Is American Market Optimism Misplaced?


Written by: Jon McGraw

“Is all this stock market optimism a red flag?”

Contrarians – investors who bet against prevailing market trends – were probably nodding along as they read that headline in The Wall Street Journal back on January 18, 2013. The Journal cited the American Association of Individual Investor’s (AAII’s) Sentiment Survey, which showed about 46 percent of participants were feeling bullish. As it turned out, the bulls were right. The Standard & Poor’s 500 Index rose from about 1486 to about 2040 through the end of last week.

You may recall, two weeks ago, the AAII Sentiment Survey showed investor pessimism at a nine-year low with just 15 percent of participants growling like bears. Well, last week, pessimism rebounded and optimism moved higher, too. The survey results were:

  • Bullish: 9 percent, up 5.2 percentage points from the prior week
  • Neutral: 8 percent, down 9.5 percentage points from the prior week
  • Bearish: 3 percent, up 4.3 percentage points from the prior week

The historic average for the survey is bullish 39.0 percent, neutral 30.5 percent, and bearish 30.5 percent.

Americans are feeling pretty confident about the stock market’s potential and that’s not always a positive sign. Expectations of Returns and Expected Returns, a paper published by Robin Greenwood and Andrei Shleifer of Harvard University, compared investors’ expectations for returns to what financial economists call expected returns (which are calculated using dividends, consumption, and market valuations). They crunched numbers for data collected between 1963 and 2011 and found expectations for returns and expected returns tend to be negatively correlated. “…Both expectations of returns and [financial economists’ expected returns] predict future stock market returns, but with opposite signs. When [financial economists’ expected returns] are high, market returns are on average high; when [investors’] expectations of returns are high, market returns are on average low.”

So, since investor expectations are high, will U.S. stock markets returns be low? There is no way to know. Whether you’re a bull or a bear, in times like these, it’s good to have a well-diversified portfolio.

Data as of 11/14/14 1-Week Y-T-D 1-Year 3-Year 5-Year 10-Year
Standard & Poor’s 500 (Domestic Stocks) 0.4% 10.4% 13.9% 17.7% 13.0% 5.6%
10-year Treasury Note (Yield Only) 2.3 NA 2.7 2.0 3.3 4.2
Gold (per ounce) 1.3 -2.7 -9.1 -13.0 0.7 10.3
Bloomberg Commodity Index -0.7 -7.1 -5.2 -7.5 -3.0 -2.6
DJ Equity All REIT Total Return Index -0.6 22.9 20.6 16.4 16.9 8.2

The Robot ‘R’ Generation

‘THE NEW HIRE’ is the name of a September survey published by PwC. It’s not about how to make newly-hired people more comfortable and productive. It’s about how the R generation – the latest iteration of industrial robots – is transforming manufacturing. More than one-half of the 120 manufacturing firms surveyed already have adopted robotics technologies. Auto manufacturers employ robots, as do food; consumer goods; life sciences, pharmaceutical, and biomedical; and metals companies.

PwC predicts the shift to robots will create new jobs for engineers specializing in robots and robotics operating systems. It also is likely to result in the displacement of a fair number of human workers. Currently there are about 1.5 million ‘intelligent industrial work assistants’ laboring around the world. About 230,000 are employed in the United States. According to The New Hire report:

“Industrial robots are on the verge of revolutionizing manufacturing. As they become smarter, faster and cheaper, they’re being called upon to do more – well beyond traditional repetitive, onerous, or even dangerous tasks such as welding and materials handling. They’re taking on more “human” capabilities and traits such as sensing, dexterity, memory, trainability, and object recognition. As a result, they’re taking on more jobs – such as picking and packaging, testing or inspecting products, or assembling minute electronics.”

That may be a little optimistic. Last month, Popular Mechanics reported engineers have been working on mechanical first-responders, like bomb-defusing and investigator robots, to help with threats like Ebola and the Fukushima nuclear power plant disaster. The magazine found robots competing in the DARPA Robotics Challenge were more like toddlers and less like capable adults. “For a typical task in the event, turning a valve, a team of several people required an hour or more to prep the robot, and that same team had to stand at the ready to catch their bot when it stumbled (which happened often).”

Google Wallet Out – Apple Pay In – Cryptocurrencies Up and Running

Last week Google quietly announced that it plans to retire its Google Wallet in March 2015. Google plans to continue supporting the sale of applications on Google Play as well as in-application payments, but other digital purchases will no longer be supported through Google Wallet.

Apple Pay is off to a promising start and is making a deeper push into China through the support of UnionPay, China’s most popular payment card, as well as through a potential alliance with Chinese e-commerce giant Alibaba. Meanwhile the U.S. Federal Reserve, Treasury and FDIC scramble to understand the rapidly changing digital payment systems developments, along with a plethera of new cryptocurrencies such as Bitcoin sweeping the globe. Former Federal Reserve Bank Examiner Matt T. Williams suggests there needs to be greater regulation, international oversight, sovereign control and stronger protection rules put firmly in place.

One thing is for certain…payments systems are evolving rapidly and governments, government agencies, banks, merchants and consumers alike will need to keep educated about money and its developing forms of exchange.

Weekly Fun – Think About It

Don’t judge each day by the harvest you reap but by the seeds that you plant.

– Robert Lewis Stevenson