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Bob’s Journal for 6/9/21

Published on: Jun 10 2021

More Retail Investors Means More Volatility

Investment markets are accessible to more households, and that is increasing market volatility.

Technology, regulations and innovation by financial services firms have made it easier and less expensive for many individual investors, also known as retail investors, to trade and invest.

The major factor is financial technology, or fintech. A number of new brokerage firms basically are apps that can be loaded on people’s mobile phones or other devices.

The apps are designed to make trading easy. The brokers also try to stimulate trading through features on the apps known collectively as gamification. In other words, they try to make trading fun and seem like playing a game.

A major innovation is zero commission trading, which is now widely available for most stocks, bonds and exchange-traded funds (ETFs), as well as options.

Another innovation allows investors to buy fractions of shares instead of having to buy whole shares or a minimum number of shares.

Some apps have systems that make it easy and seemingly painless to save money for investing.

These trends are global.

One result of these factors is more volatility in market prices. We saw examples of that in 2020 with the rapid rises and declines in “meme stocks” such as GameStop, AMC and others.

The rise in retail investing accompanied by volatility isn’t new. We experienced it in the technology stock boom of the 1990s. The number of retail investors increased thanks to the spread of online trading and day trading. That boom in retail investing slowed when the tech stock bubble burst in the early 2000s.

Evidence that the current trend is likely to be long-lasting and increase market volatility comes from China’s markets.

Retail investors have been a major factor in China’s markets for some time. They already have many of the innovations recently introduced in the United States. China also has concepts such as stock gift cards and the ability to buy some stocks at retailers.

History shows that when the percentage of retail investors increases, stock prices have lower correlations with company and economic fundamentals. Boom and bust cycles also tend to be more frequent with higher highs and lower lows.

Recently, China’s regulators took steps to increase the share of institutional investors in the markets and decrease the role of retail investors. The United States, for now, is moving in the opposite direction, and that’s likely to increase volatility in both individual stocks and the market indexes.

Financial Advice Can Be Subjective

Different professional financial advisors can offer dramatically different recommendations to the same client, according to a recent study by the London firm Oxford Risk.

In the study, the firm created six hypothetical clients who had different ages, wealth, risk tolerance and other factors. The firm then presented the hypothetical clients to 200 financial advisors and asked the advisors to recommend investment portfolios.

The recommendations varied widely for each client. The advisors recommended portfolios of varying risk levels for each client, though the advisors were given the same profile for each client.

The study concluded that there’s a lot of noise and subjectivity in how most advisors make recommendations.

Research shows that most people make decisions by focusing on only a few factors that stand out, even when given a wide range of information, according to Oxford Risk. In addition, the factors and evidence that draw the focus change over time and between different decision makers.

The study concluded that it is difficult for a prospective client to determine how subjective the recommendations from an advisor will be. It recommends that clients focus on the process an advisor uses and gravitate toward those with formal, structured processes.

More Details About SECURE Act Coming

The Setting Every Community Up for Retirement Security (SECURE) Act was enacted in December 2019.

The law had a wide range of provisions affecting all types of retirement plans. A major feature of the law was the end of the Stretch IRA, replacing it with a requirement that the balances of most inherited IRAs be distributed to the beneficiaries within 10 years.

As with most new laws, tax advisors have questions about details of the SECURE Act. More questions were raised when the IRS updated its Publication 590-B, “Distributions from Individual Retirement Arrangements (IRAs).” The revision has some sections that are inconsistent with each other and interpretations most tax experts say are inconsistent with the language of the SECURE Act.

An IRS official recently said that many of the questions and concerns about the SECURE Act would be put to rest when comprehensive regulations interpreting the law are released.

The regulations aren’t at the end of the drafting process and there’s no target date for their release. But at a recent virtual tax conference, the IRS official said they would be released “soon.”

The Data

The labor market continues to improve. The main obstacle is that businesses aren’t able to hire all the people they want.

The ADP Employment report estimated that in May, 978,000 private sector jobs were created. But April’s estimate of jobs created was revised lower to 654,000 from 742,000.

New unemployment claims hit a fresh pandemic low and were below 400,000 for the first time since the pandemic in the latest week. That’s down from 405,000 new claims the previous week.

Continuing claims increased by 169,000 to 3.7 million.

The total number of Americans still receiving some form of unemployment benefit is 15.4 million. That’s about half the number receiving some form of benefits 12 months ago.

In May, nonfarm payrolls increased by 559,000, according to the Employment Situation reports. That’s higher than the revised 278,000 new jobs in April but below economists’ expectations of 671,000.

The biggest increase was in leisure and hospitality, which added 292,000 jobs. Of those new jobs, 186,000 were in restaurants and bars.

The construction sector lost 20,000 jobs and retail lost 6,000 jobs.

The number of job openings in the U.S. reached a new high in April, according to the JOLTS (Job Openings and Labor Turnover Survey). There were 9.3 million job openings on the last day of April.

Even so, the number of hires didn’t change much. In addition, the “quits” rate increased to a high for the report (which dates back to 2000). A higher quits rate indicates workers believe the demand for labor is strong and that they can find better jobs than their current ones.

The services sector continues to expand, according to the ISM Services Index. The index rose to 64.0 in May from 62.7 in April.

Likewise, the PMI Services Index for May increased to 70.4 from 64.7 in April. The Composite Index for the economy increased to 68.7 from 63.5 in April.

Factory orders declined by 0.6% in April. The decline follows 11 months of increases.

But orders for nondefense capital goods excluding aircraft, often considered a measure of business investment, increased 3.4% in April. They had decreased 1.1% in March.

The Small Business Optimism Index from the National Federation of Independent Business (NFIB) declined slightly in May to 99.6, down from 99.8 in April.

That’s the first decline in four months. Business owners remained concerned about the labor shortage and say inflation is a big concern.

The Markets

The S&P 500 rose 0.04% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 0.14%. The Russell 2000 increased 2.12%. The All-Country World Index (excluding U.S. stocks) added 0.24%. Emerging market equities lost 1.00%.

Long-term treasuries rose 1.62% for the week. Investment-grade bonds increased 0.77%. Treasury Inflation-Protected Securities (TIPS) lost 0.10% but high-yield bonds gained 0.24%.

On the currency front, the U.S. dollar gained 0.21%.

Energy-based commodities increased 1.46%. Broader-based commodities rose 0.88%. Gold declined 0.36%.

Bob’s News & Updates

My latest book is “Where’s My Money: Secrets to Getting the Most out of Your Social Security.” It tells you clearly what your benefit options are in different situations and how to determine the best choice for you. You can find it on Amazon.com or Regnery.com.

The number of regular viewers for my Retirement Watch Spotlight Series continues to increase. You should sign up because I make in-depth presentations of key retirement finance topics. You can watch these online seminars from the comfort of your home or office at times you choose. To learn more about my new Spotlight Seriesclick here.

A recent five-star review of my book on Amazon.com said, “A complete retirement guide! One of the best books on this topic!” Click for more details about the revised edition of “The New Rules of Retirement.”

If you’re interested in my books, check my Amazon.com author’s page.

I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.

P.S. On June 17, I will be holding a teleconference called “Your Retirement is Under Attack: Learn How to Protect Yourself.” During this time, I will be able to take your questions and offer tips and tricks on how to avert the most common retirement disasters. Click here to sign up.

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