Why It Matters (CNBC)
  • Powell’s Taper Tightrope Could Be Complicated by Fed ‘Dots’ (WSJ)

Investing

Other

  • For the Three- and Four- Point Stance: Is This the End of the Line? (SI)
  • iOS 15 Is Here: The iPhone Software Update’s Small Tricks Make a Big Difference (WSJ)
  • Why You’ll fail the Milk Crate Challenge (Wired)

MARKETS AT A GLANCE

Source: Morningstar Direct.

Source: Morningstar Direct.

Source: Treasury.gov

Source: Treasury.gov

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Do you want to receive financial market updates in your inbox? Sign up here! 

ABOUT THE AUTHOR

402.763.2967

jjenkins@lutz.us

LINKEDIN

JOSH JENKINS, CFA + CHIEF INVESTMENT OFFICER

Josh Jenkins is the Chief Investment Officer at Lutz Financial. With 12+ years of relevant experience, he specializes in assisting clients with portfolio construction, asset allocation, and investment risk management. He is also responsible for portfolio trading, research and thought leadership as well as analytics and operational efficiency for the Firm's Financial division. He lives in Omaha, NE.

AREAS OF FOCUS
  • Asset Allocation
  • Portfolio Management
  • Research & Data Analytics
  • Trading System Operation & Execution
AFFILIATIONS AND CREDENTIALS
  • Chartered Financial Analyst®
  • Chartered Financial Analyst Institute, Member
  • Chartered Financial Analyst Society of Nebraska, Member
EDUCATIONAL BACKGROUND
  • BSBA, University of Nebraska, Lincoln, NE

P: 402.827.2300 | F: 402.827.2319 | E: contact@lutzfinancial.com | 13616 California Street | Suite 200 | Omaha, NE 68154

All content © 2017 Lutz Financial  | Important Disclosure Information |  Privacy Policy

FORM CRS RELATIONSHIP SUMMARY

What Investors Can Learn From Sports Betting + Financial Market Update + 10.12.21

Highlights from the Latest Tax Proposal + Financial Market Update + 9.14.21

FINANCIAL MARKET UPDATE 9.14.2021

GUEST AUTHOR: JUSTIN VOSSEN

STORY OF THE WEEK

HIGHLIGHTS FROM THE LATEST TAX PROPOSAL

House Democrats via the Ways and Means Committee spelled out detail on the proposed tax increases on corporations, investors, high-income individuals and business owners on Monday. The proposed draft of a bill is 881 pages long in its current form and would still have to pass both chambers of Congress and be signed by President Biden. It could be passed as is, scrapped completely, or radically modified for passage. Investors should note some important changes being proposed that may apply to them. We will focus on those highlights as the entirety of the bill detail would encompass multiple blog entries.

  • Shifts the current 35% tax bracket to $400,000-$450,000 and moves the 37% bracket to 39.6% for anyone earning more than $450,000 (married filing jointly).
  • The highest long-term capital gains rates will move to 25% and apply to taxable years ending after the introduction of the act. Any gains prior to 9/13/2021 still are applied at the 20% capital gain rate.
  • Surcharge of 3% on adjusted gross income in excess of $5,000,000 jointly
  • Cryptocurrency would be subjected to the wash sale rules.
  • Elimination of all Roth IRA conversions for those making more than $450,000 effective in taxable years after December 31, 2031.
  • Effective 2022, after-tax amounts in retirement accounts will no longer be eligible for conversion to Roth accounts.
  • An individual will not be able to invest IRA funds into a company in which they own greater than a 10% share.
  • IRAs would be prohibited from owning private placements, even if it is a third-party investment.
  • Termination of the increase in the unified credit against estate and gift taxes, reverting the credit to its 2010 level of $5,000,000 per individual, indexed for inflation as of 2022. (This inflation adjustment would make it slightly more than $6,000,000 for 2022, but less than the current $11,700,000 exemption for 2021)
  • For family farms and family business for estate tax purposes, property can be valued on actual use instead of fair-market value subject to a maximum reduction of $11,700,000.
  • Grantor trust proposed changes are numerous and focus on control of the assets and eliminates valuation discounts on non-business assets. Details on these current changes, as well as how they could relate to prior trusts, should be discussed with an attorney in further detail.

