Investor Intel: What the Stock Market Taught Sir Isaac Newton
Equity investors are scrambling as they continue to head into what is the worst start ever to a calendar year for the stock market.
In the U.S. on Wednesday, stocks plunged around midday with the Dow losing more than 550 points, while the benchmark S&P 500 and Nasdaq were off more than 3 percent. A frantic afternoon rally saw the Dow and S&P nearly trade unchanged at one point while the Nasdaq finished positive. Oil also jumped, and yields on 10-year Treasury notes rose above 2.06 percent.
Since the start of 2016, it’s looked pretty much like this:
Fears abound as to whether or not we’re in a global recession. But are we? Consensus is mixed.
“Behind the horrible start to 2016 for risky asset valuations lies a material downgrade of global growth over the long term,” wrote Hans Mikkelsen, credit strategist at Bank of America Merrill Lynch. “Clearly the near-term concern for the markets is that U.S. and global data show elevated risk that the U.S. is about to enter a recession.”
“In light of the large drawdown (in stock market assets), a growing number of commentators have cited the tumult as evidence of a U.S. economy headed towards recession,” wrote Elad Pashtan, U.S. equity strategist at Goldman Sachs. “Although equity sell-offs do coincide with most recessions, large sell-offs do not necessarily presage recessions.”
While market turbulence is driving mortgage rates down, economists expect the U.S. housing market as a whole to follow the upswing of the labor market, rather than financial markets. Thankfully the labor market is strong, and payrolls will likely continue to rise.
Builders are certainly breaking ground at a higher rate. According to data released Wednesday by the U.S. Department of Housing and Urban Development and the U.S. Census Bureau, privately owned housing starts in December hit a seasonally adjusted annual rate of 1,149,000. That’s 6.4 percent above the December 2014 rate of 1,080,000.
And there are more promising numbers coming out of the housing market.
Year-end foreclosures for 2015 are significantly lower than they were at the end of the previous year, and at or below pre-crisis levels in some areas, according to Black Knight Financial Services’ “First Look” at mortgage data for December 2015 released today.
U.S. existing home sales hit 5.46 million units in December (versus expectations of 5.2 million), according to National Association of Realtors data released Friday. And according to Redfin, home prices rose 8.8 percent in December on a year-over-year basis, the biggest increase in almost two years.
So what does Sir Isaac Newton have to do with all this?
The physicist and mathematician, who developed calculus and the laws of motion and universal gravitation, was no master of the universe when it came to equity investing. In 1720, he lost £20,000 (or more than $3 million in early 2000’s money) on volatile South Sea Company shares. The popular stock moved like this (look familiar?):
The great physicist purportedly remarked that he “could calculate the motions of the heavenly bodies, but not the madness of the people.” Some things never change.
Could he have invested in a portfolio of single-family rentals, he might have had a lot better return.
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