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Market Survivorship


market investorFebruary 15, 2022

Welcome to the 2022 Winter Olympics. What kind of joke is this? The NBC television coverage is the worst I have ever seen or can remember for an Olympics. It looks like they are shooting the television coverage with one iPhone! I try to tune in and watch some events every night, but they constantly jump around from venue to venue. I have no idea what’s coming up next and whether it’s a heat or a final. I still remember where I was when I watched the Miracle on Ice, when the U.S. Olympics men’s hockey team was victorious over the Soviet Union in 1980.

Also, what kind of political hack job is this that the 2022 Winter Olympics are held in Beijing, China, which historically averages about one inch of precipitation in February? During China’s bid for these games, they estimated that they would need about 49 million gallons of water to blanket the Olympic slopes in snow. However, a geographer interviewed by Bloomberg estimated that they probably need closer to 528 million gallons of water. Meanwhile, is currently one of the most water-stressed regions in the country. This bid must have been motivated by politics and not the environment. It’s been fascinating to listen to the commentators mention how many skiers have gone off the course or fallen down- I don’t know about you, but have you ever tried to ski on fake snow or ice?

On a lighter note, this brings me to what I believe has truly fundamentally changed in the past two years: streaming and subscription services, also known as cutting the cord. How many streaming services exist today versus two years ago that contain thousands of new movies and series? Everybody is getting into the streaming game: Apple with Apple TV+, Disney with Disney+ and ESPN+, Google with YouTube TV and Amazon with Prime, including deliveries and unlimited music on top of their original content streaming on Prime Video. Between Pandora, Spotify, Sirius and more, how many music streaming services are there now? Even in the world of gaming, you don’t need to go to GameStop anymore to trade in a game; you can just get a subscription to PlayStation Now for $4.99 a month and have thousands of video games at your fingertips.

Time for the participation portion of this Ed’s Take: I want to know what your current favorite shows are on streaming, and what service are you using to listen to music today. My new favorite show on streaming in the drama category is Yellowstone on Paramount+, and my favorite comedy is Ted Lasso on Apple TV+. I have also spent a lot of time listening to No Shoes Radio on SiriusXM while “chillaxing.” Let me know how you prefer to use streaming. Till next time.

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Three Market Drivers

We focus on three market drivers that lead to notable movements in the stock market: economic fundamentals, technical environment, and investor sentiment.
Our fundamental indicator follows 19 economic datapoints that track the underlying health of the US economy. From unemployment to homebuilding, changes in these economic datapoints tend to confirm recession or recovery after the technical and sentiment indicators have already reversed.

Dynamic Asset Level Investing, or D.A.L.I., is a technical indicator that compares each of the major asset classes, sectors, and sizes and styles against each other to discover emerging trends in the market. D.A.L.I. compares daily price action of each of these elements on a point-and-figure chart to illustrate momentum. The chart at the bottom of this page shows the current leadership in D.A.L.I.
Our sentiment indicator tracks how everyday investors currently feel towards the U.S. economy and the stock market. Between our own polling and professional surveys like the American Association of Individual Investors (AAII) Investment Sentiment Survey and Citigroup’s Panic/Euphoria Model, we track the two most dangerous emotions for investors: fear and greed.

Here is a breakdown of where each market driver currently sits:

The U.S. Inflation Rate came in at 7.48%, its highest reading since February 1982. Between this new inflation data and comments made by Federal Reserve members, it remains to be seen how aggressive the Fed will be with their rate hikes in March and the rest of the year.
Stocks continue to struggle to find direction in anticipation of the March Fed meeting, as nearly two-thirds of stocks in the S&P 500 and nearly 80% of stocks in the Nasdaq-100 remain below their 50-day moving average, a key support level for the major indices.
The University of Michigan’s Consumer Sentiment Survey for February 2022 came in at 61.7, its lowest level in over a decade. The new reading was largely due to consumers having an increasingly pessimistic view on rising inflation and the economic policies enacted by the government to combat it.

market investor


This is a hypothetical example for illustrative purposes only.

