RR #94 – VIDEO | The Stock Market vs. The Economy, and Assessing Risk Tolerance
When it comes to the question of whether the economy affects the stock market, it’s not about whether the former is in a good or bad state, but how that relates to what the market was expecting. In today’s episode we get into predictions about labour economics during COVID-19, the relationship between the market and the economy, and how to make decisions that suit your risk tolerance. We kick things off by reviewing insights Edward Lazear and Gerard O’Reilly gave in a recent webinar. They spoke about how the current crisis relates to past events from the perspective of labour economics, and what empirical data is saying about stock returns and the economy. A talking point here is the idea that recessions are defined by committees, and always long after they have either begun or ended. This leads to the topic of whether there is a relationship between economic data and stock market performance. We find many examples of cases in the short and long term where no correlation can be found between the two, and cases where the market starts to recover before the economy. We discuss how this speaks of a fundamental difference in the analytical methods of economists versus investors, not a rigged market. The first group assesses past information while the second invests based on where they think things will go. We talk about what happens when GDP is good but not as high as expectations were, and how per-share earnings growth can only keep up with GDP if no new shares were issued. We then switch to the concept of risk aversion and discuss the differences between system one and system two thinking, before moving into a comparison between two methods of analyzing risk. Tune in for your weekly reality check!\n\nKey Points From This Episode:\n\n0:00 Introduction; Updates from Ben and Cameron; Great new Netflix shows and books.\n6:28 Predictions about labour economics during COVID.\n10:35 Implications around recessions being defined by committees after the fact.\n16:25 Pent up demand post-crisis.\n\r21:51 Gerard O’Reilly’s observations about financial markets in recession; Lazear’s stabilization predictions, and why inflation isn’t a threat in slack markets; State Street’s ETF rebalance and failed hedge fund rebalancing bets\r.\n33:30 Forward-thinking markets vs backward thinking economies; Market expectations and the effect economic news has on future stock prices.\n43:44 How component-based vs automatically rebalanced portfolios are faring; Why yield curve inversions forecast economic activity but not equity premiums.\n54:00 Slippage: per-share earnings growth can only keep up with GDP if no new shares get re-issued; How efficient the market is in pricing new information.\n1:02:41 Determining risk tolerance; Why using a GMO point is more effective than psychometric risk profiling; The dollar terms and percentage terms shown on the Riskalyze risk slider.\n1:15:36 Bad advice of the week! Rebalancing your portfolios. \n\nBooks From Today’s Episode: \n\nScience of Fear — https://amzn.to/2B1YWIw\nStumbling on Happiness — https://amzn.to/3fNkJ5x\nHow Not to Die — https://amzn.to/3dlrNok \n\nLinks From Today’s Episode:\n\nRational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582. \nRational Reminder Website – https://rationalreminder.ca/podcast/94\nOzark on Netflix — https://www.netflix.com/us/title/80117552\nHow to Fix a Drug Scandal on Netflix — https://www.netflix.com/us/title/80233339\nRonda Rousey Story on Netflix — https://www.netflix.com/us/title/80168034\nDimensional Edward Lazear Webinar — https://us.dimensional.com/perspectives/update-with-ed-lazear\nGerard O’Reilly — https://us.dimensional.com/about-us/media-center/gerard-oreilly-featured-in-financial-times\n‘Quarterly Shake-Up for World’s Biggest ETF Delayed Until June’ — https://www.bloomberg.com/news/articles/2020-04-09/state-street-delays-shaking-up-world-s-biggest-etf-on-volatility\n‘Hedge Funds Suffered Losses as Index Rebalancing Trade Went Awry’ — https://www.forbes.com/sites/nathanvardi/2020/03/27/hedge-funds-suffered-losses-as-index-rebalancing-trade-went-awry/#77c071c14218\n‘Inverted Yield Curves and Expected Stock Returns’ — https://famafrench.dimensional.com/media/467645/inverted-yield-curves-and-expected-stock-returns-july-28-2019.pdf\n‘Is Economic Growth Good for Investors?’ — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2161183\n‘Earnings Growth: The Two Percent Dilution’ — https://www.researchaffiliates.com/documents/FAJ-2003-Two-Percent-Dilution.pdf\n‘Experimental measures: Eliciting risk preferences’ — https://www.sciencedirect.com/science/article/abs/pii/S016726811200282X\n\nThe Rational Reminder is presented as an educational resource and should not be construed as individualized investment advice, nor as a recommendation to buy or sell specific securities. The funds and portfolios discussed are examples only and may not be appropriate for your individual circumstances.\n\n\n#investing #podcast #wealthmanagement
NASDAQ and NYSE sue SEC over plans to reorganize access to stock data
Nasdaq Inc and the New York Stock Exchange (NYSE) are suing the US Securities and Exchange Commission (SEC) in an effort to block the regulator’s plans to review publicly available data feeds that broadcast stock prices to investors, as evidenced by court documents.
According to the SEC’s plan, approved in December, supply and demand data for shares will be added to public (public) channels, which will increase access to information that exchanges are currently selling to professional traders at a premium..
«Nasdaq believes the SEC has exceeded its mandate by adopting an ill-considered redesign of the market structure», – said a Nasdaq spokesperson in an email. The statement says that this plan «will make the stock markets too complex and increase hidden costs for investors».
The documents were filed with the United States Court of Appeals for the District of Columbia (U.S. Court of Appeals District of Columbia Circuit).
The Wall Street Journal reported that Cboe Global Markets, which operates the Chicago Board Options Exchange (CBOE), has also sued the SEC over the matter..
This lawsuit is the latest legal action taken by exchanges against the SEC in recent years, including successfully challenging the SEC’s proposed experiment to limit trading fees for 1,400 different shares..
The SEC is also looking into other claims. In October, Citadel Securities sued the Securities and Exchange Commission for its decision to approve a new stock trading mechanism for exchange operator IEX Group Inc.