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Matt's Market Insights

April, 2016 Archives

Fed, Markets Align

By Matthew Kerkhoff

 

Central banks are in the spotlight this week, with the Federal Reserve’s statement yesterday, and the Bank of Japan’s policy decision today. Arguably two of the world’s most important central banks, let’s dig a little deeper into their actions (or rather, lack thereof) and the reasons behind them. Today’ we’ll focus on the Federal Reserve, and we’ll save the Bank of Japan for some other time.

 

Yesterday the Federal Reserve left interest rates unchanged, citing subpar performance in consumer spending, business investment and exports. They noted that growth in economic activity had slowed, and refrained from providing any details about the next possible rate hike.

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Why are Companies Still Hiring?

By Matthew Kerkhoff

 

Companies are self-optimizing units, and they optimize with respect to the bottom line. As much as we would like to think of corporations as good citizens, the fiduciary relationship between management and shareholders revolves around one primary goal: maximize profits.

 

While there is an ongoing shift towards emphasizing the triple bottom line - an accounting framework incorporating three dimensions of performance: social, environmental and financial – these days, profits continue to steal the show.

 

Why, then, in the face of difficult economic conditions, are companies still hiring?

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Thank You, Dollar

By Matthew Kerkhoff

 

Our currency is weakening, and it’s glorious.

 

For decades the term “king dollar” was seen as a rallying call. Americans, in a college spirit-rally type mentality, would cheer the strength of the dollar as a sign of domestic strength. And rightly so.

 

But things have changed. The global economy has become much more interlaced. Those who still believe in the all-mighty power of king dollar … are quite simply wrong. They're living in the past.

 

Perhaps a symptom of belief perseverance?

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Earnings Yield Suggests Stocks are Cheap?

By Matthew Kerkhoff

 

You don’t have to search very hard to find valuation tools that suggest stocks are currently expensive, but what about the opposite? Are there any valuation metrics that show stocks are fairly priced? Even cheap?

 

There is perhaps one. And regardless of whether you buy into this line of reasoning, it’s important that you understand it, because fund managers are continually watching this metric.

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Beware of Belief Perseverance

By Matthew Kerkhoff

 

Let's talk psychology again for a moment. Specifically, the idea of belief perseverance.

 

It affects all of us. I'm guilty of it. You're guilty of it. And everyone else is too, including major decision makers such as Janet Yellen and Barrack Obama. None of us can hide from it, all we can do is attempt to understand it, and thus better understand ourselves.

 

Belief perseverance refers to the natural tendency of individuals to hold their beliefs as true, even when confronted with ample disconfirming evidence.

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Q1 Complete, What's Next?

By Matthew Kerkhoff

 

With the first quarter of 2016 now in the books, the focus turns to earnings. So far the picture is not looking very pretty.

 

Earnings for S&P 500 companies are estimated to decline 8.5% (FactSet). If negative earnings growth comes to fruition, it will mark the fourth consecutive quarter of year-over-year earnings declines. The last time that happened was during the financial crisis.

 

The chart below shows the tough environment that corporate earnings find themselves in. When you consider that stock prices track corporate earnings over the long-run, it should come as no surprise that stocks have been turbulent lately.

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