market investorWith the 2022 tax season now underway, it is important for investors to understand the relationship between taxes and their investments. Whether you are opening an Individual Retirement Account (IRA) or participating in an employer’s 401(k), most investors will have the option between two main contribution types: traditional and Roth. While the decision can seem obvious at times, it may not be as cut-and-dry as you think.
Traditional contributions, also known as pre-tax contributions, are those in which salary deferrals enter your retirement account without taxes being taken out. When you withdraw from your retirement account in the future, however, you will then pay the taxes at that time. Roth contributions, also known as post-tax contributions, are the exact opposite. While your salary deferrals have the taxes taken out today, any withdrawals that you make in the future will be tax-free, since the taxes were paid upfront. In short, traditional contributions pay the taxes later, while Roth contributions pay the taxes today.
When deciding which type of contributions to make, the main factors to consider are your future earning potential and future tax rates. Those who are currently mid-career or experiencing their highest earnings may want to consider traditional contributions, as their tax rate near the end of their career may be considerably lower than their current tax rate. Likewise, if you believe taxes will be lower in the future in general, traditional contributions may be the better choice. On the flip side, if you believe that you will be making significantly more in the future, it may be better to do Roth contributions so that you are paying taxes at your current, lower tax rate. Also, if you think tax rates may rise in the future, Roth contributions would be the better option.
While future earning potential and future tax rates are the main determinants for what type of contributions to make, there are some caveats. For example, if by some miracle your tax rate remains the same during your working years and after you retire, there is no difference between choosing traditional versus Roth. Also, it is impossible to truly know how the future will be regarding your earning potential and tax rates. While it is a safe bet for younger people to assume that they will earn more in the future, it is not a given. Likewise, it is impossible to know how legislators will affect tax rates in the near and distant future, so there is a bit of guesswork involved there as well. However, investors should be able to make an educated guess based on these two aspects in an attempt to be more tax efficient regarding their retirement.

Market indices
Year-to-date returns

Large Cap indices
S&P 500: -7.65%
Dow Jones Industrial Average: -4.88%
Nasdaq-100: -12.57%

Mid and Small Cap indices
S&P 400 (Mid Cap): -7.23%
S&P 600: (Small Cap): -7.50%
Russell 2000: -10.00%

International indices
MSCI EAFE Developed Index: -4.52%
MSCI Emerging Markets: -0.94%
MSCI ACWI ex-US: -3.16%

Economic sector indicesmarket investor
Basic Materials: -8.12%
Communication Services: -12.04%
Consumer Discretionary: -11.11%
Consumer Staples: -2.76%
Energy: 23.64%
Financials: 1.85%
Healthcare: -8.65%
Industrials: -6.50%
Real Estate: -13.26%
Technology: -11.09%
Utilities: -7.25%


Survivorship Bias in the Market

Whether you are a newcomer or a seasoned investor, odds are you have heard the phrase “index funds” when it comes to investing for retirement. Today, we’d like to look “under the hood” of the stock market to find why there seems to be such a consistent bias to the upside for the major indices throughout history. While many will point to the diversification of the major indices, there is another aspect that we believe has an equal-if-not-greater impact on this upside bias: survivorship bias.
Of the three major indices, both the S&P 500 and the Nasdaq-100 are what is known as cap-weighted indices. As a refresher, a cap-weighted index determines a stock’s weight by multiplying its current share price by the number of shares outstanding; in short, the more a stock’s price increases, the greater the weight a stock will have in the index. While this seems straightforward, not every index follows this methodology, most notably the price-weighted Dow Jones Industrial Average. Through cap-weighting, both the S&P 500 and Nasdaq-100 follow a process that resembles a momentum strategy: let your winners run and cut your losers quick. For example, if the next Amazon appears, cap-weighted indices will allow that new company to gradually increase its weight in the index through its improving stock price. On the flip side, if a company is past its prime and on the decline, a cap-weighted index will allow these outdated companies to shrink and fall out of the index.
One way to better understand this phenomenon is to compare where the S&P 500 stands today versus its history. In 1972, the S&P 500 contained 157 companies that fell under the industrials sector; consumer discretionary, consumer staples, energy, and utilities rounded out the rest of the top five sectors in terms of the number of companies within the index. On the flip side, there were only 15 technology stocks within the index. In the following 50 years, however, there has been rapid change and innovation. Today, the technology sector leads the S&P 500 with 73 companies, while the industrial, financial, healthcare, and consumer discretionary sectors round out the top five sectors. In fact, the number of industrial stocks in the S&P 500 has fallen from 157 to 72 since 1972, while the healthcare sector has increased from 20 stocks in 1972 to 65 stocks today. The technology and healthcare sectors have seen some of if not the most innovation in the past 50 years, and cap-weighted indices such as the S&P 500 and Nasdaq-100 were uniquely capable of taking advantage of that innovation.
In short, cap-weighted indices such as the S&P 500 and Nasdaq-100 follow the momentum of economic innovation. When companies become mature or obsolete, their share price suffers, which in turn decreases its weight in the index and potentially causes it to be removed from the index entirely. On the other hand, innovative companies such as the megacap tech companies were allowed to grow and thrive in the index, to the point where they now make up over a fifth of the S&P 500 and roughly 40% of the Nasdaq-100. Through this momentum aspect, we hope investors can now see an additional reason for why the major indices have historically had a bias to the upside.

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Chairvolotti Financial, Inc. dba 401karat is a Registered Investment Advisor.

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