Peek of the Week
February 1, 2016
The
Markets
How low can you go?
The Bank of Japan (BOJ) dove into the negative
interest rate rabbit hole last week when it dropped its benchmark interest rate
to minus 0.1 percent. If you’ve been following Japan’s story, then you know the
country has been struggling with deflation for almost two decades. The BOJ’s
goal is to push inflation up to 2 percent. MarketWatch
explained the idea behind negative interest rates:
“Central banks use their deposit to influence how
banks handle their reserves. In the case of negative rates, central banks want
to dissuade lenders from parking cash with them. The hope is that they will use
that money to lend to individuals and businesses which, in turn, will spend the
money and boost the economy and contribute to inflation.”
If the idea of negative interest rates sounds
familiar, it’s probably because Europe has been delving into negative interest
rate territory for a while. Several European central banks have adopted
negative interest rate strategies, and about one-third of the bonds issued by
governments in the eurozone offered negative yields at the end of 2015. It’s an
unusual state of affairs – offering investors bonds that pay less than nothing.
If investors hold to maturity, they get back less than their investment amount.
While negative rates may not be pleasing to bond
buyers, U.S. stock markets were thrilled by the BOJ’s surprise rate cut. Major
indices rose by about 2 percent on Friday.
Market performance was also boosted by a
bad-news-is-good-news interpretation of weak fourth quarter U.S. gross domestic
product (GDP) growth estimates. According to Reuters, slower growth in the U.S. economy raised investors’ hopes the
Federal Reserve would hold back on future rate hikes.
Data as of 1/29/16
|
1-Week
|
Y-T-D
|
1-Year
|
3-Year
|
5-Year
|
10-Year
|
|
Standard &
Poor's 500 (Domestic Stocks)
|
1.8%
|
-5.1%
|
-4.0%
|
8.8%
|
8.6%
|
4.2%
|
|
Dow Jones Global
ex-U.S.
|
2.2
|
-7.0
|
-13.6
|
-3.8
|
-2.6
|
-0.7
|
|
10-year Treasury
Note (Yield Only)
|
1.9
|
NA
|
1.8
|
2.0
|
3.4
|
4.5
|
|
Gold (per ounce)
|
1.4
|
4.7
|
-12.4
|
-12.6
|
-3.5
|
7.0
|
|
Bloomberg Commodity Index
|
2.6
|
-1.7
|
-21.8
|
-18.2
|
-14.0
|
-7.8
|
|
DJ Equity All REIT Total Return Index
|
1.1
|
-3.4
|
-8.2
|
7.5
|
10.1
|
6.3
|
S&P 500, Dow Jones Global ex-US, Gold, Bloomberg
Commodity Index returns exclude reinvested dividends (gold does not pay a
dividend) and the three-, five-, and 10-year returns are annualized; the DJ
Equity All REIT Total Return Index does include reinvested dividends and the
three-, five-, and 10-year returns are annualized; and the 10-year Treasury
Note is simply the yield at the close of the day on each of the historical time
periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com,
London Bullion Market Association.
Past performance is no guarantee of future results.
Indices are unmanaged and cannot be invested into directly. N/A means not
applicable.
Does the stock
market overreact? Some experts say it
does. In 1985, Werner DeBondt, currently a professor of finance at DePaul
University, and Richard Thaler, currently a professor of behavioral science and
economics at the University of Chicago, published an article titled, Does The Stock Market Overreact?
The professors were among the first economists to
study behavioral finance, which explores the ways in which psychology explains
investors’ behavior. Classic economic theory assumes all people make rational
decisions all the time and always act in ways that optimize their benefits.
Behavioral finance recognizes people don’t always act in rational ways, and it
tries to explain how irrational behavior affects markets.
DeBondt and Thaler’s research,
which has been explored and disputed over the years, supported the idea that
markets tend to overreact to “unexpected and dramatic news and events.” The
pair found people tend to give too much weight to new information. As a result,
stock markets often are buffeted by bouts of optimism and bouts of pessimism,
which push stock prices higher or lower than they deserve to be.
In a recent memo, Oaktree Capital’s Howard Marks
reiterated his long-held opinion, “…In order to be successful, an investor has
to understand not just finance, accounting, and economics, but also
psychology.” He makes a good point.
When markets become volatile, it’s a good idea to
remember the words of Benjamin Graham, author of The Intelligent Investor, who wrote, “By developing your discipline
and courage, you can refuse to let other people’s mood swings govern your
financial destiny. In the end, how your investments behave is much less
important than how you behave.”
Weekly Focus –
Think About It
“Keep your eyes on the stars,
and your feet on the ground.”
--Theodore Roosevelt, 26th President
of the United States
Best
regards,
Leif M. Hagen
Leif M. Hagen, CLU, ChFC
LP Financial Advisor
Securities
offered through LPL Financial Inc.,
Member
FINRA/SIPC.
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* This newsletter was
prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with
the named broker/dealer.
* The Standard & Poor's
500 (S&P 500) is an unmanaged group of securities considered to be
representative of the stock
market in general. You cannot invest directly in this index.
* The Standard & Poor’s
500 (S&P 500) is an unmanaged index. Unmanaged index returns do not reflect
fees,
expenses, or sales charges.
Index performance is not indicative of the performance of any investment.
* The 10-year Treasury Note
represents debt owed by the United States Treasury to the public. Since the
U.S.
Government is seen as a
risk-free borrower, investors use the 10-year Treasury Note as a benchmark for
the long-term bond market.
* Gold represents the
afternoon gold price as reported by the London Bullion Market Association.
The gold price is set twice
daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in
U.S. dollars per fine troy ounce.
* The Bloomberg Commodity
Index is designed to be a highly liquid and diversified benchmark for the
commodity futures market. The Index is composed of futures contracts on 19
physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT
Total Return Index measures the total return performance of the equity
subcategory of the Real Estate Investment Trust (REIT) industry as calculated
by Dow Jones.
* Yahoo! Finance is the
source for any reference to the performance of an index between two specific
periods.
* Opinions expressed are
subject to change without notice and 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.
* You cannot invest directly
in an index.
* Consult your financial
professional before making any investment decision.
* Stock investing involves
risk including loss of principal.
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Sources:
