November 18, 2014

Investor Expectations

"Is all this stock market optimism a red flag?"

Contrarians - investors who bet against prevailing market trends - were probably nodding along as they read that headline in The Wall Street Journal back on January 18, 2013. The Journal cited the American Association of Individual Investor's (AAII's) Sentiment Survey, which showed about 46 percent of participants were feeling bullish. As it turned out, the bulls were right. The Standard & Poor's 500 Index rose from about 1486 to about 2040 through the end of last week.

You may recall, two weeks ago, the AAII Sentiment Survey showed investor pessimism at a nine-year low with just 15 percent of participants growling like bears. Well, last week, pessimism rebounded and optimism moved higher, too. The survey results were:

• Bullish: 57.9 percent, up 5.2 percentage points from the prior week
• Neutral: 22.8 percent, down 9.5 percentage points from the prior week
• Bearish: 19.3 percent, up 4.3 percentage points from the prior week

The historic average for the survey is bullish 39.0 percent, neutral 30.5 percent, and bearish 30.5 percent.

Americans are feeling pretty confident about the stock market's potential and that's not always a positive sign. Expectations of Returns and Expected Returns, a paper published by Robin Greenwood and Andrei Shleifer of Harvard University, compared investors' expectations for returns to what financial economists call expected returns (which are calculated using dividends, consumption, and market valuations). They crunched numbers for data collected between 1963 and 2011 and found expectations for returns and expected returns tend to be negatively correlated. "...Both expectations of returns and [financial economists' expected returns] predict future stock market returns, but with opposite signs. When [financial economists' expected returns] are high, market returns are on average high; when [investors'] expectations of returns are high, market returns are on average low."

So, since investor expectations are high, will U.S. stock markets returns be low? There is no way to know. Whether you're a bull or a bear, in times like these, it's good to have a well-diversified portfolio.

The Rise of Robotics

'THE NEW HIRE' is the name of a September survey published by PwC. It's not about how to make newly-hired people more comfortable and productive. It's about how the R generation - the latest iteration of industrial robots - is transforming manufacturing. More than one-half of the 120 manufacturing firms surveyed already have adopted robotics technologies. Auto manufacturers employ robots, as do food; consumer goods; life sciences, pharmaceutical, and biomedical; and metals companies.

PwC predicts the shift to robots will create new jobs for engineers specializing in robots and robotics operating systems. It also is likely to result in the displacement of a fair number of human workers. Currently there are about 1.5 million 'intelligent industrial work assistants' laboring around the world. About 230,000 are employed in the United States. According to The New Hire report:

"Industrial robots are on the verge of revolutionizing manufacturing. As they become smarter, faster and cheaper, they're being called upon to do more - well beyond traditional repetitive, onerous, or even dangerous tasks such as welding and materials handling. They're taking on more "human" capabilities and traits such as sensing, dexterity, memory, trainability, and object recognition. As a result, they're taking on more jobs - such as picking and packaging, testing or inspecting products, or assembling minute electronics."

That may be a little optimistic. Last month, Popular Mechanics reported engineers have been working on mechanical first-responders, like bomb-defusing and investigator robots, to help with threats like Ebola and the Fukushima nuclear power plant disaster. The magazine found robots competing in the DARPA Robotics Challenge were more like toddlers and less like capable adults. "For a typical task in the event, turning a valve, a team of several people required an hour or more to prep the robot, and that same team had to stand at the ready to catch their bot when it stumbled (which happened often)."

Weekly Focus - Think About It

"All the world's a stage, and all the men and women merely players: they have their exits and their entrances; and one man in his time plays many parts, his acts being seven ages."

—William Shakespeare, English playwright and poet

Best regards,
Sean M. Dowling, CFP, EA
President, The Dowling Group Wealth Management