It was a turbulent week for investors.

 

Waves of positive and negative news buffeted financial markets last week:

 

Currently, many financial companies in the Standard & Poor's 500 Index have reported third quarter earnings and have done better than expected. Despite upbeat earnings, some companies' shares declined because of uncertainty about the path of economic recovery. If recovery continues, some banks may have excess reserves; however, if recovery falters and a double-dip recession occurs, banks may need to add to reserves, reported Barron's.

 

A rapid rise in the number of COVID-19 cases worried investors at home and in Europe. New restrictions intended to slow the spread of the virus were implemented in France and the United Kingdom. A source cited by Financial Times reported, "...economists and investors had not expected governments to allow the virus to reach the point it has now."

 

The surge of new cases was compounded by setbacks in the search for effective coronavirus treatments and vaccines. Two COVID-19 trials, one for a treatment and one for a vaccine, were temporarily put on hold because of safety concerns.

 

Last week, economic data provided a mixed picture of the economy. On the plus side, September's retail sales were stronger than expected despite the tapering of unemployment benefits. On the negative side, U.S. manufacturing and industrial production both came in below expectations, reported Financial Times.

The number of people filing for first-time unemployment benefits was higher than expected, and higher than it had been for the past two weeks, even though California had temporarily stopped processing new claims. Almost 3 million people filed for extended benefits, meaning they'd been unemployed for 26 weeks or more­­­. Overall, more than 25 million people relied on unemployment benefits last week.

 

Major U.S. stock indices eked out gains last week.

 

S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, MarketWatch, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

 

One dollar is a lot like another, isn't it? In theory, we think of all money in the same way. In practice, we don't.

 

Money is fungible. That means one dollar has the same value as another dollar or four quarters or ten dimes or 100 pennies. If you are buying something valued at $1.00, you can purchase it with $1.00 in bills or coins.

 

However, when making financial decisions, people tend to engage in something called mental accounting. One aspect of mental accounting is assigning labels that identify the intended purpose of money. Sometimes this decision-making shortcut can improve financial choices. Other times, it can produce a financial setback.

 

A common mental shortcut is budgeting. People and companies rely on budgets to help them make sound financial decisions. Typically, budgets allot specific amounts of income to spending and saving. For an individual:

 

 

When people categorize money, they are reluctant to spend it on other things. Behavioral Economics reported, "When a resource [in this case, money] is divided into smaller units...consumers encounter additional decision points - a psychological hurdle encouraging them to stop and think...opening a partitioned pool of resources incurs a psychological transgression cost, such as feelings of guilt."

 

In other words, your brain will be reluctant to spend your retirement savings on a vacation.

Mental accounting is a double-edged sword. If people do not think flexibly then mental accounting can cost them. For instance, focusing too intensely on labels can result in decisions that hurt your financial position rather than help it. Kiplinger's provided an example:

 

"Mental accounting leads us to hoard money in a savings account that earns 0.3 percent interest while keeping a high balance on a 15 percent-interest credit card. We like the psychological comfort we get from having money in the bank, even though transferring cash from savings to pay off a credit-card balance can essentially 'earn' us a quick 14.7 percent."

 

Like many things, mental accounting can be helpful or hurtful, depending on how it's applied.

 

 

"A long habit of not thinking a thing wrong, gives it a superficial appearance of being right, and raises at first a formidable outcry in defense of custom. But the tumult soon subsides.  Time makes more converts than reason."

                                                                                                                                                                                                                                           --Thomas Paine, Author of 'Common Sense'

Yes. No. Maybe?

 

Markets were sharply focused on the status of stimulus last week. First, it was on. Then, it was off. Then, it might be on. Then, it was off again. There was a big bill. There was a smaller bill. There were stand-alone options.

 

Major U.S. stock indices finished the week higher, per Barron's, and global indices were bullish on Friday because of U.S. stimulus talks, reported Financial Times.

 

"Markets are dizzy from all the talk on both sides about what they want from a deal but believe that something will inevitably happen anyway...Markets are essentially drunk on massive government spending just as they are inebriated from all the Fed quantitative easing and zero-interest rate policy," said an advisory group chief investment officer cited by Financial Times.

 

Another factor that influences investors is earnings season, which begins this week. During earnings season, companies communicate how profitable they were during the previous quarter.

 

Third-quarter earnings estimates for companies in the Standard & Poor's 500 Index remain subdued. John Butters of FactSet reported, "For Q3 2020, the estimated earnings decline for the S& P 500 is -20.5 percent."

 

While that is a significant decline, it is an improvement on -25.3 percent, which was the June 2020 estimate for third quarter earnings. It is also an improvement on second quarter's -31.9 percent.

It's notable one of four companies in the S&P 500 did not provide earnings per share (EPS) guidance for 2020 or 2021. (Guidance is a forward-looking statement that tells investors what the company expects will happen in the near future.) "Almost all of these companies cited the uncertainty of the future economic impacts of COVID-19 as the reason for not providing or withdrawing EPS guidance for the full year," reported FactSet.

