Ecnfin

This is the forecast of the S&P 500 Index for 1Q 2023. It is based on the linear regression model, where I use the Gross Domestic Product (GDP) to predict the value of the S&P 500 Index. This forecast tries to predict a general pattern and direction of the stock market in the near future. When the forecast calls for a negative return, it is a warning sign....

Forecast the Future Standard & Poor’s 500 Index for the 1st Quarter 2023 This is the forecast of the S&P 500 Index for 1Q 2023. It is based on the linear regression model, where I use the Gross Domestic Product (GDP) to predict the value of the S&P 500 Index. Th…

Podcast: Impact of High Oil Prices, Inflation, Debt and Restrictive Monetary Policies on the Health of the Economy. It is a combination of multiple negative factors that creates a worrisome diagnosis for already fragile economic health of the US economy. A sharp increase in oil prices from $22 in April 2020 to $120 in June 2022. The highest inflation since 1981 which is likely to stay elevated for a while....

http://ecnfin.com/2022/06/15/impact-of-high-oil-prices-inflation-debt-and-restrictive-monetary-policies-on-the-health-of-the-economy-%ef%bf%bc/

Impact of High Oil Prices, Inflation, Debt and Restrictive Monetary Policies on the Health of the Economy. Podcast: Impact of High Oil Prices, Inflation, Debt and Restrictive Monetary Policies on the Health of the Economy. It is a combination of multiple negative factors that creates a worrisome diagnos…

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Podcast: Economic Recession Maybe Around the Corner in the US and Europe Inflationary pressures are becoming less transitory and more long-lasting. Even before the horrific events in Ukraine, inflation was already very high. Additional sanctions on Russia added additional fuel to the fire of already hot inflation. Sanctions on Russia will also have a significant negative economic effect on the world economy and particularly Europe....

http://ecnfin.com/2022/03/21/economic-recession-maybe-around-the-corner-in-the-us-and-europe/

Economic Recession Maybe Around the Corner in the US and Europe Podcast: Economic Recession Maybe Around the Corner in the US and Europe Inflationary pressures are becoming less transitory and more long-lasting. Even before the horrific events in Ukraine, infla…

Where will the S&P500 index close at the end of the 1st quarter 2022?

http://ecnfin.com/2022/02/11/forecast-the-future-standard-poors-500-index-for-the-1st-quarter-2022/

Forecast the Future Standard & Poor’s 500 Index for the 1st Quarter 2022 Podcast: Forecast the Future Standard & Poor’s 500 Index for the 1st Quarter 2022 This is the forecast of the S&P 500 Index for the 1Q 2022. It is based on the linear regression model where…

Investing Principle #7: How investment returns may improve your quality of life? By now you know, what it takes to earn a good size portfolio over time. If you do not, visit ecnfin.com to read all 15 investing principles. What can you do with $650,000? You may be able to use this portfolio to supplement your regular salary or completely live off your investments.

Investing Principle # 6: Start early and contribute regularly to your investment portfolio.

You can open the investment account with $100 today. Regular contributions may improve your investment returns. Also, time helps your portfolio to grow substantially. Early small contributions may have the same overall result as large but late contributions would. For example, John opens the investment account at age 18 with $100 initial deposit. He contributes $100 per month for the next 32 years until he is 50 years old. Let’s assume John puts all of his money in the S&P 500 Index which represents the large cap US companies. The annualized total return for this index was 13.5% during the last 10 years. Let’s assume John was able to earn 13.5% on his investment between age 18 and 50. At age 50, John should have $650,867 in his portfolio (to see the charts and read the entire principle, visit ecnfin.com)

Investing Principle # 5: Patience may help pay off in the long run.

You should allow enough time for your investment strategy to become successful. Assuming your original investment thesis was correct, the more investors wait and not react on news the better performance results maybe. However, it is important to distinguish between patience and pride. Sometimes, it’s important to realize that we all make mistakes and to cut your losses. We are all subject to behavioral biases which are very difficult to control. Investors are subject to loss aversion and are likely to sell positions when prices are down in order to limit their losses. Loss aversion expresses the intuition that a loss of $X is more aversive than a gain of $X is attractive (Daniel Kahneman and Amos Tversky, 1984). Representativeness heuristic explains how investors base their predictions on descriptions and recent data instead of personal beliefs and fundamental analysis. By watching CNBC and Bloomberg, investors may rely on incomplete analysis and make decisions that are not based on comprehensive fundamental research. Be patient with your investment decisions. Take your time to do research and make decisions based on your homework results. Read all 15 investing principles on ecnfin.com

Investing Principle # 4: Smart cash management may decrease risk and increase return for investors.