This is just a basic list of major changes that are inside of the proposal. It is important to note that this has a long way to go to become law as party margins in the House and Senate are razor-thin. Obviously, some of these proposals will probably be omitted, amended, or expanded on if and when a bill is ratified.

Additionally, there are some glaring omissions inside of this proposal that have been discussed by the Biden administration before. Specifically, the taxation of carried interest in private equity funds, the step-up in basis at death, state and local tax deduction caps, and Social Security solvency. These items may be addressed in future forms of the bill, but this proposal is the best indication to this point of what a new tax bill will look like.

WEEK IN REVIEW

  • Economic data published this morning showed inflation remains elevated, despite easing from the prior month. Headline CPI increased 0.3% MoM, vs. expectations of a 0.4% increase and a 0.5% increase the prior month. Year-over-year inflation fell from 5.4% in July to 5.3% for the twelve months ending in August. Core CPI, which strips out the volatile food and energy components, increased by 4.0% YoY, compared to 4.3% the prior month.
  • Core CPI was the lowest it has been since February, leading some economists to believe the pace of price increases has peaked. Components of the index that had previously been pushing the metric higher, including used car prices and transportation services, saw their prices decline during August.
  • Other economic data to be published this week includes industrial production and capacity utilization on Wednesday, jobless claims and retail sales on Thursday, and consumer sentiment on Friday.

ECONOMIC CALENDAR

Source: MarketWatch

HOT READS

Markets

  • Inflation Eased in August, Though Still High (WSJ)
  • Businesses are Feeling Stronger Inflation and Paying Higher Wages, Fed’s ‘Beige Book’ Says (CNBC)
  • Weekly Jobless Claims Post Sharp Drop to 310,000, another new Pandemic Low (CNBC)

Investing

  • Every Forecast Takes a Number From Today and Multiples it by a Story About Tomorrow (Morgan Housel)
  • Why Financial Manias Persist (Ben Carlson)
  • What You’ve Lost in This Bull Market (Jason Zweig)

Other

  • Facebook Knows Instagram Is Toxic for Teen Girls, Company Documents Show (WSJ)
  • Facebook Allows Prominent Users to Break Rules (Axios)
  • ‘Is This My Life Now?’: Clemson Defensive End Justin Foster’s – and My – Struggle with Long-Haul Covid (ESPN)

MARKETS AT A GLANCE

Source: Morningstar Direct.

Source: Morningstar Direct.

Source: Treasury.gov

Source: Treasury.gov

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Do you want to receive financial market updates in your inbox? Sign up here! 

ABOUT THE AUTHOR

402.763.2967

jjenkins@lutz.us

LINKEDIN

JOSH JENKINS, CFA + CHIEF INVESTMENT OFFICER

Josh Jenkins is the Chief Investment Officer at Lutz Financial. With 12+ years of relevant experience, he specializes in assisting clients with portfolio construction, asset allocation, and investment risk management. He is also responsible for portfolio trading, research and thought leadership as well as analytics and operational efficiency for the Firm's Financial division. He lives in Omaha, NE.

AREAS OF FOCUS
  • Asset Allocation
  • Portfolio Management
  • Research & Data Analytics
  • Trading System Operation & Execution
AFFILIATIONS AND CREDENTIALS
  • Chartered Financial Analyst®
  • Chartered Financial Analyst Institute, Member
  • Chartered Financial Analyst Society of Nebraska, Member
EDUCATIONAL BACKGROUND
  • BSBA, University of Nebraska, Lincoln, NE

P: 402.827.2300 | F: 402.827.2319 | E: contact@lutzfinancial.com | 13616 California Street | Suite 200 | Omaha, NE 68154

All content © 2017 Lutz Financial  | Important Disclosure Information |  Privacy Policy

FORM CRS RELATIONSHIP SUMMARY

International Diversification in Charts + Financial Market Update + 9.7.21

International Diversification in Charts + Financial Market Update + 9.7.21

FINANCIAL MARKET UPDATE 9.7.2021

AUTHOR: JOSH JENKINS, CFA

STORY OF THE WEEK

INTERNATIONAL DIVERSIFICATION IN CHARTS

As consumers, we utilize products from non-US companies every day. Whether it is the car we drive, the clothing we wear, the TVs in our homes, or the phones in our pockets, many of the goods we purchase were at least partially manufactured abroad. While consumers are typically diversified when it comes to buying goods, the same is not always true for investors buying stocks.

