Personal Economics 101

By J.P. Morgan Wealth Management Birds and bees are great – but so are brains. In the last few decades, behavioral finance has emerged as a field of study that merges psychology and finance. It’s a subset within the field of behavioral economics, which was developed by, we assume, super smart dudes named Daniel Kahneman and Amos Tversky. In 1979, they proposed the idea of prospect theory, which argues that people make decisions based on the potential value of gains and losses rather than the utility of a decision itself. Their empirical findings challenged the assumption that human rationality prevailed in modern economic theory – and in 2002, Kahneman even won the Nobel Memorial Prize in Economic Sciences. (See, we were right, they are super smart.) To put it simply: investors are humans. We feel greed, fear, hope, excitement – all sorts of emotions impact our behavior on the micro and macro levels. It is precisely because we are human that we often make irrational decisions. Behavior...

I guess my portfolio (13% Bond, 70% Stock and 17% Cash) isn't doing to badly, with a YTD return (including dividends) of 3%. About 25% of my stocks are either in, or were, in energy. I sold about half my holdings a few months ago and invested in income producing ETFs.

A bond selloff (lower prices means higher yields) is deepening after Monday's (March 21) comments from Jerome Powell, which said the Fed is prepared to act even more aggressively to tackle inflation. The yield on the 10-year Treasury has soared 20 basis points to 2.32% since the remarks, leading to the worst month for the asset class since 2016. Meanwhile, the 2-year Treasury yield broke above 2%, jumping almost 24 bps over the past 24 hours to reach 2.19%, as the yield curve hurtles towards an inversion (or one of the best indicators of a coming recession). Stocks are hanging in there despite the latest comments - closing in positive territory yesterday - while futures linked to the major averages are up another 0.4% Tuesday morning. Quote: "If we determine that we need to tighten beyond common measures of neutral (i.e. an interest rate that neither hinders nor fuels economic growth) and into a more restrictive stance, we will do that," Jerome Powell announced during a s...

Fed chair Jerome Powell was appeared before Congress yesterday to give his semi-annual monetary policy report. In no uncertain terms, he backed a rate hike at the Fed's upcoming meeting on March 15-16. Specifically, Powell said he was "inclined to propose and support a 25 basis-point rate hike"-- the kind of plain-speak you rarely hear from Fed chairs, ever, about future tightening plans. Goldman Sachs reiterated their call for seven hikes -- one per meeting -- this year soon after Powell's remarks. The market isn't fully pricing that in yet. Of course everybody is extremely nervous about how poorly events could play out in Ukraine, or even closer to home, based on Russia's continued military action. But as Powell himself noted, we have no idea how those events will play out. What we do know is the impact they already having -- an impact that is undoing the Fed's efforts to tighten and lessen inflationary pressures in the U.S. economy. How so?  (1) Interes...

U.S. equities finished lower (see below), with the S&P 500 venturing further into correction territory for the first time since mid-2020, as the markets continued to fret over events in Ukraine.  After the movement of Russian troops into some of Ukraine's eastern regions, the country's Ministry of Digital Transformation said a mass cyberattack disabled bank and government websites, prompting further actions from Western governments.  President Biden cut off resources to the two regions and announced further sanctions on Russia, while meetings scheduled between the U.S. and Russia have been tabled. Moreover, Germany halted the certification of the potentially key Nord Stream 2 pipeline.  The markets also continued to grapple with elevated expectations of tighter global monetary policies, while digesting another round of earnings reports. Lowe's Companies rose following its quarterly performance and guidance, while Palo Alto Networks was higher on its report, though TJX...

The Federal Open Market Committee (FOMC) concluded its two-day monetary policy meeting, making no change to the Fed funds rate, as was widely expected. However, it hinted at the possibility of its first rate hike since 2018 being around the corner, saying, "With inflation well above 2% and a strong labor market, the committee expects it will soon be appropriate to raise the target range for the federal funds."  As well, in its statement of "Decisions Regarding Monetary Policy Implementation," the Committee said it expects its balance sheet reduction "will commence after the process of increasing the target range for the federal funds rate has begun." Schwab's Chief Fixed Income Strategist, Kathy Jones notes in her latest article, The Fed's Policy Tightening Plan: A One-Two Punch, how beginning quantitative tightening soon after rate hikes is a big departure from the Federal Reserve's past policy. The FOMC also said it will continue to taper its...

