Is Our World Really a Bad Place?

world-held-up-by-hands-002Aren’t you glad the contentious presidential debates are now over?   Do you feel like the only things reported are politicians bashing each other and other terrible and depressing events?  Wondering what this world is coming to? Sick of the negativity?  Yes, we are too.

The problem is that “big data,” the media and politicians all know the “secret.”  Our brains are hard-wired to react strongly to negative impulses.  Not surprising, from the dawn of human history, survival depended on our skill at staying away from danger.  To ignore bad news could be dangerous and/or fatal.

That’s why political smear campaigns work better than positive ones.  Nastiness just makes a bigger impact on our brains.  Hence important political issues take a back seat to allegations of candidates being “crooked” or “womanizers.”

Researchers Marc Trussler and Stuart Soroka ran an experiment at McGill University in Canada focused on the kind of political news people really prefer to read.  Even though, when asked, participants said they wanted good news stories, in a controlled experiment they generally chose stories with a negative tone- corruptions, set-backs, and hypocrisy rather than neutral or positive stories.  We are all unfortunately naturally attracted to negative content.

This phenomenon is more solid evidence of our “negativity bias”, which is the psychologists’ term for our desire to hear and remember bad news.  Is it any surprise that the media and politicians know this and focus their content accordingly?

So, think of a typical evening newscast.  Out of 30 minutes, there are 28 minutes filled with stories of political accusations, tragic events around the world, reports of threatening diseases and commercials designed to suggest we can’t live without their product or service. And, at the end, two minutes of a heart-warming, human interest story.  So, basically 90% disturbing stories and 10% of what most of the world is really like.  Is it any surprise that we start to think the world is a bad place?

Let’s look at the facts.  There are 7 billion people on earth.  How many do you think are threats to the rest of us?  Let’s include the world’s worst politicians, terrorists, violent criminals, corrupt corporate officers and downright evil people.  Let’s say there are 7 million of these threats to society.  That’s less than 1/10 of one percent.  In other words, 99.9% of the people in the world are likely decent human beings or at least not a threat to others.

Mahatma Gandhi summed it up this way:  “You must not lose faith in humanity.  Humanity is an ocean; if a few drops of the ocean are dirty, the ocean does not become dirty.”

In addition, the negativity bias impacts more than just our reactions to politicians and the media.  It impacts our relationships with friends and loved ones as well.  Because negative interactions take on a greater weight in our brains than positive interactions, we must have more positive stimuli than negative just to “stay even.” Researchers suggest a ratio of five to one.  For example, studies show that marriages where there was five times the positive interaction as compared to negative interaction were likely to be stable over time.  Couples heading for a divorce generally had a ratio of less than 5 to 1 and sometimes below 1 to 1.  Our other relationships need the similar 5 to 1 ratio for success.  Great relationships in life may be built over time on many small positive interactions.

I am sure we all cannot wait to have November 8th and our presidential election behind us.  Regardless of your political feelings, we must all agree that this “dirt” that both parties have been throwing into our “ocean” is sickening.  Let’s hope both parties give us better choices in the future.  For now, we might all benefit by just turning off the news sometimes and instead identifying and celebrating positive, even if small, observations in our daily lives.  And, then taking the time to provide positive communication, smiles and interaction with our loved ones, friends, associates and even those we pass on the street. The world is not a bad place.  Our ocean of humanity is not dirty.  Let’s all just do our part to keep it clean.

Election Musings

Trump ClintonAs the DNC convention concludes, we now have our two Presidential candidates and about 100 more days of campaigning before the Election on November 8th.  In a year of unprecedented dislike of both candidates, billions will be spent trying to convince voters.  What a waste.

The Supporters aren’t Changing.  Trump and Clinton supporters aren’t changing their minds.  One Trump enthusiast was asked what it would take for the Donald to lose his vote.  His response: “Nothing. There is nothing he could do to lose my vote.”  To his supporters, Donald Trump is going to make America great again.  “He’s rich and can’t be bought.” “He speaks his mind.” “He’ll get the job done.”  Those who oppose him often believe him to be a narcissistic buffoon, liar, racist, and woman-hater; unfit to be president.