Investors should have cash savings in their bank account for cloudy days. Cash savings may hedge the unknown need for cash distributions in the future. It is a smart risk management technique which may also improve the overall investment return. Unexpected need for cash increases during economic downturns. There is a greater probability of a job loss and prolonged unemployment during an economic downturn. Without enough cash savings, the investor may start to withdraw money from the investment portfolio. Economic downturn is the least favorable time to sell securities. You will be selling securities when the prices are low. By selling securities when the prices are down will prevent the investor from participating in the future stock market recovery. In contrast, smart cash management may provide necessary cushion for investors to weather the economic hardship and wait for the financial markets to recover. Instead of relying on the investment portfolio, investors should have at least 6-month worth of living expenses saved as cash. Read all 15 investing principles on ecnfin.com

Investing Principle # 3: Open the right type of the investment account for your needs

Selecting the right type of the investment account may improve your after-tax investment returns. Most of the time you will have to select between taxable, tax exempt or tax deferred account types. What are the benefits of taxable and non-taxable accounts?

A taxable account can be Individual or Joint account. With a taxable account you share the tax risk with the IRS. Capital and incomes gains are your tax liability – IRS gains. In contrast, capital losses are your tax deductions - IRS losses. It might be prudent to have growth stocks with no dividends in your taxable account. When you have realized capital losses you may be able to deduct them on your tax returns. Another benefit of a taxable account is flexibility. There are no penalties for early distributions or limits for deposits. However, taxable account are more costly. All your contributions are after tax and you are required to pay tax on all realized capital gains and income every year.

Tax advantaged accounts are your 401k Plans, Regular and Roth IRAs. Tax advantaged account are more tax efficient and may improve your investment returns. However, they come with restrictions: visit ecnfin.com to learn more

Investing Principle # 2: Investing has become more accessible than before. Commission free trading provided access to financial markets for investors of all sizes, it created a greater opportunity to profit even for small investors.

Recent advances in the financial world provided opportunities for everybody to become an investor. There is no minimum account balance required. With as little as $100 you can become an investor today. That is a low barrier to enter.

One of the major recent improvements in the financial system is commission free trading for US stocks, ETFs, and options. That is a huge benefit for the beginner investors. It allows low barrier to enter. In 2015, Robinhood started offering commission free trading. Later, in 2019, Charles Schwab began offering commission-free online trading. Soon after, the rest of the major financial institutions started offering zero trading costs in the US. Today, you can open a brokerage account at TD Ameritrade, Fidelity, Charles Schwab or Robinhood and pay zero trading costs.

Why is zero commission so important for the beginner investor with little money to invest?

Read the entire article and all 15 Investing Principles on ecnfin.com

Investing Principle # 1: Why should you invest? By investing today, you invest in your future with the hope of a better quality of life.

When you invest today, you may earn a future reward which you can then enjoy later on. It is prudent to balance the future reward with today’s pleasure. Spend some of your monthly budget on pleasure today, but also save some of your money and invest in your future. It is good to have a healthy balance. In contrast, when you use a credit card to receive a joy today, you borrow against your future. You will have to work more to pay back your credit card balance in the future. Instead of borrowing against your future time, you should start investing in yourself. You will feel better each month knowing that in the future you may have more free time and ability to enjoy a better quality of life. Invest in yourself starting today.

To read all 15 Investing Principles, I invite you to visit my website: ecnfin.com

ECNFIN a place where economics and finance meet

How much risk did investor assume by holding the Long-Term US Treasury bonds or being invested in the S&P 500 Index during March 2020?

