THE WEEK ON WALL STREET
Stocks notched a solid gain as dovish comments from Federal Reserve officials boosted the market’s recovery from early August lows. The S&P 500 Index rose 1.45 percent, while the Nasdaq Composite added 1.40 percent. The Dow Jones Industrial Average picked up 1.27 percent. The MSCI EAFE Index, which tracks developed overseas stock markets, gained 2.98 percent.
FACT OF THE WEEK
Charles Franklin Kettering, the American engineer and longtime director of research for General Motors Corp. (GM), is born on August 29, 1876, in Loudonville, Ohio. Of the 140 patents Kettering obtained over the course of his lifetime, perhaps the most notable was his electric self-starter for the automobile, patented in 1915.
Early in his career, Kettering worked at the National Cash Register Company in Dayton, Ohio, where he helped develop the first cash register to be equipped with an electric motor that opened the register drawer. With Edward A. Deeds, he formed Dayton Engineering Laboratories Company (DELCO), a business dedicated to designing equipment for automobiles. Kettering’s key-operated electric self-starting ignition system, introduced on Cadillac vehicles in 1912 and patented three years later, made automobiles far easier and safer to operate than they had been previously when the ignition process had been powered by iron hand cranks. By the 1920s, electric self-starters would come standard on nearly every new automobile.
MARKET MINUTE
Dovish Week
Stocks started the week strong, rallying after Wall Street welcomed dovish comments from Minneapolis Fed President Neel Kashkari. The S&P 500 and Nasdaq each posted gains on Monday–the 8th consecutive winning session. The Dow rose for the 5th session in a row. From there, markets traded in a narrow band until Wednesday afternoon when minutes released from the July 30-31 FOMC Meeting revealed more dovish comments. On Thursday, stocks dipped ahead of Fed Chair Jerome Powell’s annual Jackson Hole, Wyoming, speech. Well-received comments from Powell on Friday boosted markets, with all three averages closing higher.
“The Time has Come”
The Fed’s annual symposium for global central bankers started Friday morning with Fed Chair Powell’s much-anticipated speech. Citing the risk of the labor market cooling even further, he said, “the time has come for policy to adjust.”
Investors responded favorably, with the remaining question being how significant a rate cut might be. Powell kept that door open, adding that “the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”
FINANCIAL STRATEGY OF THE WEEK
Don’t Be Your Own Worst Enemy
One of the most well-known investors of the 20th Century, Benjamin Graham, said that "the investor's chief problem—and even his worst enemy—is likely to be himself."
What Graham understood—and modern research is catching up to—is the idea that we all have emotions and biases that affect our decision-making. The innate wiring built to survive pre-modern times can be counterproductive in our modern world, especially when it comes to investing.
Let's take a quick look at a few of the human emotions and biases that can adversely impact sound investment decision-making.
Fear and Greed — These are the two most powerful emotions that move investors and investment markets. Each emotion clouds our capability for rational and dispassionate decision-making. They are the emotions that lead us to believe that prices may continue to rise (think the Tulip price bubble of 1636) or that everything has gone so wrong that prices may not recover (think Credit Crisis of 2008-2009).
Some investors have found a way to conquer these emotions, be brave when everyone else is fearful, and resist the temptations of a too-exuberant market.
Overconfidence — Peter Bernstein, a noted economic historian, argued that the riskiest moment may be when we feel that we are right. It is at that precise moment that we tend to disregard all information that may conflict with our beliefs, setting ourselves up for investment surprise.
Selective Memory — Human nature is such that we tend to recast history in a manner that emphasizes our successes and downplays our failures. As a result, we may not benefit from the valuable lessons failure can teach. Indeed, failure may be your most valuable asset.
Prediction Fallacy — Humans have an innate desire to recognize patterns and apply these patterns to predicting the future. We erroneously believe that because "A" occurred and "B" happened that if "A" happens again, we can profit by anticipating that "B" will repeat. Market history is littered with examples of "rules of thumb" that have worked until they no longer worked.
Financial markets are complex and unpredictable. Our endeavors to tap their opportunities to pursue our financial goals are best realized when we don't burden the enterprise by blindness to the inherent behavioral obstacles we all share.