Many investors exhibit ‘home country bias,’ which is the tendency to over-allocate to the country in which they live. Not only do investors exhibiting this bias forfeit the benefit of additional diversification, but they also miss out on the potential for improved returns, as valuations in non-US markets generally appear less stretched.

The chart below illustrates how the total value of the global stock market is distributed across countries. As you can see, the US market is by far the largest, comprising about 57% of the global market capitalization. An investor concentrated in US investments is missing out on nearly half of the investable equity market.

Percent of World Equity Market Capitalization

In USD. Market cap data is free-float adjusted and meets minimum liquidity and listing requirements. Dimensional makes case-by-case determinations about the suitability of investing in each emerging market, making considerations that include local market accessibility, government stability, and property rights before making investments. China A-Shares that are available for foreign investors through the Hong Kong Stock Connect program are included in China. 30% foreign ownership limit and 25% inclusion factor are applied to China A-Shares. Many nations not displayed. Totals may not equal 100% due to rounding. For educational purposes; should not be used as investment advice. Data provided by Bloomberg. Diversification neither assures a profit nor guarantees against loss in a declining market.

Of course, it is impossible to know in advance which country will perform the best. The chart below illustrates the relative performance across major stock markets over the last twenty years. During this period, the US stock market delivered a 7% per annum return. While that return ranks highly, there were other countries that did better.

Developed Market Return Comparison

Past performance is no guarantee of results. In USD. MSCI country indices (net dividends) for each country listed. Does not include Israel, which MSCI classifed as an emerging market prior to May 2010. MSCI data © MSCI 2021, all rights reserved.

The most important takeaway from this chart is that there is no discernable pattern in the performance rankings over time. As a result, it is unlikely an investor would be able to outperform a diversified international stock allocation by attempting to identify the winners and losers from one period to the next.

One of the biggest benefits of owning a globally diversified portfolio is that it smooths the investor experience. For example, the US market spent several years as one of the worst-performing countries and several others as one of the best performers. That sort of roller coaster ride has the tendency to derail investors from their long-term plan. A great example of this is the “Lost Decade,” which took place from 2000-2009. During that episode, the US market (S&P 500) lost 9.1% of its value on a cumulative basis. The rest of the world performed significantly better during this period. Investors that were diversified into other stock markets around the world have had a much better experience.

Global Index Returns

January 2000 – December 2009

Source: DFA. S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. MSCI data © MSCI 2020, all rights reserved. Indices are not available for direct investment. Index performance does not reflect expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results.

Nearly half of the world’s equity market value exists outside of the United States. Diversifying equity exposure internationally can potentially reduce volatility and smooth out periods of extreme performance disparity. In recent years, the US has generally outperformed the international stock market as a whole. With valuations looking cheaper abroad, diversifying internationally may also increase expected returns moving forward.

WEEK IN REVIEW

  • The top story from last week was the disappointing jobs number. The economy added 235,000 new jobs in August, much lower than the 720,000 jobs economist were expecting or the roughly 1 million from each of the prior two months. The services sector that involves in-person interaction saw particularly weak job growth, suggesting that the Delta Covid strain is dampening economic activity.
  • The weak jobs number has created some speculation that the Federal Reserve may delay the tapering of its asset purchase program that might have otherwise begun following the FOMC meeting this month.
  • This will be a very light week in terms of economic data releases. The initial jobless claims data will likely be the most watched in light of the week jobs figure published last week.

ECONOMIC CALENDAR

Source: MarketWatch

HOT READS

Markets

  • Jobs Report Disappoints – Only 235,000 positions added vs. Expectations of 720,000 (CNBC)
  • Major Automakers Fear the Global Chip Shortage Could Persist for Some Time (CNBC)
  • Fall’s Economic Comeback Turns Into a September Slowdown (WSJ)

Investing

Other

  • The First Thing to Understand about NIL Is That Nobody Fully Understands NIL (SI)
  • Google’s Quantum Computer Achieves Chemistry Milestone (Scientific American)
  • 11 Ways to Upgrade Your Wi-Fi and Make Your Internet Faster (Wired)

MARKETS AT A GLANCE

Source: Morningstar Direct.

Source: Morningstar Direct.