Hillary Clinton’s supporters believe she is the only qualified candidate, the only one capable of being commander-in-chief and, of course, she isn’t Donald Trump.  Those who oppose her believe she is a phony, part of the establishment that caused their economic woes, and has a long history of corrupt episodes including the recent FBI investigation into the “extremely careless” use of her private email server.

For supporters, new information makes no difference.  “It really goes back asswards, lots of times,” said Peter Ditto, a psychologist at UC Irvine.  “People already have a firm opinion and that shapes the way they process information.”  Psychologists call this “motivated reasoning” meaning that once a person selects Trump or Clinton, they tend to downplay or ignore things that paint their candidate in a bad light by forcing new information to fit within pre-existing beliefs.  Even lies don’t matter.  Many people would rather hear an appealing fib rather than an ugly truth. And politicians know that for sure.

Investors like Clinton.  Americans with money in the markets prefer Clinton.  They love divided government and are assuming the Republicans will control Congress and Clinton would be held in check.  Actually, for all their promises of sweeping changes, U.S. Presidents can’t do much without the House and Senate.  Furthermore, Republican House Speaker Paul Ryan has his own ideas, different from Trump and Clinton on taxes, trade and other matters.  So, we’ll likely have a divided government in any case.

Wall Street seems to think that it is highly unlikely that Trump will win.  Of course, think back to Brexit, when the “Remain” camp was certain they wouldn’t lose.  If he did win, Trump would likely move quickly to get the U.S. out of NAFTA and perhaps put tariffs in place on Chinese and other goods.  This could lead to a “trade war” which would most likely hurt the U.S. and world economy.

The Race will likely remain too close to call.  With more than three months remaining, we will continue to be bombarded daily with media coverage, emails and phone calls.  Like Brexit, it will likely come down to voter turnout. There are many angry, disillusioned Americans these days.  They question is which ones will show up in droves on November 8th.

Impact on Investments.  When Britain voted to leave the EU it surprised investors worldwide.  In the U.S., markets initially declined 5-10% and many investors bailed out.  It took the markets just a few days to realize that Brexit is a UK problem, not a U.S. issue and since then the S&P 500 Index and Dow Jones have hit all-time highs though demand remains high for “haven” assets; for example, government bonds and gold.

Investing based on world events is nearly impossible. UK politicians, property owners, businesses and bookies got all it wrong.  Timing the market, both entrance and exits, is impossible.  Longer-term investors know that you need to look beyond short-term events like Brexit, Kennedy’s assassination, the 1987 market crash and 9/11 to see that each had a short-term downside and fear followed by a return to fundamentals.  It’s prudent to leave the short-term noise to short-term traders.

Let’s focus on staying invested in a globally diversified portfolio with an appropriate asset allocation.  Yes, diversification may be boring, but it works.  We can control our behavior, but there are lots of things we can’t control, including the U.S. Presidential election.  So, enjoy the Greek drama as it unfolds. Not sure we are watching a comedy, tragedy or satyr (featuring lustful, drunken woodland gods).   Regardless, don’t let it stress you out.  Enjoy the rest of the summer and focus on what you can control.

Arrrrrrrrrgh!

sb frazzleLet’s all go ahead and be emotional and let out a big scream. Arrrrrrrrrgh! These stock markets are really frustrating. After a lackluster 2015, equity markets are down around 10% in 2016. Of course, a balanced account might “only” be down 5% in 2016, but that still doesn’t feel good. Aren’t markets supposed to rise in Presidential Election Years?

Generally, that’s true. Since 1933, the S&P 500 has risen 8% per year in election years.

The simple fact is that politics is likely having a big impact on the markets. Certainly, investors are concerned about the price of oil, slowing world economic growth and China. But, a major part of the anxiety is very likely being caused by the presidential race. It’s similar to the impact that the Ebola scare had on the markets in mid-2014.

Think of it. In a normal election year, whether we are Republican, Democrat or Independent, we find a candidate that we think can make a change for the better in the U.S. and perhaps the world. We support that candidate with the hope and the optimism that things will be better after the election. In part, this typical election year optimism has helped produce historically good returns. Hence, there appears to be both a correlation between election year and good results and a likely causation.

