Summer 2011 

In this edition:

Market Update: Emotional Behavior
The behavior of the markets so far this year reminds me …

Raising the Debt Limit
The clock continues to tick towards the August 2, 2011 …

Racing Update
Ralph recently completed his eighth full marathon, the …

 

Emotional Behavior

The behavior of the markets so far this year reminds me of my last marathon race. My training was inadequate and my calf was sore. I misplaced my contact lenses and had to wear glasses. There were problems with the shuttles to the starting line. Because of all the uncertainty, I was neither confident of nor committed to my race strategy.

The economy and the markets do not appear to be in the kind of shape that’d have us expecting a great performance, and, as usual, the signs of an economic stall are rampant. The economy (GDP) should be growing between 3% and 4%, but it’s currently growing less than 2%. Unemployment remains stubbornly high, prices of food and energy continue climbing, confidence in our country’s leadership is waning, and just like this time last year, the European debt crisis constantly feeds the pessimists.

For the second year in a row, the stock market peaked in late April and had a tough go of it into June. Last year, the peak to trough correction on the S&P 500 index saw a decline of 16%. This year, we’ve already had two “pull-backs” of more than 5%. But pullbacks and corrections should be expected. According to data provided by JP Morgan Asset Management, in every one of the past 31 years there have been mid-year market declines averaging over 14%, but in 24 of those 31 years the market had positive annual returns at year end. Last year, in spite of the 16% Spring slide, the market ended the year up over 15%, including dividends.

Political commentators have really stoked the flames of the debate on Washington’s budget crisis. They would like nothing more than to see the spending / revenue debates go down to the final minutes. And it probably will. That’s how things get done in American politics. The extreme positions get forced into making practical compromises only when there’s a bigger threat if they don’t resolve the issue. Since the 1956 presidential election, they call it “brinkmanship”.

Bad news is what makes the news. People’s attention is riveted when they are scared. In my opinion, the networks no longer provide fair & balanced information, instead serving up a series of inflammatory soundbites followed by opinionated celebrity muckrakers, who are experts at getting the public emotionally engaged in the story.

Emotions interfere with rational decisions. I entered that marathon expecting to treat it like a workout, as I was recovering from an injury. But during the first half I “felt good” and increased my pace. Then, when the half marathoners split off the course, and I found myself basically running alone for several miles, I wasn’t having much fun. It was already too late, I’d burned too much of my body’s fuel. By the 22nd mile, I had to stop and rest; I had “bonked”.  When I crossed the finish line I felt terrible about the whole race

Economically, we don’t have anything or anyone giving us confidence right now. All we’re hearing is the daily give and take between the two sides of major issues. A reasonable compromise in Washington DC that ends the revenues versus spending stalemate (AKA the “debt ceiling”) would signal to the world that America still has the backbone to address its problems head-on.

Even when we don’t perceive things as being very good, the rational truth can be surprising. It turns out that I finished my race in 10th of 91 in my division. Similarly, most Americans have adjusted their lifestyles and expectations, yet we continue to be the wealthiest people in the wealthiest nation ever to exist. By-and-large we still believe that honest, hard-working people can succeed, and it is our collective energy that moves our economy forward. All we really need right now is a serious boost to our confidence.

As always, please feel free to call or email me with any questions or concerns.

Sources: Yahoo!Finance; The Wall Street Journal; JP Morgan Asset Management