THE WEEK ON WALL STREET
Markets reacted positively last week to cooler inflation and the idea of potential rate cuts next year, adding to the gains of the market’s year-end rally. The Dow Jones Industrial Average rose 2.92%, while the S&P 500 gained 2.50%. The Nasdaq Composite index picked up 2.85% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, tacked on 2.75%.
FACT OF THE WEEK
On December 19, 1843, Charles Dickens’s classic story “A Christmas Carol” was published. Dickens was born in 1812 and attended school in Portsmouth. His father, a clerk in the navy pay office, was thrown into debtors’ prison in 1824, and 12-year-old Charles was sent to work in a factory. The miserable treatment of children and the institution of the debtors’ jail became topics of several of Dickens’s novels.
In his late teens, Dickens became a reporter and started publishing humorous short stories when he was 21. In 1836, a collection of his stories, Sketches by Boz, later known as The Posthumous Papers of the Pickwick Club, was published. The same year, he married Catherine Hogarth, with whom he would have nine children. The short sketches in his collection were originally commissioned as captions for humorous drawings by caricature artist Robert Seymour, but Dickens’ whimsical stories about the kindly Samuel Pickwick and his fellow club members soon became popular in their own right. Only 400 copies were printed of the first installment, but by the 15th episode 40,000 copies were printed. When the stories were published in book form in 1837, Dickens quickly became the most popular author of the day.
The success of the Pickwick Papers was soon reproduced with Oliver Twist (1838) and Nicholas Nickleby (1839). In 1841, Dickens published two more novels, then spent five months in the United States, where he was welcomed as a literary hero. Dickens never lost momentum as a writer, churning out major novels every year or two, often in serial form. Among his most important works are David Copperfield (1850), Great Expectations (1861), and A Tale of Two Cities (1859).
Beginning in 1850, he published his own weekly circular of fiction, poetry, and essays called Household Words. In 1858, Dickens separated from his wife and began a long affair with a young actress. He gave frequent readings, which became immensely popular. He died in 1870 at the age of 58, with his last novel, The Mystery of Edwin Drood, still unfinished.
Stocks gathered momentum last week after upbeat news from two key inflation reports. But the outcome of the Federal Open Market Committee (FOMC) meeting on Wednesday powered the week’s advance. The combination of the FOMC signaling three rate cuts in 2024 and dovish comments by Fed Chair Powell led to a sharp drop in bond yields and a spike in stock prices, with the Dow Industrials closing above 37,000 and setting an all-time high. The rally continued the following day as beneficiaries of lower rates, such as smaller capitalization stocks and real estate, rallied. A solid retail sales number, which reflected a strong consumer and supported the soft landing thesis, also boosted enthusiasm.
The anxiously awaited read on November inflation came close to market expectations, with a 0.1% increase over October and a year-over-year increase of 3.1%. Core inflation, which excludes energy and food prices, came in a bit hotter, rising 0.3% month-over-month and 4.0% from a year ago. A 2.3% decline in energy costs helped offset a 2.9% jump in food prices. Shelter prices remained stubbornly high, rising 0.4% from October and 6.5% from last November. The inflation news was better on wholesale prices, tracked by the Producer Price Index (PPI). Producer prices were unchanged in November and higher by just 0.9% year-over-year. Excluding energy and food, the monthly increase was also unchanged.
FINANCIAL STRATEGY OF THE WEEK
Do Our Biases Affect Our Financial Choices?
Investors are routinely warned about allowing their emotions to influence their decisions. However, they are not often cautioned about their preconceptions and biases that may color their financial choices.
In a battle between facts & biases, our biases may win. If we acknowledge this tendency, we may be able to avoid some unexamined choices when it comes to personal finance. It may actually "pay" to recognize blind spots and biases with investing. Here are some common examples of bias creeping into our financial lives.
Letting emotions run the show. How many investment decisions do we make that have a predictable outcome? Hardly any. In retrospect, it is all too easy to prize the gain from a decision over the wisdom of the decision and to, therefore, believe that the findings with the best outcomes were the best decisions (not necessarily true). Put some distance between your impulse to make a change and the action you want to take to help get some perspective on how your emotions affect your investment decisions.
Valuing facts we "know" & "see" more than "abstract" facts. Information that seems abstract may seem less valid or valuable than information related to personal experience. This is true when we consider different types of investments, the state of the markets, and the economy's health.
Valuing the latest information most. The latest news is often more valuable than old news in the investment world. But when the latest news is consistently good (or consistently bad), memories of previous market climate(s) may become too distant. If we are not careful, our minds may subconsciously dismiss the eventual emergence of the next market cycle.
Being overconfident. The more experienced we are at investing, the more confidence we have about our investment choices. When the market is going up, and a clear majority of our investment choices work out well, this reinforces our confidence, sometimes to a point where we may start to feel we can do little wrong, thanks to the state of the market, our investing acumen, or both. This can be dangerous.
The herd mentality. You know how this goes: if everyone is doing something, they must be doing it for sound and logical reasons. The herd mentality leads some investors to buy high (and sell low). It can also promote panic selling. The advent of social media hasn't helped with this idea. Above all, it encourages market timing, and when investors try to time the market, it can influence their overall performance.
Sometimes, asking ourselves what our certainty is based on and reflecting on ourselves can be helpful and informative. Examining our preconceptions may help us as we invest.