The daily standard deviation for the iShares Core S&P 500 ETF (IVV) was 5.92% in March 2020. The daily standard deviation for the iShares 20 Plus Year Treasury Bond ETF (TLT) was 3.77% in March 2020. Each selected asset class comes with a significant risk. If you were invested in the IVV, with 68% probability, you would expect your portfolio to be up or down 5.92% on any single day during March 2020. On the other hand, if you put all your money in the long-term US government bonds, with 68% probability you would expect your portfolio to be up or down 3.77% on any single day in March 2020. Both equities and government bonds have significant risk by themselves. Read the full article published here: https://ecnfin.com/2021/03/01/the-analysis-of-the-stock-market-volatility-and-ways-to-mitigate-the-risk/

As investor, how do you manage the risk of uncertain time horizon?

Some investors may have the high-risk tolerance and ability to ignore a steep decline in the stock prices. Even these investors face the risk of uncertainty - their own time horizon. As I discussed before, the death will come for certain but when that day will come is everybody’s assumption and guess. Life expectancy is the risk because we cannot predict it with certainty. So even the risk averse investors may not be able to wait for the stock market to recover due to uncertain death.

Investors may be able to control the behavioral bias, such as, loss aversion. Even though, it is very difficult to do even for professional investors. All investors are subject to certain future death with uncertain date. This creates uncertain time horizon. Knowing about these risks, what solutions can investors implement in managing money? Read the full article published here:
https://ecnfin.com/2021/03/01/the-analysis-of-the-stock-market-volatility-and-ways-to-mitigate-the-risk/

Do you have wiliness and ability to stay invested for a long-term?

Stock market correction may last a long time. Investors should be prepared to take the risk and may need to wait multiple years to see their portfolios to recover. For example, the dotcom bobble caused Nasdaq index to rise to 5,048.62 on March 10, 2000. When the dotcom buddle did burst, the Nasdaq fell by 76.81% all the way to 1,139.90 on October 4, 2002. It took about thirteen years for the Nasdaq to return to 5,000 level on July 2015. Some stock market corrections can take a long time to recover from. Read the full article published on https://ecnfin.com/2021/03/01/the-analysis-of-the-stock-market-volatility-and-ways-to-mitigate-the-risk/

How did you handle the stock market volatility in 2020?

By closing your eyes and visualizing March 2020 with a wild volatility and unknown future ahead, did you have strength to stay calm and hope for the best? What if the rest of the year was similar to March? That would mean you could have made plus or minus 94% of your portfolio using 68% probability (see Chart). By increasing the probability to 95%, the swing in your portfolio values would have been between plus and minus 188%. Would you be willing to risk it all? Fortunately, we know that the rest of the year was not the same as March 2020 and we saw a nice recovery. However, nobody knows what the future will hold, the next time will be different. Read the full article published on https://ecnfin.com/2021/03/01/the-analysis-of-the-stock-market-volatility-and-ways-to-mitigate-the-risk/

Requirements, risks and future uncertainty of being an investor. Do you have what it takes to be a successful investor?

Investing in the stock market can be rewarding. Let’s break down the prior sentence. Definition of investing is to commit (money) in order to earn a financial return (Merriam-Webster dictionary). The key word is to commit. You must commit for a long-term in order to fully benefit from investing. Long-term commitment allows investors to go through ups and downs of the stock market and come out with a positive gain. Sometimes, you need to provide enough time for your investment to be noticed by the rest of the market participants.

However, it is easier said than done. We are all human and have many limitations that may break our commitment to invest and wait. We are all subject to behavioral biases such as loss aversion. Loss aversion expresses the intuition that a loss of $X is more aversive than a gain of $X is attractive (Daniel Kahneman and Amos Tversky, 1984). When investors feel the pain from losing money in the short-term, they may be inclined to sell when the stock market is down. By selling stocks when the market is down, will create realized losses and prevent investors from a future possible recovery.

Another limitation that most investors face is the personal time horizon. Benjamin Franklin wrote before: “in this world, nothing is certain except death and taxes” (Constitution Center). We all have our personal time horizon in terms of living years. However, we do not know for certain the duration of our time horizon. The death is certain, but the exact time is not. We may not guess exactly how many years we may have left. Thus, we cannot know the duration of our lifetime horizon with certainty. Read the full article published on https://ecnfin.com/2021/03/01/the-analysis-of-the-stock-market-volatility-and-ways-to-mitigate-the-risk/

What is required to be a successful investor?

