Trade War Revisited 11/26/18

The Markets

It was a turkey of a week.

The United States and China continued to spar over trade and other issues. An expert from Moody’s told Frank Tang of the South China Morning Post (SCMP) the United States-China dispute will not be easily resolved:

“Look at the speech Vice President Pence gave in Papua New Guinea at the Apec conference. He didn’t just talk about trade, but also intellectual property, the South China Sea, forced technology transfers. So there’s a whole long list of issues the U.S. administration is now raising…”

Financial Times reported the Organization for Economic Coordination and Development (OECD) anticipates global economic growth could stumble if trade tensions escalate.

SCMP reported investors are hoping for greater clarity around trade issues when President Donald Trump meets with China’s President Xi Jinping at next week’s G-20 Summit.

The climate report added a new dimension to uncertainty about economic growth last week, reported Fortune. Black Friday shoppers may have missed it, but the U.S. government released the 4th National Climate Assessment on Friday. Ed Crooks of Financial Times summarized some of the report’s economic findings:

“The largest costs of climate change for the United States this century were expected to come from lost ability to work outdoors, heat-related deaths, and flooding…If [greenhouse gas] emissions are not curbed it warns, ‘it is very likely that some physical and ecological impacts will be irreversible for thousands of years, while others will be permanent.’”

Major U.S. stocks indices finished the week lower. It was the biggest drop during Thanksgiving week since 2011, according to CNBC.com.

AMERICANS ARE HARD WORKING AND GENEROUS. 

Take a guess: How many hours do Americans work each year relative to Europeans? 

Here are a few hints provided by The Economist and Expatica:

• The average American has 23 vacation days each year.

• The Spanish and the Swedes average 36 vacation days each year.

• Workers in the European Union are guaranteed at least 20 paid days of holiday each year, excluding public holidays.

• The United States has 10 public holidays.

• The British have 8 public holidays.

• Germans may enjoy as many as 13 public holidays, depending on where they live.

So, how many hours do Americans work relative to our European counterparts?  

In a typical year, Americans work 100 hours more than the British, 300 hours more than the French, and 400 hours more than the Germans, on average. The Economist reported:

“In 2017 the average American took 17.2 days of vacation. That was a slight rise on the 16 days recorded in 2014 but still below the 1978-2000 average of 20.3 days. Around half of all workers do not take their full allotment of days off, which averages around 23 days. In effect, many Americans spend part of the year working for nothing, donating the equivalent of $561 on average to their firms.”

That’s pretty generous.

There is a case to be built for the importance of taking more vacation time, according to the Harvard Business Review. “Statistically, taking more vacation results in greater success at work as well as lower stress and more happiness at work and home.”

Food for thought as you consider New Year’s Resolutions.

Weekly Focus – Think About It 

“When you are inspired by some great purpose, some extraordinary project, all your thoughts break their bonds: your mind transcends limitations, your consciousness expands in every direction, and you find yourself in a new, great, and wonderful world. Dormant forces, faculties, and talents become alive, and you discover yourself to be a greater person by far than you ever dreamed yourself to be.”

--Patanjali, Hindu author and philosopher

Keep Your Eyes On The Horizon 11/19/18

The Markets

Keep your eyes on the horizon.

Motion sickness happens when your body receives conflicting signals from your eyes, ears, and other body parts. One way to manage the anxiety and queasiness that accompany the condition is by keeping your eyes on the horizon.

The motion of the stock markets has been causing some investors to experience similar symptoms. Surprisingly, the remedy is the same: Keep your eyes on the horizon – your financial planning horizon.  

A planning horizon is the length of time over which an investor would like to achieve his or her financial goals. For instance, perhaps you want to pay off student loans by age 30, fund a child’s college tuition when they reach age 18, or retire at age 60.

When stock markets are volatile, an investor may receive conflicting signals from various sources, which may induce anxiety and queasiness. When you start to worry about the effects of market volatility on your portfolio, remember stock markets have trended higher, historically, even after significant downturns.

For instance, in 2008, during the financial crisis, the Dow Jones Industrial Average lost about 33 percent. It finished the year at 8,776. The drop sparked tremendous anxiety among investors who wondered whether their portfolios would ever recover.

Last week, the Dow closed at 25,413.

While stock markets have trended higher historically, there is no guarantee they always will. That’s why asset allocation and diversification are so important. A carefully selected mix of assets and investments can reduce the impact of any single asset class or investment on a portfolio’s performance. Keep in mind, of course, past performance is no guarantee of future results.

Last week, stock markets finished lower. MarketWatch reported U.S. stocks moved higher on Friday after President Trump indicated he might not pursue tariffs against China.

What Is An Apology Worth? 

