Shameless Donald Trump takes on the Fed

Stocktake: Rodrigo Duterte not helping markets while active fund managers have bad year

US Republican presidential nominee Donald Trump. Photograph: Jonathan Bachman/Getty Images

US Republican presidential nominee Donald Trump. Photograph: Jonathan Bachman/Getty Images

 

The Federal Reserve is fuelling the “Obama paper bull” market, according to Trump’s senior economic adviser, Peter Navarro, keeping rates low to support a government which “doesn’t know how to get the economy going again”. An “honest” Fed chair would not be “playing along” with the administration, he said.

Trump’s language has been even more blunt. The Fed was “totally being controlled politically”, he said recently. Low rates have created a “false economy”. Partisan Fed chair Janet Yellen should be “ashamed of herself”.

Funnily enough, Trump had a different take in May, saying he had a “very high regard” for Yellen.

“Right now I am for low interest rates, and I think we keep them low,” he said. A minor hike could be “devastating”, so policymakers “have to be very, very careful”. Yellen “is a low-interest rate person, she has always been a low-interest rate person, and I must be honest: I am a low-interest rate person”.

Trump, not Yellen, is the shameless one.

Loudmouth politicians hurt stocks

Investors are increasingly alarmed by Philippine president Rodrigo Duterte, who last week said “f**k you” and raised his middle figure to the European Union following criticisms of his draconian drugs war.

A loose cannon who has used the term “son of a whore” in reference to both Pope Francis and US president Barack Obama, Duterte doesn’t inspire confidence. Among Asian indices, the Philippine stock exchange has been the worst performer over the last month. The Philippine peso is lagging. Foreign investors, the Wall Street Journal reported last week, had been net sellers in 24 of the previous 25 trading days.

Investors do not like loudmouth law-and-order types. US voters should take note.

Nine in 10 active funds underperform

It has been another lousy year for active fund managers, according to the latest S&P Global scorecard, with nine out of 10 US equity funds failing to beat the market over the last year.

Similarly, most managers investing in global, international and international small-cap equities underperformed benchmarks. Only in emerging markets did a majority outperform.

Active managers say the last year has been tricky. “There weren’t a lot of places to go and find alpha,” said LPL Research, which noted the  gap between the top-performing and worst-performing sectors over the last year has been one of the lowest on record.

This year is no outlier, however. Over five- and 10-year periods, 94.6 per cent and 87.5 per cent of US funds underperformed. Over 10 years, 81.2 per cent of global and 81.9 per cent of emerging market funds underperformed.

Investors are giving up, with money flowing out of active and into index funds, and little wonder: the failure rate, said S&P’s Aye Soe last week, “is embarrassing”.

All-or-nothing days are back

The return of volatility has resulted in a spate of all-or-nothing days lately, according to Bespoke Investment Group.

All-or-nothing days occur when the vast majority of S&P 500 stocks rise or fall in unison, something often associated with nervy markets. After going 43 trading sessions without a single all-or-nothing day, the index recently saw four such days in a five-day period. Based on year-to-date data, 2016 is set to register 34 all-or-nothing days, slightly fewer than 2015.

The interesting part, however, is the surge in all-or-nothing days over the last decade. There was not a single all-or-nothing day in 1992, 1993 or 1995; between 1990 and 2002, the numbers were in single figures on all but one occasion. Numbers spiked in 2003, really took off in 2007 and have since remained at historically elevated levels.

What’s changed? Instead of trading individual stocks, investors increasingly prefer ETFs to increase or decrease their market exposure. ETFs have provided investors with low-cost, diversified market access, but “there are always side effects”, says Bespoke, with markets becoming “increasingly one-sided on a day-to-day basis”.

Loss aversion costs traders

Past research has shown ordinary investors get the jitters if they look at their portfolio too often, and a new paper indicates professional traders are no different.

The University of Chicago study, Can Myopic Loss Aversion Explain the Equity Premium Puzzle?, divided hundreds of traders into two groups: one group could view price changes every second, the latter would see fluctuations only every four hours. Those receiving infrequent price updates invested 33 per cent more in risky assets, yielding profits 53 per cent higher than those receiving constant portfolio updates.

People are more affected by losses than gains. The more often you look at your portfolio, the more likely you are to experience losses, resulting in lousy decision-making. If professional traders are this susceptible to “myopic loss aversion”, one can only imagine the consequences for inexperienced investors.

“Investors and traders all want timely information and flexibility,” said the researchers, but “revealing information on a less frequent basis” is better for one’s financial wealth.

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