Source: Treasury.gov

Source: Treasury.gov

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

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ABOUT THE AUTHOR

402.763.2967

jjenkins@lutz.us

LINKEDIN

JOSH JENKINS, CFA + CHIEF INVESTMENT OFFICER

Josh Jenkins is the Chief Investment Officer at Lutz Financial. With 12+ years of relevant experience, he specializes in assisting clients with portfolio construction, asset allocation, and investment risk management. He is also responsible for portfolio trading, research and thought leadership as well as analytics and operational efficiency for the Firm's Financial division. He lives in Omaha, NE.

AREAS OF FOCUS
  • Asset Allocation
  • Portfolio Management
  • Research & Data Analytics
  • Trading System Operation & Execution
AFFILIATIONS AND CREDENTIALS
  • Chartered Financial Analyst®
  • Chartered Financial Analyst Institute, Member
  • Chartered Financial Analyst Society of Nebraska, Member
EDUCATIONAL BACKGROUND
  • BSBA, University of Nebraska, Lincoln, NE

P: 402.827.2300 | F: 402.827.2319 | E: contact@lutzfinancial.com | 13616 California Street | Suite 200 | Omaha, NE 68154

All content © 2017 Lutz Financial  | Important Disclosure Information |  Privacy Policy

FORM CRS RELATIONSHIP SUMMARY

What Investors Can Learn From Sports Betting + Financial Market Update + 10.12.21

The Hidden Risk of Holding Too Much Cash + Financial Market Update + 8.24.21

FINANCIAL MARKET UPDATE 8.24.2021

AUTHOR: JOSH JENKINS, CFA

STORY OF THE WEEK

THE HIDDEN RISK OF HOLDING TOO MUCH CASH

The current market environment has some investors feeling uneasy. The S&P 500, which represents large companies in the US, has been hovering around record highs. Meanwhile, stock valuations are stretched, the Federal Reserve could be forced to tighten monetary policy sooner than expected due to inflation, and the surge of the Delta Covid-19 variant continues to interrupt business activity and supply chains. With this backdrop, it makes sense that some people would be hesitant to put more money into the market. While keeping assets in cash is an effective way to limit portfolio volatility, doing so can expose investors to other risks.

With interest rates currently held near zero, the yield potential for cash is non-existent. At the same time, inflation has been running at the highest levels in years, leading to a negative real (inflation-adjusted) return on cash. In effect, investors that opt to remain in cash rather than invest in the market today are exchanging the possibility of market volatility for a certain decline in the purchasing power of their assets.

The table below illustrates the annualized real return for a variety of asset classes going back 95 years. As you can see, at 0.38%, cash has historically returned slightly more than inflation. Bonds have outpaced inflation by a solid 2.13%. Stocks show off their wealth-creating potential, having exceeded inflation by 7.32% per year.

In addition to calculating the annualized return over the entire period, we also calculated rolling 10-year returns1. There are a few critical takeaways from this data:

  • Cash had by far the most 10-year periods with a loss of purchasing power (448), followed by bonds (254), while stocks had the fewest (140).
  • A traditional 60/40 portfolio of stocks AND bonds experienced a loss of purchasing power in fewer periods (116) than any of the individual asset classes alone.
  • Stocks had the worst 10-year real return of any asset class (-45.33%). What is shocking, however, is that cash experienced a loss of purchasing power that was basically as devastating as the worst period experienced by stocks (-42.08%).
  • A traditional 60/40 portfolio of stocks AND bonds had a smaller loss during its worst 10-year period than any of the asset classes alone.

Source: Morningstar Direct. Analysis form 1/1/1926 – 7/31/2021. Includes all 10-year periods using monthly returns. “Rolling” means all 10-year periods calculated in 120-month increments. Returns are annualized and inflation-adjusted (real). Stocks are represented by the IA SBBI US Large Stock Inf Adj TR USD Ext Index, cash is represented by the IA SBBI US 30 Day T-bill Inf Adj TR USD Index, bonds represented by the IA SBBI US IT Govt Infl Adj TR USD Index. The 60/40 portfolio is 60% stocks and 40% bonds, rebalanced monthly. 

The graph below provides a good visual of the rolling 10-year return periods. In it, we compare the experience of an investor in a diversified 60/40 portfolio of stocks and bonds with an investor that chose to remain in cash. There were certainly periods where the 60/40 portfolio underperformed cash after inflation. Still, the all-cash allocation generated a negative real return more frequently, and its worst periods of negative return were more severe than the diversified alternative. Importantly, the attempt to limit portfolio volatility came at the expense of a significant degree of forgone upside, as the diversified portfolio soared above cash during the good times.

