TIME Hong Kong

Hong Kong’s Protesters Are Fighting for Their Economic Future

Thousands of protesters attend a rally outside the government headquarters in Hong Kong as riot police stand guard
Thousands of protesters attend a rally outside the government headquarters in Hong Kong as riot police stand guard on Sept. 27, 2014 Tyrone Siu— Reuters

The city can't remain a global financial center without its own political process

The conventional wisdom about Hong Kong’s pro-democracy protests is that they are bad for business. Hong Kong has become one of the world’s three premier financial centers (along with New York City and London) because the city has been a bastion of stability in an ever changing region, the thinking goes, and therefore the tens of thousands of protesters who paralyzed downtown Hong Kong on Monday are a threat to its economic success. The Global Times, a state-run Chinese newspaper, used just such an argument to try to persuade the protesters to clear the streets. “These activists are jeopardizing the global image of Hong Kong, and presenting the world with the turbulent face of the city,” it said in an editorial on Monday.

That worry isn’t merely Beijing propaganda. Andrew Colquhoun, head of Asia-Pacific sovereign ratings at Fitch, said one of the big questions facing Hong Kong over the long term is “whether the political standoff eventually impacts domestic and foreign perceptions of Hong Kong’s stability and attractiveness as an investment destination.” The fallout for Hong Kong’s financial sector from the Occupy Central movement was immediate. The stock market dropped, banks closed branches, and the Hong Kong Monetary Authority, the de facto central bank, had to reassure the investor community that it would “inject liquidity into the banking system as and when necessary” to overcome any possible disruptions.

But the real reason why Hong Kong has been so successful is that it is not China. When Hong Kong was handed back to Beijing by Great Britain in 1997, the terms of the deal ensured that the former colony, ­now called a “special administrative region,” or SAR, of China ­would maintain the civil liberties it had under British rule. That separated Hong Kong from the Chinese mainland in key ways. In China, people cannot speak or assemble freely, and the press and courts are under the thumb of the state. But Hong Kongers continued to enjoy a free press and freedom of speech and well-defined rule of law. The formula is called “one country, two systems.”

That held true in the world of economics and finance as well. On the Chinese side of the border, capital flows are restricted, the banking sector is controlled by the state, and regulatory systems are weak and arbitrary. Meanwhile, in Hong Kong, financial regulation is top-notch, capital flows are among the freest in the world, and rule of law is enshrined in a stubbornly independent judicial system. Those attributes have given Hong Kong an insurmountable advantage as an international business hub. Banks from all over the world flocked to Hong Kong, while its nimble sourcing firms orchestrated a global network of supply and production that became known as “borderless manufacturing.” While there has been much talk of Shanghai overtaking Hong Kong as Asia’s premier financial center, the Chinese metropolis simply cannot compete with Hong Kong’s stellar institutions, regulatory regime and laissez-faire economic outlook.

What happens if Hong Kong loses this edge? In other words, what happens if Beijing changes Hong Kong in ways that make its governance and business environment more like China’s? Hong Kong would be finished. The fact is that Hong Kong’s economic success, the nature of its institutions and the civil liberties enjoyed by Hong Kongers are all inexorably entwined. If Beijing knocks one of those pillars away, ­if it suppresses people’s freedoms or tampers with its judiciary, ­Hong Kong would become just another Chinese city, unable to fend off the challenge from Shanghai. Foreign financial institutions would be forced to decamp for a more trustworthy investment climate.

That’s why the Occupy Central movement is so critical for Hong Kong’s future. So far, Beijing has generally abided by its agreement with London and left Hong Kong’s economic system more or less unchanged. But when China’s leaders made clear last month that Hong Kongers would be able to choose their top official, known as the Chief Executive, from 2017 onward only from candidates who have the approval of Beijing, it became obvious that Hong Kong was going to face tighter control by China’s communists over time. That raises the specter that Beijing will at some point dismantle “one country, two systems” and along with it the foundation of the Hong Kong economy.

