Behavioral Finance Art & Science of Investing

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The Art & Science of Investing Through Two COVID19 Recoveries

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Todays’ instant access to financial news and trading tools right from our mobile phones can help to magnify the “madness of the crowd” along with the voices in our heads.

In many cases, the answers to our follies can be found inside our own brains. Psychological errors and how we frame issues can inadvertently trick us into making quick, short term decisions that can take us far away from our best choices and long term outcomes.

Art and Science

Many industries and services involve both art and science. For example, building cars is the science of engineering while designing cars is an art.

Famed investor Peter Lynch once stated that “it’s obvious that studying history and philosophy was much better preparation for the stock market than, say, studying statistics. Investing in stocks is an art, not a science, and people who’ve been trained to rigidly quantify everything have a big disadvantage.”

Jon here. Investing is both a science and an art from gathering & interpreting data (science) to developing portfolios and working with clients (art). This dichotomy is presented spot-on by blogger Housel:

  • Gathering information is a science. Filtering out noise is an art.
  • Net present value is a science. Identifying the trust and passion of a CEO is an art.
  • Measuring what worked in the past is a science. Understanding why things are different now is an art.

Housel further established that the difference between science and art is basically this: Science often provides multiple ways of getting something done. If any of those ways contradict each other, then art is playing a role.

Two Recoveries

While there is a definite divergence in America between those individuals that are working successfully through the pandemic-led recession as an employee or business owner, and those that have lost their jobs and are suffering from industries that may take a couple of years to rebound, the stock market appears to be operating on a bandwidth separate from the Armageddon headline news stories and unbelievable political banter on jobs and the economy leading up to the 2020 Presidential elections.

As discussed in past newsletter, it’s important to separate personal and political feelings from investments and not make any rash short term moves that may derail your retirement. When it comes down to it, long-term investors should be wary of claims that one candidate or another will “kill the market” or “ruin the economy.” It’s likely that this has been said about every president in modern times across 14 presidencies since 1933 (7 from each party).

Halfway Point

Recent economic data show that we may be near the halfway point in the recovery from the COVID-19 shutdown. (see below) However, there is evidence that the second half may take much longer and be more difficult. This is because there are really two recoveries underway: many areas and sectors of the economy which were not directly affected by the public health crisis bounced back rapidly while others may need years to fully recover.

More than half of the jobs lost during the recent crisis, about 11.4 million out of 22 million, have already been regained (see below). This is driven by the ability of many Americans to return to work after being furloughed and temporarily unemployed during the shutdown, pushing the unemployment rate down to 7.9%. While this is still high, it is far lower than the 20% or more that many economists had feared.

Many other economic data points corroborate this trend. Industrial production, consumer spending, housing activity, and other areas all bounced back from recent lows. This suggests that much of the activity that was put on hold from March to May was simply delayed. This is often referred to as “pent-up demand” since many consumers still need homes, factories need parts, businesses need services, and so on.

However, many parts of the economy are still struggling and will continue to face challenges. Some data suggest that restaurant dining activity is down 40% across the country and as much as 60% in places such as New York State (see below). At the moment, employment at restaurants and bars is 2.3 million lower than before the crisis. There is evidence that travel activity is down by about 60% as well. Industries such as hotels, restaurants and leisure, and areas of the transportation sector will likely continue to face challenges.

Overall, the jobs data also suggest that some workers have dropped out of the labor force in recent months. The labor force participation rate, which measures the percentage of working-age Americans with a job or are looking for work, has fallen to its lowest level since the late 1970s (see below). This is a trend that began in the early 2000s and accelerated during the 2008 global financial crisis. Concerns such as income inequality, personal health, private debt and more may be directly affected by an individual’s long-term job prospects.

Thus, the data suggest that while there has already been a significant economic recovery, there is also a divergence in economic fortunes. For long-term investors, navigating this period is challenging as the stock market continues to reach new highs. Still, those with the discipline to stay invested while maintaining perspective on the next phase growth will likely navigate this period better. Below are three charts that highlight recent data from the economic recovery.

1 Over half of the jobs lost during the pandemic have been regained

The current recession resulted in the steepest drop and subsequent recovery of jobs in history. 22 million jobs were lost in a matter of two months. At this point, more than half of those jobs – 11.4 million – have been regained. This is because many were able to return to work once the economy began to reopen.

2 Many Americans, however, have dropped out of the labor force

One worrisome trend is that the labor force participation rate has fallen. This measures the percentage of the population that is working or is actively seeking work. The fact that it has declined suggests there may be Americans who have given up on finding new jobs. This is a trend that began two decades ago and has been driven by technology, globalization, an aging population and other macro-economic factors.

3 Some areas such as restaurant and travel activity will take time to recover

Although many parts of the economy bounced back quickly, areas such as restaurant and travel activity may take much longer to recover. Some economic data suggest that these industries are still at least 40-60% below where they were just a year ago.

The bottom line? While many areas of the economy came roaring back once businesses reopened, there are also areas that may take much longer to recover. Investors should continue to focus on these long-term trends as the pandemic continues.

When studying financial news and data, remember to take a few steps back when developing your viewpoint and strategy, like when studying fine arts. While measuring what worked in the past is a science, recognizing why things are different now while designing and managing a portfolio process over time is an art.

For more information on our firm or to get in touch with Jon Ulin, CFP®, please call us at (561) 210-7887 or email [email protected]Get Started Today.

You cannot invest directly in an index. Past performance is no guarantee of future returns. Diversification does not ensure a profit or guarantee against loss. 

The information given herein is taken from sources that IFP Advisors, LLC, dba Independent Financial Partners (IFP), IFP Securities LLC, dba Independent Financial Partners (IFP), and its advisors believe to be reliable, but it is not guaranteed by us as to accuracy or completeness. This is for informational purposes only and in no event should be construed as an offer to sell or solicitation of an offer to buy any securities or products. Please consult your tax and/or legal advisor before implementing any tax and/or legal related strategies mentioned in this publication as IFP does not provide tax and/or legal advice. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. This report may not be reproduced, distributed, or published by any person for any purpose without Ulin & Co. Wealth Management’s or IFP’s express prior written consent.

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