Journey from Naive to Evidence-Based Investing
Contributed by Doug Walters, Max Berkovich
On September 11th, 2001, in the midst of the dot com implosion, the United States endured an unthinkable shock as American Airlines Flight 11 crashed into the North Tower of the World Trade Center. The subsequent events of that sad day are etched into the minds of Americans. For me, it was the start of a journey.
I was living in Manhattan at the time and three days away from boarding a plane to London to begin my career in finance. With the stock market closed and air travel grounded, the flight, the move overseas, and a career in finance all seemed impossible (both physically and emotionally). Twenty years later, it is still difficult to think about that day without tears. But that naive young investor, that stepped aboard that British Airways flight on September 14th, 2001, is a distant memory.
The past twenty years have provided an unprecedented training ground for investors. The dot com bust, 9/11, The Financial Crisis of 2008, and the current coronavirus pandemic all caused market disruptions and tested investors’ emotions. Yet, through it all, the S&P 500 has returned over 500%! When you are in those difficult moments, surrounded by negative news flow, the tendency is to shed risk and run for cover. But that is how value is permanently destroyed! The research shows, and the events of the past twenty years have taught me, that investors who can put those emotions aside and take a more evidence-based approach have an advantage. In other words, investing should be about science, not speculation.
Today, the stock market seems to know only one direction; up. There will be a time when it falls again, and that is okay. Investors should not try to predict the fall, and when it happens, they should not overreact. The past twenty years have prepared us well for whatever comes next.
We snapped this photo just a few weeks before 9/11 while sightseeing on the Hudson with some visiting friends. We will never forget.
Stocks ended the week down as investors faced concerns over the continued impact of the coronavirus delta variant, the impending pullback of Federal Reserve stimulus, and the lapse of covid unemployment benefits.
Falling Off the Benefits Cliff
Many covid benefits expired last weekend, with roughly 7.5 million people losing their expanded unemployment coverage and around 3 million losing the $300 supplement.
- Proponents say this will encourage more individuals back into the workforce. The “JOLTS” report on Wednesday (which looks at job openings) showed there are a record 10.9 million job openings in the US. So there are jobs… although there is no indication if the jobs match the skills of those looking.
- Detractors point to states that have already pulled benefits and have seen minimal impact on the return to work. Covid fear and lack of child care are cited as contributors.
Raising the Roof
Debt ceiling talks are likely to heat up in the coming weeks.
- Treasury Secretary Yellen has called for an increase in the national debt ceiling to avoid a default in October if a bill is not passed.
- The US technically hit the current $28 trillion debt ceiling back in early August. Since then, the Treasury has been pulling levers to not exceed it. They will run out of levers in October.
- Failure to reach a deal would cause the US to default on its debt and likely be economically disastrous. We have been here before (about every two years), and never have lawmakers allowed default to occur. However, the political wrangling impacts bond pricing, so expect fixed income volatility over the next few weeks.
A Building Debate
Speaking of political wrangling, the debate continues on the $3.5 trillion proposed infrastructure bill.
- The debate is largely among Democrats who need to somehow find common ground between the moderate and progressive ends of the spectrum to get the needed 50 votes in the Senate.
- Investors are closely watching the bill for details on how it will be paid for, including, potentially, higher corporate and capital gains taxes.
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