By fighting for their democratic rights, the activists in Hong Kong are fighting for an independence of administration and governance that will perpetuate their city’s economic advantages. Beijing should realize that ultimately a vibrant Hong Kong is in its own interests. China has benefited tremendously from Hong Kong over the past 30 years. It was Hong Kong manufacturers that were among the first to bravely open factories in a newly opened China, thus sparking the mainland’s amazing economic miracle. Chinese firms have been able to capitalize on Hong Kong’s stellar international reputation to raise funds and list shares on the city’s well-respected stock exchange. Even now, China continues to upgrade its economy by seeking Hong Kong’s expertise. The stock markets in Hong Kong and Shanghai are in the process of being linked to allow easier cross-border investment.

Of course, Hong Kong’s economy is far from perfect, and here, too, the importance of Hong Kong’s democracy movement can be found. The SAR suffers from a highly distorted property market and one of the widest income gaps in the world. Such ills have bred more resentment in the city toward Beijing. Yet right now many of the people of Hong Kong simply don’t trust their Beijing-chosen leaders to resolve these issues. Hong Kong requires a popular administration that commands the support of the people in order to implement the reforms necessary to tackle these critical problems. Thus the battle unfolding on the streets of central Hong Kong is a contest for the city’s very survival. Perhaps Hong Kong’s pro-democracy activists will disrupt the usually sedate financial district for a few days. But that’s a tiny sacrifice compared to the long-term damage Hong Kong faces if its citizens do nothing.

Schuman reported from Beijing.

MONEY stock market

These 3 Simple Steps Will Protect You If There’s a Market Meltdown

melting chocolate coins
Lara Jo Regan—GalleryStock

Every time the stock market hits a new high, we hear rumblings of a potential crash. But you can stop worrying about a meltdown if you prepare yourself -- and your portfolio -- ahead of time.

It seems that every time the stock market hits a new high these days—or retreats from one—we hear rumblings of a potential crash. In an interview last week after the Standard & Poor’s 500 hit yet another peak, Yale professor Robert Shiller noted that stock valuations were near levels that preceded meltdowns in the past and thus were “a cause for concern.”

But if you’re investing for retirement, should the prospect of a bear market give you a serious case of the jitters?

I don’t want to downplay the effects that a market meltdown can trigger. It can wreak havoc with the economy. And if you’re on the verge of retirement and have a big portion of your savings in stocks, a setback on the order of the 2007-2009 50%+ drop in stock prices could force you to sharply scale back your post-career lifestyle or stay on the job longer than you want.

But if retirement is many years away, even a severe downturn isn’t necessarily a big deal. It could even work to your advantage, as the stocks you scoop up at at a market bottom can earn the highest long-term return.

Regardless of what stage of retirement planning you’re in—just starting out, mid-career, ready to retire, or already retired—there are two important things you need to know about market crashes. One is that there’s no avoiding them. Bear markets have been around as long as we’ve had stock markets. Since World War II alone, we’ve had eight major downturns averaging nearly 39% and lasting an average of 19 months. Big, scary dives in stock prices are a normal part of the investing landscape that will always be with us. Rather than trembling in fear of their onset, smart investors learn how to live with the certainty that sooner or later stock prices will collapse.

The second thing you need to know is that, far more important than the meltdown itself, is how you handle it. And that largely depends on how well you prepare ahead of the crash. Once a major correction is really under way, there’s not a whole lot you can do to stave off damage to your portfolio; indeed, scrambling to mitigate the damage may make matters worse. Nor can you depend on some gut instinct or trusty technical indicator to get you out of the market just before things fall apart. In retrospect, it’s always easy to see when the meltdown started. But in real time, it’s impossible to tell in the early stages of a bear market whether it’s The Big One or is just another false alarm.

So what should you do to prepare in advance for an inevitable market setback, while also staying positioned to share in the gains if the market continues to rise rather than drop (which ends up being the case most of the time)?