 A 10 percent drop in any market means that market is in a correction. A drop of 20 percent is normally defined as a bear market.  The Dow Jones Industrial Average (DJIA) is down 5.25% from its high in early January. IWM, which tracks the Russell 2000, is down 16.5% since it's high in 2021. The NASDAQ 100 is down 15% since its high in November 2021. The S&P 500 index is down 5.87%. The drop in prices have been strongest in tech and small caps, with larger cap stocks not reaching correction status quite yet. 

Certain ETFs used covered calls to generate extra income, which are returned to shareholders as dividends. With most of these ETFs, income is the priority; capital gains are secondary. One example of this type of ETF is QYLD , Nasdaq 100 Covered Call ETF. Some, such as QYLG and XYLG, only sell calls on about 50 percent of their holdings in order to increase the possibility of gains. One EFT, NUSI, also write puts, as a hedge against a bear market. (Note: The possibility of gains also increases the risk of losses, so judge accordingly.) If you're looking for income, you should consider one or more of these ETFs. Note that QQQ and SPY, which as pure equity plays, had great returns, but the markets were up last year. This would be different in a down year. Also note that these covered call ETFs are new enough that they have not been tested during a bear market.  Consider that the volume on some ETFs, such as XYLG, has a daily average volume of less than 10,000 shares. This will cause...

In early 2020, I answered the following question posed on Quora :  What will be the best investment strategies for late 2019 going into 2020? Here is the answer I wrote, along with comments today as an update for 2022.  I used this strategy in 2021 and my portfolio returned 16.09% for the year. While not as much as the S&P 500 (about 30%), it did yield 5.9% in income, which was my objective, since I'm retired and looking for income).  I don’t really change my strategy, which is long-term. I may change the allocation of my portfolio, based on current events. While you could be in cash 100 percent right now, you would not have any earnings on your investments. In fact, you’d be losing about 2 percent annually due to inflation. So that’s not a very good strategy. (For 2022, this would be closer to 6 percent inflation). While it is probable that there will not be a recession in the next few months, if we created a strategy that assumed the worse, we might miss the opportu...

U.S. equities began the holiday-shortened week on a down note, as uncertainty regarding the ultimate impact of the omicron variant persists. All the major sectors were in the red, led by Financials, Consumer Discretionary and Information Technology, while Health Care issues were also lower despite Moderna's announcement of positive results of its COVID booster against omicron.  The markets also grappled with dampened expectations (in my opinion, this should be positive) regarding the passing of President Biden's social spending and climate plan after Democratic senator Joe Manchin said he won't support the bill.  In economic news, leading indicators accelerated more than expected and posted the ninth-straight monthly gain. In other equity news, Oracle Corporation confirmed last week's reports that it agreed to acquire Cerner Corporation for an equity value of $28.3 billion.  Treasuries were mixed, and the U.S. dollar was little changed, while crude oil prices tumbled, a...

The bulls' attempt to extend yesterday's rally that was sparked by the Fed's decision to speed up the tapering of its asset purchases fell short, as U.S. equities did an about-face to finish lower amid continued worries over the omicron variant.  The markets also digested monetary policy decisions out of Europe, with the European Central Bank temporarily increasing its asset purchases and the Bank of England unexpectedly raising its benchmark interest rate.  Investors also sifted through a host of economic data that showed jobless claims modestly bounced off multi-decade lows, housing construction activity came in stronger than expected, manufacturing and services sector growth decelerated, and industrial production rose at a slightly smaller pace than anticipated.  In equity news, Lennar Corporation and Adobe traded lower following their earnings reports, while Accenture rallied in the wake of its earnings results and guidance.  Treasuries were mixed and the U.S. do...

About 18 months ago, I overloaded (30 percent) my portfolio in energy, with ETFs FENY, VDE, and IEZ, along with pipeline and delivery plays AMLP and MPLX. These are increasing in value as energy prices are on the increase and are paying decent dividends along the way. This was a contrarian play; because traditional energy was going out of favor, I felt that over the next few years, it would increase in value. I was right, and Biden's anti-oil policies have only helped me.  Energy prices continue to surge to fresh records as renewed fears stoke panic of the worst shortage in decades. India has warned it has only four days of coal reserves left, German power plants are running out of fuel and China just unloaded an Australian coal shipment despite an import ban and icy relations. Supply is just not there as economies rebound from a pandemic-induced lull, while problems like logistical logjams and transport bottlenecks are adding to the pressure. OPEC+ didn't come to the rescue ye...