John List, an economist at the University of Chicago and Chief Economist for a ride-sharing app, needed to go from his house to the hotel where he was a keynote speaker. So, of course, he called his ride-sharing company. The experience was less than stellar, as he explained to Steven Dubner of Freakonomics Radio:

“So I get in the back of the car and it says I’m going to be there in 27 minutes. So I go into my own land of working on my slides, because of course I’m doing things at the last minute. I lose track of time. I look back up about 25 minutes later, and I’m back in front of my house…And I said, ‘Oh my god, what happened?’ The driver said, ‘I got really confused, and the GPS switched, and we turned around and I thought that you changed the destination, so I went back.’ So I told her immediately, ‘Turn around, go back.’ I missed part of my panel.”

List also missed an apology, which neither the driver nor the company offered.

He decided to investigate how much mistakes, like the one he experienced, cost the company and whether an apology would reduce the cost. As it turned out, the cost of 5 percent of trips that resulted in customers being 10 or 15 minutes late was 5 to 10 percent in lost revenue.

List enlisted the help of researchers Benjamin Ho of Vassar College, Basil Halperin of Massachusetts Institute of Technology, and Ian Muir of the ride-sharing company, and conducted a field experiment on clients of the ride-sharing company. They discovered apologies are not universally successful at reducing the costs associated with a bad experience. The most successful apologies had a monetary value. In their case, a $5 coupon produced a 2 percent increase in net spending.

The team discovered another important fact. Apologies lose value and can inflict reputational damage when a company has to apologize multiple times.

No surprise there.

Weekly Focus – Think About It 

“When dealing with people, remember you are not dealing with creatures of logic, but creatures of emotion.”

--Dale Carnegie, American writer and lecturer

Rise In Optimism 11/12/18

The Markets

How are you feeling about financial markets?

Some votes are still being counted but investors appear to be happy with the outcome of mid-term elections. Major U.S. stock indices in the United States moved higher last week, and the American Association of Individual Investors (AAII) Sentiment Survey reported:

“Optimism among individual investors about the short-term direction of stock prices is above average for just the second time in nine weeks…Bullish sentiment, expectations that stock prices will rise over the next six months, rose 3.4 percentage points to 41.3 percent. This is a five-week high. The historical average is 38.5 percent.”

Before you get too excited about the rise in optimism, you should know pessimism also remains at historically high levels. According to AAII:

“Bearish sentiment, expectations that stock prices will fall over the next six months, fell 3.3 percentage points to 31.2 percent. The drop was not steep enough to prevent pessimism from remaining above its historical average of 30.5 percent for the eighth time in nine weeks.”

So, from a historic perspective, investors are both more bullish and more bearish than average. If Sir John Templeton was correct, the mixed emotions of investors could be good news for stock markets. Templeton reportedly said, “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.”

While changes in sentiment are interesting market measurements, they shouldn’t be the only factor that influences investment decision-making. The most important gauge of an individual’s financial success is his or her progress toward achieving personal life goals – and goals change over time. 

Is A Zeal of zebras a better investment than a blessing of unicorns? 

Collective nouns are the names we use to describe collections or significant numbers of people, animals, and other things. The Oxford English Dictionary offered a few examples:

• A gaggle of geese

• A crash of rhinoceros

• A glaring of cats

• A stack of librarians

• A groove of DJs

In recent years, some investors have shown great interest in blessings of unicorns. ‘Unicorns’ are private, start-up companies that have grown at an accelerated pace and are valued at $1 billion.

In early 2018, estimates suggested there were approximately 135 unicorns in the United States. Will Gornall and Ilya A. Strebulaev took a closer look and found some unicorns were just gussied-up horses, though, according to research published in the Journal of Financial Economics.

The pair developed a financial model for valuing unicorn companies and reported, “After adjusting for these valuation-inflating terms, almost one-half (65 out of 135) of unicorns lose their unicorn status.”

Clearly, unicorn companies must be thoroughly researched. There is another opportunity Yifat Oron suggested deserves more attention from investors: zebra companies. Oron’s article in Entrepreneur explained:

“Zebra companies are characterized by doing real business, not aiming to disrupt current markets, achieving profitability and demonstrating it for a while, and helping to solve a societal problem…zebra companies…are for-profit and for a cause. We think of these businesses as having a ‘double bottom line’ – they're focused on alleviating social, environmental, or medical challenges while also tending to their own profitability.”

Including both types of companies in a portfolio seems like a reasonable approach. 

If you were to choose a collective noun to describe investors, what would it be? An exuberance? A balance? An influence?

Weekly Focus – Think About It 

“In his learnings under his brother Mahmoud, he had discovered that long human words rarely changed their meanings, but short words were slippery, changing without a pattern…Short human words were like trying to lift water with a knife.”

--Robert Heinlein, American science fiction writer