1) Know thyself. Start by getting a handle on your true appetite for risk, specifically how much of a drop in the value of your savings you can stand before you start unloading stocks in a panic. The Investor Questionnaire in RDR’s Retirement Toolbox can help you make this assessment. As you do this risk evaluation, keep in mind that investors have a tendency to underestimate how much risk they’re taking when stock prices are rising and overestimate the risks they’re taking after prices have plummeted. Be careful not to get swept up in irrational exuberance when the market’s on a tear, and avoid becoming overly pessimistic in the wake of a crash.

2) Adjust your investments accordingly. Next, make sure your portfolio jibes both with the level of risk you’re willing to accept, and that your mix of stocks and bonds makes sense given your investment goals. Reconciling these two aims can be tricky. If you’re risk-averse by nature, you may feel much better emotionally by hunkering down almost exclusively in bonds or cash. But such a low-risk portfolio may not give you the returns you’ll need to build an adequate nest egg or allow you to draw sufficient income from your savings once you’ve retired.

So you need to balance your emotional needs with your financial needs. Your aim is to end up with a portfolio that has enough exposure to stocks so that you have a decent shot at earning a reasonable rate of return, but not so stock-heavy that you’ll be reaching for the Maalox every time some pundit prophesies doom. The Retirement Income Calculator in RDR’s Retirement Toolbox can help you gauge whether the mix of stocks and bonds you’re contemplating can give you a reasonable shot at achieving your retirement goals.

3) Sit tight. Once you’ve done that, you should largely stick to your mix of stocks and bonds regardless of what’s going on in the market or how your portfolio is doing at any particular moment. That can be tough. You can always come up with reasons to justify straying from your investing principles or strategy “just this once.”

Resist that temptation. Often, what seems like a good move in the moment isn’t wise for the long run. In the spirit of full disclosure, I recently wrote a column explaining how I abandoned my investing principles years ago by selling shares of Warren Buffett’s Berkshire Hathaway company only seven months after buying them. As a result of that lapse, I missed out on a near $400,000 gain on that stock. Ouch.

Hanging on every twist and turn of the market is no way to live, especially in retirement. So instead, learn to live with the fact that the market is flighty and the knowledge that every now and then it’s going to tumble. Just prepare ahead of time, so you can handle that volatility, financially and emotionally.

Walter Updegrave is the editor of RealDealRetirement.com. He previously wrote the Ask the Expert column for MONEY and CNNMoney. You can reach him at walter@realdealretirement.com.

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TIME Economy

The Worst Stock Tip in History

Stock Market Crash
Messengers from brokerage houses crowd around a newspaper in New York City on October 24, 1929. New York Daily News Archive / Getty Images

Sept. 3, 1929: The market reaches its highest point before the Great Depression

At this time 85 years ago, Yale economist Irving Fisher was jubilant. “Stock prices have reached what looks like a permanently high plateau,” he rejoiced in the pages of the New York Times. That dry pronunciation would go on to be one of his most frequently quoted predictions — but only because history would record his declaration as one of the wrongest market readings of all time.

At the time he said it, in early October, he had good reason to believe he was right. On Sept. 3, 1929, the Dow Jones Industrial Average swelled to a record high of 381.17, reaching the end of an eight-year growth period during which its value ballooned by a factor of six. That was before the bubble began to burst in a series of “black days”: Black Thursday, October 24, when the market dropped by 11 percent, followed four days later by Black Monday, when it fell another 13 percent; and the next day, Black Tuesday, when it lost 12 percent more.

Fisher, consistently bullish, pronounced the slide only temporary.

In his defense, he was not the only optimist on Wall Street. After witnessing nearly a decade of growth, most economists, investors, and captains of industry believed that the market’s natural direction was up. The beginning of the crash struck them not as a sign of financial doom, but as an opportunity for bargains. Following the first of the black days, the New York Times was full of positive predictions: “I have no fear of another comparable decline,” said the president of the Equitable Trust Company.