 

Certainty about earnings may improve when a treatment or vaccine for the virus becomes available. The Milken Institute reported there are 318 treatments for COVID-19 and 213 vaccines in the works. Thirty-five of the vaccines are in clinical trials.

 

S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, MarketWatch, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

 

Where is everyone going? You may have read Americans are moving out of cities to escape the coronavirus or violent protests. During the past few months, pundits have said things like, "...the coronavirus pandemic has shifted attitudes about city living, altering the dynamics of the real estate market for years ahead."

 

Marie Patino of Bloomberg CityLab decided to look at the data and see if it was true. She gathered information from moving companies, real estate aggregators, and real estate consultants.

 

As it turns out, people are leaving cities - two cities in particular.

 

Patino wrote, "According to [moving company] data, between May and August 2020, move requests out of New York City to any destination were up 45 percent, and in San Francisco, up 23 percent, compared to the same time last year."

 

Where were people moving?

 

Some were moving to other cities, continuing trends that had been identified before the pandemic arrived. For instance, San Franciscans began to migrate to Seattle before 2020. Other top destinations for San Franciscans this year have included:

 

 

Likewise, New Yorkers had been moving to Los Angeles and the west coast prior to 2020. This year, they also have favored:

 

 

One real estate aggregator's 2020 Urban-Suburban Market Report found, "Both urban homes and suburban homes are selling more quickly now than they were in February, and the percent change in time on market has been nearly equal for both classifications. The share of homes selling above their list price in suburban areas vs. urban areas exhibit the same trend nationally."

 

"Information is the oil of the 21st century, and analytics is the combustion engine."

                                                                 --Peter Sondergaard, Business executive

 

Best regards,

Last week, the third quarter of 2020 came to an end - and the fourth quarter delivered a doozy of an October surprise.

 

On Friday Americans awoke to the news President Trump had contracted COVID-19. Financial markets responded with relative equanimity. After a brief sell-off on Friday, major U.S. indices finished the week, and the third quarter, higher.

 

U.S. stock markets moved higher in July and August. Then, in early September, investors became skittish and major U.S. indices recorded losses for several weeks. The surge of uncertainty may have resulted from changing vaccine expectations, concerns about earnings, fears of a disputed election, and lack of new stimulus, reported Ben Levisohn of Barron's.

The Federal Reserve's changing policies may have had an influence on markets, as well. The Fed intends to keep interest rates near zero for the foreseeable future. The Federal Open Market Committee (FOMC) statement provided a big picture explanation, "The path of the economy will depend significantly on the course of the virus. The ongoing public health crisis will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term."

 

Yields on 10-year U.S. Treasuries moved in a narrow range during the quarter, finishing near where they started.

Treasury yields rose and stock markets perked last week when Congress resumed stimulus talks. Investors expect $1.3 to $1.5 trillion in new stimulus, according to BCA Research cited by Kiplinger's.

 

Additional stimulus measures were expected early in the third quarter, after CARES Act provisions ran dry in July. However, better-than-expected economic data and a reluctance to increase the burgeoning budget deficit made some in Congress adopt a wait-and-see approach, reported Victor Reklaitis of MarketWatch.

 

By last Friday, stimulus negotiations appeared to have stalled again. However, there were new calls for action over the weekend, following Friday's weaker-than-expected employment report, according to Jacob Pramuk of CNBC.

Throughout the third quarter, employment improved steadily. In July it was 10.2 percent. By September, it had fallen to 7.9 percent. While continued improvement is important, the pace of jobs creation slowed last month. Consensus estimates for September suggested the economy would produce 850,000 new jobs. It came up short at 661,000. That could be a sign economic growth is slowing.

During the second quarter (April through June), the U.S. economy shrank by about a third (-31.7 percent). Data for third quarter economic growth is not yet available, but it is expected to show a significant improvement. The Atlanta Federal Reserve's GDPNow estimates third quarter growth could be as high as 34.6 percent.

 

While a double-digit rebound would be welcome news, Aaron Weitzman of The Bond Buyer pointed out a 34.6 percent rebound does not offset a 31.7 percent contraction. The economy needs to grow by 46 percent to get back to even.

 

Global markets may be volatile through the end of 2020.

 

S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, MarketWatch, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

 

THE VERY BEST WRONG TEST ANSWERS. Almost everyone has come across a test question they couldn't answer. Some ingenious souls provide their teachers with some humor instead. British author Richard Benson asked teachers to share their favorite wrong test answers, and he shared a few with Business Insider:

 

Q: When did the founding fathers draft the Constitution?

 

A: It was a second round pick, right after LeBron James.

 

Q: Describe what is meant by "forgetting."

 

A: I can't remember.

 

Q: What is a nitrate?

 

A: It is much cheaper than a day rate.

 

Q: Upon ascending to the throne, the first thing Queen Elizabeth II did was to...

 

A: Sit down.

 

Q: Where was the Declaration of Independence signed?

 

A: At the bottom.

 

 

"You pay a very high price for a cheery consensus. It won't be the economy that will do in investors; it will be the investors themselves. Uncertainty is actually the friend of the buyer of long-term values."

                                                                     Warren Buffett, Investor and philanthropist

 

Best regards,