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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
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1-Week
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Y-T-D
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1-Year
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3-Year
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5-Year
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10-Year
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Standard & Poor's 500 (Domestic Stocks)
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1.8%
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-5.1%
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-4.0%
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8.8%
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8.6%
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4.2%
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Dow Jones Global ex-U.S.
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2.2
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-7.0
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-13.6
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-3.8
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-2.6
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-0.7
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10-year Treasury Note (Yield Only)
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1.9
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NA
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1.8
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2.0
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3.4
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4.5
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Gold (per ounce)
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1.4
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4.7
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-12.4
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-12.6
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-3.5
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7.0
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Bloomberg Commodity Index
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2.6
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-1.7
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-21.8
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-18.2
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-14.0
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-7.8
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DJ Equity All REIT Total Return Index
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1.1
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-3.4
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-8.2
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7.5
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10.1
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6.3
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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.
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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."
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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.
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Best regards,
Lofy Group Wealth Management
P.S. Please feel free to forward this commentary to family, friends, or colleagues. If you would like us to add them to the list, please reply to this e-mail with their e-mail address and we will ask for their permission to be added.
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Securities offered through LPL Financial, Member FINRA/SIPC
Accounting and Legal Services are not affiliated with LPL Financial
* This newsletter was prepared by Peak Advisor Alliance.
* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
* The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices.
* 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 London afternoon gold price fix as reported by the London Bullion Market Association.
* The DJ 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 TR 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.
* Past performance does not guarantee future results.
* You cannot invest directly in an index.
* Consult your financial professional before making any investment decision.
Sources:
http://www.marketwatch.com/story/us-economy-gains-120000-jobs-in-march-2012-04-06
http://www.bloomberg.com/news/2012-04-05/gap-target-same-store-sales-gain-on-warm-march-weather.html
http://www.cnn.com/2012/03/19/opinion/happiness-success-achor/index.html?iref=allsearch
http://www.guardian.co.uk/sustainable-business/bhutan-advise-united-nations-happiness
http://www.goodreads.com/quotes/tag/happiness
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