I found a great quote while putting this blog together. “Mass media doesn’t tell you what to think, but it tells you what to think about”. This is from Stanley J Baran’s definition of Agenda Setting. With this in mind, here are some of the thoughts I have when I hear various media outlets discuss today’s investment markets, the economy, and how I feel these topics are not being told in a manner that the layperson can understand. Chapter 24 in my book “Castles & Moats” discusses several of these topics by the way. (The Amazon link is at the bottom if you want to learn more.)
A word of caution here and that is I am diving into Economics 101 here so read and maybe reread carefully. This is important information that you are subjected to daily whether you realize it or not. If you’re not as mad as heck, then you should be!
- The Dow Jones Industrial Average (DJIA) fell by over 1200 points on September 13th. This was big news, and it was all over the news and news channels. However, this index only represents 30 stocks. Not 100, not 500, 30! The stocks in the average are constantly changing. Since it’s inception on May 26, 1896, there have been 57 changes of companies. General Electric was the last of the original companies. When they were no longer relevant to the US economy, they were removed from the DJIA on June 19, 2018. This continues the trend of a constantly changing membership. (www.djia.com & www.Investopedia.com ) Today, unless you’re invested directly in these 30 stocks, the daily average the media gives you is irrelevant. Remember this when you’re listening to the news on your way home today.
- The S & P 500 is similar to the DJIA but is more comprehensive. In 1926 it included 90 stocks & grew to 500 in 1957. It’s an index; a benchmark and comparison tool, that’s all. You might think that each of the included 500 stocks are weighted evenly but they are not. Hopefully, you have heard of the “FAANG stocks”. This is an acronym for Facebook, Amazon, Apple, Netflix, and Google. As of July 25,2022, their total market share represented 14% of the total market capitalization of the S&P 500 average. Simple math says that the other 495 stocks made up 86% of the total. (www.marketwatch.com) You cannot invest directly into the S & P 500, but you can buy an “index fund” that seeks to match the performance. Only US companies are included. In 2008, when Anheuser-Busch was sold to InBev, a Belgian company, they were removed from the Index.
- The Federal Reserve uses interest rates as either a gas pedal or a brake on the economy when needed. By raising rates in today’s economy, which it looks like they will continue to do, their aim is to make borrowing more expensive so that consumer demand will decrease, and this will bring prices back in line. The goal is to “pump the brakes on the economy” in order to get inflation under control. This is not an overnight solution, and we have no choice but to be patient. Just like a physician uses chemotherapy and radiation to eliminate cancer in your body, the FED literally has to kill parts of the economy to slow things down. Case in point, it is having a direct effect on the Nashville housing market with the increasing mortgage rates. In April 2021 the national average 30-year fixed mortgage was 3.06%. As of this writing, today’s 30-year fixed mortgage was hovering around 6.0% (www.finance.yahoo.com)
- The national unemployment percentage includes people who are jobless, looking for a job, and available for work. Today’s national unemployment rate, using these definitions, is 3.4%. If one is on unemployment benefits, they end after an 18-month timeframe. If after that period, they become none of the definitions above, meaning they are no longer seeking a job or are available for work, they “fall off the role” are no longer a part of that unemployment percentage number. The real level of total unemployment is seen as 9-10% of the US population (www.bls.gov)
- Investor behavior is more important than ever before. For every $2 in stocks and stock funds, there is $1 in cash. This equals $5,000,000,000,000 in cash. That’s what trillion looks like, by the way! This means that people are getting out of the market at the worst possible time, and those paper losses become real to them. To validate this, per www.dalbar.com from 1/1/1992 to 12/31/2021 the Average Equity Mutual Fund Investor earned an average of 7.13%. This compared to 10.65% in an S & P 500 Index fund. Emotions cost the average US investor the loss of a 3.5% average annual return over the last 20 years. There’s a reason I do what I do, and this is me being that “financial psychologist”.
I know, I know…I told you this would be an Economics lesson. What I want to know is do these bullet points help you understand what is going on in our country a little better? This is a different style of blog for me. Not so much storytelling, but more being that “professional explainer”.
As always, I appreciate the 3-5 minutes you spent in reading this blog. I do not take this lightly. Hopefully something resonated that might create a 30–40-minute coffee together to dive a little deeper into your financial needs and wants. I’m here to serve. Fall is upon us, and I can now say one of my favorite phrases, “It’s football time in Tennessee!”
**Examples are intended for illustrative purposes only and may be not indicative of your situation. Individual results may vary.