Making Your Own Luck
On this Saint Patrick’s Day, investors will find they did not need luck to recover from the lows of the pandemic (though a little bit of gold did help). Instead, all they needed was science.
Contributed by Doug Walters , Max Berkovich , ,
Saint Patrick’s Day is this Wednesday. After a week in the green and U.S. stock indexes hitting all-time highs, perhaps a little leprechaun luck will keep portfolios growing? If you invest properly, luck has nothing to do with it (though you might just find some gold).
We often say that investing should be about science, not speculation. So, no, luck has no place in our process. However, investors can, to a degree, make their own luck. The average investor underperforms the broad market. Research studies highlight numerous behavioral biases in the human brain that are to blame. One of the most devastating is the tendency for investors to feel they need to take action.
We are wired for action. Consider a study on elite soccer goalkeepers1. Data from the study indicates clearly that the best course of action for a goalie defending a penalty kick is to stand their ground in the middle of the goal. However, an overwhelming majority of goalies opt to take action by diving left or right. Why is this? The explanation is psychological. A goalie who dives and gets scored on feels better about their action than the goalie who stands still and gets scored on. The effect amplifies in the face of loss. The same is true in investing. When portfolio values are falling, like they were last March, the natural tendency is to want to take action, and often the wrong action. Staying fully invested at a level of risk appropriate for you is almost always the best approach.
We are approaching the first anniversary of the bottom of the pandemic stock market crash (March 23rd). Have a look at your one-year returns. Investors who followed the science, and held their nerve in a well-diversified portfolio (including gold!), will have found they indeed made their own luck!
Headlines This Week
The Vaccine Plan
- In a prime-time address, President Biden called on states to open vaccine access to all adults by May in hopes to normalize the economy by Independence Day.
- About 20%, or 66 million, of the U.S. population, has been vaccinated to date. To get herd immunity in the U.S., we need to have 80%-90% of our population vaccinated. So at a minimum, we need about 210 million doses of the vaccine to be distributed.
- With rapidly increasing production of the vaccines from Pfizer (PFE), Moderna (MRNA), Johnson & Johnson (JNJ), and Novavax (NVAX), the U.S. has a real shot at vaccinating all those who desire the vaccine by the end of summer.
- Logistics are still challenging, however. For example, to distribute the Pfizer vaccine, the truck has to be packed with dry ice to keep the temperature below -70 degrees Celsius and -20 degrees Celsius for Moderna’s vaccine.
Big and Bold
- Biden signed the $1.9T relief bill into law. The U.S. Secretary of the Treasury Janet Yellen said that Americans will begin receiving $1,400 relief payments as soon as this weekend.
- Now that the relief bill is done, the focus shifts towards a $2-4 trillion dollar infrastructure plan and Federal minimal wage increase.
- The infrastructure bill will focus on physical infrastructure, the auto industry, zero-emission transit, clean energy, buildings and housing, agriculture, and the environment.
- On the economic front, the core Consumer Price Index (CPI, a measure of inflation) was a bit softer than expected.
- There were concerns that inflation rising too quickly would prompt the Federal Reserve to tighten slightly, but that is not the case yet. Core CPI is running at a 1.3% year-on-year rate, while the Fed is targeting an average of 2%.
- According to Bank of America, about $41.5B moved to equities last week.
- During the same period, investors moved $15.4B out of bonds.
- Investors continue to favor Value, as cheap, cyclical stocks are making a comeback after underperforming Growth and Momentum stocks over the past few years.
- Investors are expecting brief inflation from pent-up demand as the economy reopens this summer. Sectors like Consumer Discretionary and Energy should see a nice boost as people return to travel and shopping.
% of U.S. Population that has received at least one vaccination dose
Source: Centers for Disease Control and Prevention
The Week Ahead
With the U.S. Federal Reserve, Bank of England, and Bank of Japan all scheduled to have their rate decisions next week, it is safe to assume the economic outlooks and press conferences from central bankers will grab all the headlines.
- Rate decisions no longer mean central banks will do anything with rates. All focus will be on what other tools the banks will use to keep the economies moving towards recovery and when they will start lifting their foot off the gas.
10 & 20
With recent Treasury auction anxiety grabbing headlines, another bout is on the card with a 20-year Treasury and a 10-year Inflation protection security coming to market next week.
- The appetite for the U.S. government’s debt this past week was solid, so another successful market test will be important to help calm the markets.
This week brings us the tip-off of the NCAA College Basketball tournament.
- 68 teams will play single-elimination tournament entirely in the State of Indiana due to Covid-19 related logistics.
- Last year’s tournament was canceled, so we welcome March Madness back with great anticipation.
- Gonzaga University Bulldogs will make their 23rd appearance in the tournament and enter the tournament unbeaten this season.
- Do not forget to advance the clock one hour on Sunday.
Wednesday is St. Patrick’s Day.
- Here’s hoping for a Leprechaun to cross your way and bless you with a pot of gold! Even if that does not happen, you can find gold in our portfolio strategies! Happy St. Patrick’s Day!
1. Bar-Eli, Azar, Ritov, Keidar-Levin and Shein, “Action Bias Among Elite Soccer Goalkeepers: The Case of Penalty Kicks”, Journal of Economic Psychology Volume 28, Issue 5 (October 2007): 606-621
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