First, the stock market requires a long-term commitment to be a successful investor. Second, we are all human and subject to behavioral biases. We may experience loss aversion and sell when the market is down. Third, even if we can control our emotions, we are certain to have the end of our living years at some unknown point. The duration of the living years is uncertain and creates the risk for investors. Read the full article published on https://ecnfin.com/2021/03/01/the-analysis-of-the-stock-market-volatility-and-ways-to-mitigate-the-risk/

How expensive home can you buy today with $4000 monthly mortgage budget? How about a million-dollar home! Due to historically low interest rates, the housing affordability increased substantially. Just over two years the interest rates declined from 4.9% to 2.86%. If you have a budget of $4,000 per month to spend on the 30-year fixed mortgage, you were able to borrow $753,684 in October 2018 when the interest rate was 4.9%. With the decline in the interest rates from 4.9% to 2.86%, you can now borrow a staggering $965,971 with the same $4,000 a month budget. This translates into the increase of $212,287 in purchasing power or almost 30% higher purchasing power for home buyers. The complete article is available on ecnfin.com. It was written in September 2020 when rates were at 2.86%. The current interest rate is even lower at 2.73%. That is another reason why housing market continues to remain very strong.

If you have $3000 monthly mortgage budget, how much more house can you afford to buy today vs two years ago? Due to historically low interest rates, the housing affordability increased substantially. Just over two years the interest rates declined from 4.9% to 2.86%. If you have a budget of $3,000 per month to spend on the 30-year fixed mortgage, you were able to borrow $565,263 in October 2018 when the interest rate was 4.9%. With the decline in the interest rates from 4.9% to 2.86%, you can now borrow $724,478 and pay the same $3,000 per month. This translates into the increase of $159,215 in purchasing power or almost 30% higher purchasing power for home buyers. The complete article is available on ecnfin.com. It was written in September 2020 when rates were at 2.86%. The current interest rate is even lower at 2.73%. That is another reason why housing market continues to remain very strong.

If you have $2000 monthly mortgage budget, how much more house can you afford to buy today vs two years ago? Due to historically low interest rates, the housing affordability increased substantially. Just over two years the interest rates declined from 4.9% to 2.86%. If you have a budget of $2,000 per month to spend on the 30-year fixed mortgage, you were able to borrow $376,842 in October 2018 when the interest rate was 4.9%. With the decline in the interest rates from 4.9% to 2.86%, he/she can now borrow $482,985 and pay the same $2,000 per month. This translates into the increase of $106,143 in purchasing power or almost 30% higher purchasing power for home buyers. The complete article is available on ecnfin.com. It was written in September 2020 when rates were at 2.86%. The current interest rate is even lower at 2.73%. That is another reason why housing market continues to remain very strong.

How much home can you afford to buy due to the decrease in interest rates if you have $1000 toward mortgage payments?

Mortgage interest rates have been declining for the last 2 years. There is indirect relationship between the interest rate and home affordability. As rates decrease, the among of money one can borrow increases. With a significant decline in rates, home buyers can borrow more while keeping the monthly payments the same. The home buyer with $1000 monthly budget towards the mortgage payments was able to borrow $188,421 in October 2018 when interest rate was 4.9%. However, with the decline in rates from 4.9% to 2.86%, the same home buyer can now borrow $241,493. In other words, the home buyer with $1000 monthly budget can now borrow an additional $53,072 due to the decline in interest rates (see Chart 1). The monthly payments will remain the same at $1000 per month but the amount available to borrow increased significantly by more than $53,000 in just two years. Read full article here: https://ecnfin.com/2020/09/28/how-much-home-can-you-afford-to-buy-due-to-the-decrease-in-interest-rates-analysis-of-todays-housing-market/