We are experiencing inflation for the first time in a long time: at least four decades as a matter of fact. We are also experiencing scarcity in some goods and services. I am 69 years old—the only time in my life that I recall experiencing this level of scarcity was with gasoline in the 1970s because of the oil embargo.  From what I recall of the 70s, people were plenty grumpy about having to do even/odd days at gas stations and sit in hour-long lines. And the interest rate on my mortgage was north of 10 percent. Americans are generally great people. But we are not good at rationing scarce resources. It is every man for himself. If I think we are going to run out of cat food, I am not going to leave some in the store for my neighbor. My cats are more important. It’s simply supply and demand. Supply is shrinking for a variety of reasons, but a big reason is the shrinking labor supply—there simply aren’t enough people to transport it and stock it and put it on the shelves. People are...

The S&P 500 is up 20% this year, without a single 5 percent pullback or correction. Last week, we saw between 2 to 3 percent pullback and I advised staying the course . This week, markets were up about 3 percent. While there is no way to predict the future, at some point the market will correct. There's not a lot that the market seems troubled by: Afghanistan, Covid, or Inflation seems of little concern to investors right now. Actually, the economy is doing pretty well, all things considered, and business profits are looking OK. And ultimately, profits drive the market.  The Fed is not going to do anything until later this year. So interest rates will continue to be low. But look for a change near the end of the year, first of next year. That may change market dynamics if the Fed allows interest rates to rise.  Have a plan to exit the market if you're still fully invested. And not just equities. Watch bond prices. As the Fed tapers is bond purchases, the upward pressure on...

In my opinion, there is nothing to do. If you're a long-term investor and you have a plan, and the plan is still valid, I wouldn't change a thing. Based on a chart of the NASDAQ, there is no indication of a change of trend. The DJIA and SP500 look similar.   My portfolio allocation is: 40% Bonds, 30% Energy Stocks and MLPs, 18% Percent Large Cap Stocks; 10% REIT, and 2% Cash. The portfolio earns about 5.2% of market value in dividends.  Note: My portfolio is heavy in energy because 1) I know the industry, 2) there is good potential on the upside in the next three years, and 3) the dividend earnings are between 4% and 5%. I do not recommend this for everyone. Know what you invest in. 

Stocks slipped on Tuesday and Wednesday morning following a drop in retail sales, which fell 1.1% in June, driven largely by a slump in car sales. Earnings reports from Home Depot ( HD ) and Walmart ( WMT ) didn't help investing sentiment either amid flattening revenue growth and slowing e-commerce trends. The retail bonanza continues this morning with earnings from Target ( TGT ), Lowe's ( LOW ) and TJX Companies ( TJX ). Fed minutes: Not a day goes by that there isn't some action, with the catalyst today being the Fed's most recent policy meeting. The minutes may show discussions about tapering monthly bond purchases, or just how divided FOMC officials are on the debate. Yesterday, Fed Chair Jerome Powell said the pandemic is "still casting a shadow on economic activity," and stock futures wavered around the flatline overnight as investors continued to size up the market. The bulls: "We remain bullish on stocks (particularly cyclicals/value) thanks to a...

In this video Peter Lynch offers 8 investing rules for all beginner investors to follow. They're simple but the hard thing is sticking to them! Peter Lynch is an American investor, mutual fund manager, and philanthropist. As the manager of the Magellan Fund at Fidelity Investments between 1977 and 1990, Lynch averaged a 29.2% annual return, consistently more than double the S&P 500 stock market index and making it the best-performing mutual fund in the world. 1. Small investor's have a huge advantage 2. Know what you own 3. Don't invest purely on others opinions 4. Focus on the company behind the stock 5. Don't try to predict the market 6. Study history. Market crashes are great opportunities 7. You have plenty of time 8. You need an edge to make money I highly recommend his book.  From Amazon:  One Up On Wall Street