Global shares rallied this week after stronger than expected job data out of the US lifted markets to multi-month highs. The US economy added 223,000 jobs in May, blitzing the 188,000 figure that markets were expecting. The strong jobs growth report will give the Federal Reserve scope to continue raising interest rates, which until recently was considered a bad thing for shares. Readers may recall that it was stronger than expected wage growth and job creation that prompted a heavy sell-off in February. After losing money in a speculative bubble, Isaac Newton, arguably the greatest scientist of all time, remarked “I can calculate the movement of the stars, but not the madness of men”. Food for thought.
In local news, the RBA kept interest rates on hold as expected, as wage growth and inflation remain sluggish. The economy seems to be showing signs of life however, with GDP expanding by 3.1% in the past 12 months, the fastest growth rate in seven quarters. Hobart’s burgeoning housing market is showing up in the economic figures, with Tasmania recording the strongest growth of all states in the March quarter.
Finance 101 – Loss Aversion
One of the most important skills required for successful investing is knowing when to cut your losses and sell an underperforming investment. Many investors shoot themselves in the foot by refusing to cut their losses, insisting on holding on to losers in the hope that they’ll ‘come good’. This mistake is a form of the behavioural bias known as loss aversion, where individuals are more sensitive to losses than gains.
American financial planner, Carl Richards, once posed the following question to test whether investors were allowing biases to creep into their decision making: if an administrative error mistakenly sold your portfolio down into cash, would you buy the same portfolio you hold today? If the answer to that question is no, you need to consider whether you’re holding some investments for the wrong reasons.
In no way are we advocating selling just because an investment undergoes a period of underperformance. Rather, understand the difference between having conviction and hoping for a reversal of fortunes. No investment goes up in a straight line and a great deal of patience is required for successful investing. As Warren Buffett once said “the stock market is a device for transferring money from the impatient to the patient”.
Fat Cats Get Fat Slap
CBA made headlines again this week after receiving a $700m fine for violating anti-money-laundering and counter-terrorism financing laws. Despite receiving the largest fine in Australian corporate history, CBA shares were at one point up 2.4% in the hours after the fine was laid down. This is largely because investors were expecting a larger fine to be handed down, and were buoyed by the news that the fine was only $700m.
Charting the Housing Slowdown
The Sydney property market continued to soften in May, with prices 4.2% lower than a year ago. Although the combination of rising interest rates, sluggish wage growth and curtailed foreign investment will likely continue to weaken the broader market, the slowdown in property prices will not affect different suburbs equally.
As the chart below shows, houses have been hit harder than apartments, with homes in the inner city and Ryde as much as 10% off their previous peaks.
Investor sentiment took another hit during the week after the NSW government announced restrictions on online home-sharing platforms such as Airbnb. Many property investors prefer Airbnb over traditional lease agreements as their occupants are usually tourists willing to pay a premium for accommodation. Under the new regulations, Airbnb landlords will only be allowed to rent out their homes for 180 days per year, which should put downward pressure on rents.
#Shorting A Tall Order
Famed economist John Kenneth Galbraith once attributed the excesses of financial markets to “extreme brevity of the financial memory”, and it appears that some market participants are eager to prove Galbraith right. Financial markets are on pace to have their most volatile year since 2008, yet hedge funds are increasingly making bets that volatility will be subdued.
In February we wrote about investors who shorted volatility suffering heavy losses as markets sold off, we’ll have to wait and see whether these hedge funds can avoid a similar fate.
Mind Over Matter
For those who may have missed it, check out our monthly newsletter for retirees “Mind Over Matter”, where in this month’s instalment we cover the Beatles, travelling in Europe, and a “spot the difference” picture at the centre of impassioned debate in the Stanford Brown Sydney Retiree Community.
Please let your adviser know if you would like to be added to the distribution list for Mind Over Matter.
Who am I?
Congratulations to Chris and Natasha who spotted Sean Connery in last week’s TW3!
But who is this broody young man?
Pic of the Week
Video of the week
Have a great weekend everyone!
Jonathan Hoyle, CEO & Nicholas Stotz, Investment Analyst