The year 2021 maybe a bad year for the S&P 500 Index. My model predicts a negative return for the year 2021. This means that the stock market is ahead of itself and may experience a correction and volatility in the next 12 months. My model is based on the simple linear regression model. The model uses Gross Domestic Product (GDP) as explanatory variable to the performance of the S&P 500 Index. The model predicts the S&P 500 Index to close between 3,390 and 3,480 points at the end of the year 2021. This represents a negative return between -7.3% and -9.7% for the year. If my forecast is correct, the year 2021 will provide a negative return to equity investors. Investors may not be fully compensated for taking the market risk. It is time to be cautious about taking on equity risk. Read the full article here: https://ecnfin.com/2021/01/11/forecasting-the-future-standard-poors-500-index-for-the-year-end-2021/

As investor in the long-term US government bonds, you can expect to earn negative income after inflation for the next ten years. The daily real yield on the 10-year US treasury bonds is at the historical lowest level. The real yield on the 10-year US Treasury bonds was -1.02% on January 29, 2021, according to the Federal Reserve Bank of St. Louis data. When the real interest rates are positive, the investor is earning income above inflation. When the real interest rates are negative, the income from the bond portfolio will not compensate for inflation. It should also signal a warning sign that bonds maybe too expensive. Read the full article here:
https://ecnfin.com/2020/12/21/valuation-of-government-bonds/

Wealthy people own most of the stock market and their wealth increased during the pandemic widening the inequality gap. The richest one per cent of Americans own more stocks than half of the US households, according to the Goldman Sachs (Financial Times). Also, the top one per cent of Americans own 31% of all household wealth. In contrast, the bottom 50% of Americans own only 2% of household wealth according to the Federal Reserve. These statistics should support more aggressive fiscal stimulus, especially for lower income families. We should expect more stimulus checks in early 2021. Read the full article published on https://ecnfin.com/2021/01/27/how-will-the-new-us-secretary-of-the-treasury-janet-yellen-effect-the-economy-and-the-stock-markets/

Podcast: How will the new US Secretary of the Treasury Janet Yellen effect the Economy and the Stock Markets? President elect Joe Biden nominated Janet Yellen as the 78th United States secretary of the treasury. In my opinion, Janet Yellen will support aggressive fiscal stimulus of the US economy at the beginning of her new job. Her prior experience as the chair of the Fed will create a bridge and very favorable relationship between the current Fed chairman Jerome Powell and the US Treasury Department....

http://ecnfin.com/2021/01/27/how-will-the-new-us-secretary-of-the-treasury-janet-yellen-effect-the-economy-and-the-stock-markets/

How will the new US Secretary of the Treasury Janet Yellen effect the Economy and the Stock Markets? President elect Joe Biden nominated Janet Yellen as the 78th United States secretary of the treasury. In my opinion, Janet Yellen will support aggressive fiscal stimulus of the US economy at the be…

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what will be the stock market performance in 2021? Is the stock market cheap or expensive?

http://ecnfin.com/2021/01/11/forecasting-the-future-standard-poors-500-index-for-the-year-end-2021/

Forecasting the Future Standard & Poor’s 500 Index for the Year-End 2021 How much will the stock market return in 2021? Is the stock market cheap or expensive?

Podcast: Valuation of Government Bonds Current valuation of government bonds became expensive. In this paper, I compare the total return on the iShares 20+ Year Treasury Bond ETF (ticker TLT) with the real yield on the 10-year US treasury bonds. By investing in the long-term US government bonds when the real rates are negative, makes such investment speculative and risky. …...

http://ecnfin.com/2020/12/21/valuation-of-government-bonds/

Valuation of Government Bonds Does it make sense to invest in government bonds now? Current valuation of government bonds became expensive. In this paper, I compare the total return on the iShares 20+ Year Treasury Bond ETF (ti…

Podcast: How did the international stock markets perform during the Covid-19 recession? The effect of the Covid-19 on the stock markets around the world was widespread. Most major equity markets around the world witnessed a steep decline in the stock prices. However, the degree of the stock market correction and recovery was different from one country to another. How did various stock markets around the world weather the Covid-19 pandemic? [ 624 more words ]

http://ecnfin.com/2020/10/07/how-did-the-international-stock-markets-perform-during-the-covid-19-recession/

How did the international stock markets perform during the Covid-19 recession? How did various stock markets around the world weather the Covid-19 pandemic? The degree of the stock market correction and recovery was different from one country to another.