Source: Morningstar Direct. Analysis form 1/1/1926 – 7/31/2021. Includes all 10-year periods using monthly returns. “Rolling” means all 10-year periods calculated in 120-month increments. Returns are annualized and inflation-adjusted (real). Stocks are represented by the IA SBBI US Large Stock Inf Adj TR USD Ext Index, cash is represented by the IA SBBI US 30 Day T-bill Inf Adj TR USD Index, bonds represented by the IA SBBI US IT Govt Infl Adj TR USD Index. The 60/40 portfolio is 60% stocks and 40% bonds, rebalanced monthly. 

While the desire to protect one’s assets from volatility is understandable, an attempt to minimize portfolio fluctuations has the potential to expose investors to other risks. The impact of inflation is not as readily observable as the day-to-day fluctuation of a portfolio’s value, but it is every bit as consequential to the ability to fund future spending needs.  For long-term investors, what really matters is the preservation of buying power, NOT the preservation of capital. Historically, a diversified portfolio has been more successful in accomplishing this goal than cash.

1. Rolling 10-year returns were calculated in 120 month increments, beginning with the first 120 months in the observation period and advanced one month at a time.

WEEK IN REVIEW

  • Minutes from the July FOMC meeting, released last week, showed that Federal Reserve officials believe it may be appropriate to begin tapering asset purchases by end of the year. Officials stressed the need to “reaffirm the absence of any mechanical link between the timing of tapering and that of the eventual increase in the target range for the federal funds rate.” Look for more details this week from the Kansas City Fed’s annual conference (typically held in Jackson Hole), where Chairman Powell is expected to provide some additional clarity on the committee’s views.
  • Earnings season is coming to a close, with over 90% of companies having reported earnings as of August 13th.  87% of companies that reported beat earnings estimates, while the YoY earnings growth rate increased by approximately 89%.
  • Economic data to be published later this week includes durable goods orders on Wednesday, jobless claims and a GDP revision on Thursday, and inflation data (PCE) on Friday.

ECONOMIC CALENDAR

Source: MarketWatch

HOT READS

Markets

  • Fed Chairman Powell Navigates the Inflation Debate (WSJ)
  • Federal Reserve Preparing for Taper this Year, July Minutes Show (CNBC)
  • Home Sales Rose for the Second Straight Month in July, as Demand Outpaced Slightly Stronger Supply (CNBC)

Investing

Other

  • Who Are the Taliban and How Did They Conquer Afghanistan? (WSJ)
  • NFL Teams Should Just Acknowledge Their Rookie Quarterbacks Are Going to Play (SI)
  • We’re Entering a New Age of Asteroid Science (Axios)

MARKETS AT A GLANCE

Source: Morningstar Direct.

Source: Morningstar Direct.

Source: Treasury.gov

Source: Treasury.gov

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Do you want to receive financial market updates in your inbox? Sign up here! 

ABOUT THE AUTHOR

402.763.2967

jjenkins@lutz.us

LINKEDIN

JOSH JENKINS, CFA + CHIEF INVESTMENT OFFICER

Josh Jenkins is the Chief Investment Officer at Lutz Financial. With 12+ years of relevant experience, he specializes in assisting clients with portfolio construction, asset allocation, and investment risk management. He is also responsible for portfolio trading, research and thought leadership as well as analytics and operational efficiency for the Firm's Financial division. He lives in Omaha, NE.

AREAS OF FOCUS
  • Asset Allocation
  • Portfolio Management
  • Research & Data Analytics
  • Trading System Operation & Execution
AFFILIATIONS AND CREDENTIALS
  • Chartered Financial Analyst®
  • Chartered Financial Analyst Institute, Member
  • Chartered Financial Analyst Society of Nebraska, Member
EDUCATIONAL BACKGROUND
  • BSBA, University of Nebraska, Lincoln, NE

P: 402.827.2300 | F: 402.827.2319 | E: contact@lutzfinancial.com | 13616 California Street | Suite 200 | Omaha, NE 68154

All content © 2017 Lutz Financial  | Important Disclosure Information |  Privacy Policy

FORM CRS RELATIONSHIP SUMMARY