So, what do we have now? Two political outsiders whose popularity has been largely anti-establishment. Donald Trump’s and Bernie Sanders’s victories in New Hampshire were seen as a vote of no confidence in the nation’s economy and the political status quo. Yet, while their supporters are happy to show their anger at the current situation and hope for change, neither candidate has any proven track record of being able to accomplish on a nationwide level what they propose.

Investors of all kinds are skeptical and concerned. The two “establishment” candidates, Jeb Bush and Hillary Clinton, are struggling.   There is a real question as to what would happen if Trump or Sanders was elected. This has likely helped spook investors, big and small.

Remember, too, that Mr. Trump is, according to the NYT, strongest among Republicans who are less affluent and less educated. Mr. Sanders appeals to a wide variety of people and has raised millions of dollars of support without the aid of a Super PAC. In Tuesday night’s victory speech, he thanked his more than one million supporters who contributed an average of $27 to his campaign. Their supporters are not your typical investor or Wall Street firms. Hence, this optimism generated by both candidates from their supporters doesn’t translate to typical election year investor optimism.

Then we have the omnipresent media. Every day we are besieged by the newspapers, TV and other sources filled with political content, much of which is pure useless trivia. Most candidates are all quite happy to drone on about the current problems and how they alone have simple solutions to fix everything. Educated people and institutions who represent the bulk of investors aren’t buying it. The result: a gradual, “grinding” downward slide that is worse than a fast panic-driven rout. It’s like everyone is bringing up the negative over and over and the “Group Think” pushes the equity markets down.

Brett was on a Goldman Sachs conference call yesterday discussing market volatility. They reiterated what Schwab, BlackRock and others have said. Yes, there continues to be concerns about China, credit/rates, oil, and expectations of monetary policy. They think there is a 15% chance of recession in the next 12 months. Which is good because any year on average is 24%. They summed it up this way, “There is a disconnect between fundamentals and what the market is saying. Take it easy, stay disciplined, stay diversified, and stay invested.”

We agree, the markets may continue to be choppy for 2016, particularly if a viable, experienced candidate, known and trusted by the investment community doesn’t move to the head of the pack. In the meantime, we suggest you let out a big scream and wait for the markets to swing back and catch up with the fundamentals. We know they will, we just don’t know when.

Stock Markets in an Election Year

Stock Markets in Election YearsElection years have traditionally been good for the markets. Since 1928, there have been 21 elections and the S&P index has had a negative return during an election year only three times. Of course, 2 of those 3 negative years were 2000 and 2008. Hence, there may not be a pattern and, even if there was, the pattern may not be relevant to the decisions we are about to make.

Business Week had a great series of graphs in December showing how correlation and causation are often erroneously linked. They suggest that creating statistics is easy: all you need is two graphs and a leading question to “prove” whatever you already believe. For example, did you know that babies named Ava caused the U.S. housing bubble? Well, if you graph the number of newborns that were named Ava each year starting in 1991 until now and compared that graph to a graph of the housing price index over the same time, there is a significant correlation. After 2006, Ava, for whatever reason, has become a significantly less used name for newborns. Of course, this significant decline was very close in percentage terms to the decline in the housing market at the same time. Here’s another one: did you know that Facebook is driving the Greek Debt Crisis? Again, if you graph the Facebook stock price since 2005 and compare them with the yield (interest rate) on Greek debt until now, you will find a very strong correlation. There may be a correlation, but there is certainly not causation.

In a similar way, the performance of the stock and other markets has little to do with an election year. Typically, when an incumbent is doing well in the polls it is because the economy is doing well, unemployment is low and companies are generating solid earnings. These causes drive the stock market higher and make Americans feel more secure. Conversely, when economic conditions are weak and unemployment is high, the stock markets don’t perform as well and challengers have a better chance of winning. 

Mr. Market doesn’t get into politics. He’s not a Republican or a Democrat. He’s more like radio and TV detective Sgt. Friday from Dragnet who reportedly wanted “Just the facts…” Current data and expectations concerning consumer spending, unemployment, corporate profits home and abroad, housing, inflation, world events and many other data points cause the markets to move. This information does two things- impact the markets and affect who may be elected.

Election year politics  have become a huge spectacle. Yet, Mr. Market really pays little attention to all the promises, conflicts, hype and media show. He, instead, stays focused on relevant facts and moves accordingly.