A Time for Emotionally Intelligent Investing

Doug Walters, CFA

Celebrating the strong investment performance this week is okay, but those emotions need to be left at the door when it comes time to plot your next portfolio move.

Contributed by Doug Walters, Max Berkovich, David Lemire,

I’ll be the first to admit that it feels good to be writing Insights this week with stocks closing in the green. Six percent performance is a big week in any environment! While we can enjoy the moment, we know this could easily be another bear market head fake (but it still feels good).

Regular Insights readers might be surprised to read the emotions in the above paragraph. After all, we are evidence-based investors! Behavioral biases are the enemy, and emotion is not in our DNA! Right? Yes and no.

It is okay to be pleased when your investments are performing well and to cringe when they are not. What is not okay is if these emotions bleed into your investment decisions. It is all too common for bull markets to lead to excessive risk-taking. Suddenly everyone knows someone getting rich on a hot tip, crypto, meme stocks, or SPACs and wants in on the action. And when the bear market rears its head, investors are looking for “safe alternatives” and de-risking their portfolios. Without emotion, these common pitfalls are much easier to avoid.

Emotion’s impact on investing is well-researched. If you are like me and enjoy a good psychological study, check out this one by Shiv et al. (Investment Behavior and the Negative Side of Emotion). They used a unique group of participants with brain damage that inhibited their ability to feel emotion. The study showed that their investment decision-making was far superior to their emotional counterparts.

We cannot eliminate emotion (nor would we want to), but we can isolate them from our investment decision-making with an evidence-based process built on science, not speculation. So, the next time you contemplate a change to your investments, pause and ensure your motivation is logical and not emotional.

Headline of the Week

Big moves in stocks and bonds this week, with both moving in the right direction for long investors. Stocks rallied, up over 6% on the week, while bonds were generally in the green. “Peak” narratives dominated economic commentary, providing our headline of the week.

Whether justified or not, investor attention turned to peak inflation and peak “Fed” narratives this week.
We will get a read on inflation with the PCE indicator next week and expectations now are that the peak may be behind us.
In addition, estimates for where Fed rates will be a year from now have come down, indicating increasing comfort that the Fed is successfully catching up to inflation.
Time will tell if this week’s optimism is justified, but investors have been able to catch their breath this week.

The Week Ahead

The last week of the 2nd quarter brings a sea of data releases. The big ones to keep an eye on are the 1st Quarter GDP final read and the Personal Consumption Expenditures Index (PCE).

Core Concern

The Personal Consumption Expenditures Price Index (PCE) is a key inflation gauge that the Federal Reserve prefers. Other economic releases include Durable Goods Orders, Personal Income, Consumer Confidence, House Prices, and Vehicle Sales.

April inflation was 6.3% year over year, declining from 6.6% in March, so another leg down in May will be a sign of easing inflation.
The “core” number excludes food and energy, which economists believe is the most volatile, came in under 5% in April.
A dip and another successive month under 5% would be good news for markets.
Core PCE estimates going into the report are for 4.8%.
The other inflation reading, Consumer Price Index, was stubbornly uncooperative, but the Producer Price Index did indicate some ease in inflation. A confirmation of that should help prognosticators to revisit their interest rate predictions.
Most of the other domestic economic releases, while important, should take a backseat to the inflation report.

For the Third Time!

The last and final read on the Gross Domestic Product (GDP) for the 1st quarter will be released on Wednesday.

This will not be a new number. The initial reads were for a decline of 1.5%. However, there may be positive revisions to some of the underlying data.
The decline in the early part of the year was blamed on inventories and trade, which most economists hinted understated the health of the economy.
If that analysis proves correct, we might be able to rebound in the 2nd quarter and avoid a recession (two consecutive quarters of GDP decline).

Going to the Mountains

The Federal Reserve has its end-of-summer Jackson Hole symposium. The European Central Bank will host its version next week.

The 3-day gathering in Portugal’s foothills of the Sintra Mountains gathers central bankers and academics to discuss views and policy issues.
Inflation and slowing global growth will be the central issue.
The forum will have speaking events from Federal Reserve Chairman Powell, ECB chief Christine Lagarde and Bank of England Governor Andrew Bailey, amongst the many other key monetary policy influencers.
With all that economic star power, the event is sure to be newsworthy.

About Strategic

Founded in 1979, Strategic is a leading investment and wealth management firm managing and advising on total client assets of over $2 billion.

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