May Market Commentary: The Fed Owned It, But Can They Control It?

April Recap and May Outlook

COVID concerns took a definitive backseat as mask mandates on flights ended, and the concerns about the economy turned to how bad things will get. The concerns over the disruption of the ongoing war in Ukraine, 40+ year record inflation, and the resulting amping up of the Fed’s intentions on rate increases moved distinctly into the foreground. Let’s look at some headlines:

  • The IMF released projections for the impact of the war in Ukraine. Global growth will likely slow from an estimated 6.1% in 2021 to 3.6% in 2022 and 2023. This is 0.8 and 0.2 percentage points lower for 2022 and 2023 than projected in January.

  • The war isn’t just impacting growth. The IMF also reported that war-induced commodity price increases and broadening price pressures have led to 2022 inflation projections of 5.7% in advanced economies and 8.7% in emerging market and developing economies—1.8 and 2.8 percentage points higher than projected last January.

  • In remarks at a panel discussion at the IMF on April 21st, Chairman Powell reiterated that it is appropriate “to be moving a little more quickly” on rate hikes. That translated into guidance on the first 50-bps rate increase in 22 years.

  • Economists began talking about “stagflation.” Stagflation is high inflation, high unemployment, and slow or negative real economic growth. Stagflation fears rise out of the potential for the Fed to overshoot and tip the economy into recession. Another way to think of stagflation is a circular firing squad. In stagflation, the moves the central bank makes to rescue the economy push it further into recession.

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A Note on the Invasion of Ukraine

The news about the invasion of Ukraine is distressing on a humanitarian level and unsettling when thinking about the impact of increased volatility on investment portfolios.

Added to already high inflation and the market’s uncertainty around the Federal Reserve’s future interest rate increases, markets are now reeling from the added pressure of what will likely be more aggressive sanctions.

Let’s break it down and look at some of the threads we’re tracking.

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GMB Ep #114: Behavioral Economics With Professor John Howe

 

When confronted with significant decisions, our thoughts frequently stand in the way of rational decision-making. Today’s episode of Grow Money Business features John Howe, a finance professor at the University of Missouri. He is an award-winning educator and researcher with expertise in investments, behavioral economics, household finance, corporate finance, and corporate governance. He is also the author of the book The Foolish Corner: Avoiding Mind Traps in Personal Financial Decisions. Throughout this episode, he shares his expertise and wisdom on behavioral economics, focusing specifically on the behavioral biases we all have regarding investing.

 

 

Show Notes

[03:36] Behavioral Economics – Prof. Howe discusses his background, career, and current activities.

[07:23] Kahneman’s Nobel Prize – Behavioral economics is a field of study that lies at the nexus of economics and psychology. Prof. Howe discusses how the Nobel laureate’s teaching of behavioral economics impacts his teachings.

[10:53] Diversified Portfolios – Prof. Howe highlights the importance of diversifying one’s investments.

[15:00] Confirmation Bias – Confirmation bias is a term that refers to our natural predisposition to be receptive to new information that confirms our existing beliefs. Prof. Howe explains how confirmation bias affects the decisions we make on a day to day basis.

[20:19] Transitions – Individuals frequently undergo transitions, such as selling a business they have built over the years or acquiring another. Prof. Howe shares his insights on what should be considered during such a transition.

[26:43] More on Biases – Prof. Howe explains the reason behind biases by presenting examples from evolutionary psychology.

[30:00] Reproducibility – One of the trademarks of the scientific method is the ability to replicate an experiment and obtain the same results. Prof. Howe broadly discusses the reproducibility issue in psychological research.

[40:49] Better Decisions – Prof. Howe explains how being well informed on biases can help us making better decisions in the future.

[49:31] The Future – Prof. Howe discusses the current research going in the field, as well as the future of behavioral economics.

[57:59] Research – Prof. Howe shares the current scientific issues that pique his interest.

[01:02:29] Mental Health – Prof. Howe shares his observations concerning the state of mental health in the United States and the way it affects people’s financial decisions.

[01:06:28] Gamblers – Prof. Howe outlines his view on gambling and how this relates to the human capacity for pattern recognition

[01:08:52] Books – Prof. Howe shares several books that are worth reading.

 

Resources

Connect with Professor John Howe:

LinkedIn: linkedin.com/in/john-howe-1013498/

Newsletter: johnhowe.substack.com/welcome

 

Mentioned in the episode: 

Your body language may shape who you are | Amy Cuddy:

youtube.com/watch?v=Ks-_Mh1QhMc

The Foolish Corner: Avoiding Mind Traps in Personal Financial Decisions:

amazon.com/Foolish-Corner-Avoiding-Financial-Decisions/dp/099851070X

Science Fictions: How Fraud, Bias, Negligence, and Hype Undermine the Search for Truth:

amazon.com/Science-Fictions-Negligence-Undermine-Search/dp/1250222699

Rationality: What It Is, Why It Seems Scarce, Why It Matters:

amazon.com/Rationality-What-Seems-Scarce-Matters/dp/0525561994

Misbehaving: The Making of Behavioral Economics:

amazon.com/Misbehaving-Behavioral-Economics-Richard-Thaler/dp/039335279X

Thinking, Fast and Slow:

amazon.com/Thinking-Fast-Slow-Daniel-Kahneman/dp/0374533555

The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness:

amazon.com/Psychology-Money-Timeless-lessons-happiness/dp/0857197681