Many of those optimists, including Fisher, went broke by mid-November, when the Dow had lost nearly half its pre-crash value. Fisher’s reputation likewise plummeted.

He went on to develop a new theory about what had triggered the crash: overly liberal credit policies that encouraged Americans to take on too much debt, as he himself had done in order to invest more heavily in stocks. By then, however, no one was listening. His theory didn’t gain traction until the 1950s, when, years after his death, Harvard economist Milton Friedman pronounced him “the greatest economist the United States has ever produced.” Fisher’s debt-deflation theory found its way into the spotlight again when overgenerous credit lines and huge debts prompted another U.S. market crash — this time in 2008.

Read Niall Ferguson’s comparison between 1929 and 2008 here in TIME’s archives: The End of Prosperity?

TIME stock market

Another Milestone: S&P 500 Closes Above 2,000

It was a big round-number day for the stock market.

The Standard & Poor’s 500 index closed a hair above 2,000 points Tuesday, 16 years after it closed above 1,000 points for the first time.

The milestone added to the market’s gains from the day before and extended the stock index’s record-shattering run this year.

The S&P 500 index, a widely followed barometer of the stock market, has closed at a new high 30 times this year. By this time last year, it had done so 25 times.

The index briefly rose past 2,000 on Monday, but closed just below that level. It still set a record-high close in the process.

“There’s perhaps a small psychological boost when you get over such a significant price level,” said Cameron Hinds, regional chief investment officer at Wells Fargo Private Bank.

U.S. stocks, in the midst of a five-year rally, have surged in the final weeks of the summer after dipping earlier this month on concerns about geopolitical tensions in Russia and the Middle East.

The latest string of shattered market benchmarks comes as investors cheered new indications that the economy is strengthening, setting the stage for stronger company earnings.

Major U.S. indexes began in positive territory in premarket trading Tuesday. That trend held as investors began to digest the latest economic reports.

The Conference Board said Tuesday that its consumer confidence index rose this month to the highest point in nearly seven years. A separate report showed that orders of durable manufactured goods surged by a record 22.6 percent in July, thanks to a jump in aircraft sales. A third report showed U.S. home prices rose in June, although at a slower pace.

Stocks opened slightly higher and remained in the green the rest of the day. The S&P crossed above 2,000 points early on, and hovered at or above the mark as it approached the close of regular trading.

Moments before the close it dipped below 2,000, then inched up just above.

The S&P 500 rose 2.10 points, or 0.1 percent, to end at 2,000.02. Seven of the 10 sectors in the S&P 500 index gained, led by energy stocks. Utilities declined the most.

The Dow Jones industrial average rose 29.83 points, or 0.2 percent, to 17,106.70. The Nasdaq composite gained 13.29 points, or 0.3 percent, to 4,570.64.

The major U.S. indexes are riding a three-week streak of weekly gains and are up for the year.

The string of record highs this year isn’t unusual when a market is recovering from a downturn, said Kate Warne, an investment strategist at Edward Jones.

In the past, once stocks have hit a new high after a downturn, they have continued higher for about two years, on average, she said. The first time the S&P 500 hit a new high after the financial crisis was March 2013. So this year’s record run is still within the average range.

“Markets don’t climb sharply. They tend to climb slowly, and that’s probably good news for a continued climb in the future,” Warne said.

The Dow also has put up some big numbers this year, notching 15 new closing highs. That trails the 30 it racked up by this time a year ago.

While the market is setting records, many stock watchers believe equities remain fairly valued, though not cheap.

The S&P 500 is trading around 16 times its forward-operating earnings, or over the next 12 months. The historical average on that measure is about 15 times.

“That says stocks are no longer cheap, but we also don’t think they’re expensive,” Warne said. “Historically, when the price-earnings ratio has been in that range, returns over the next year have been around 7 percent. That’s not bad.”

Bond prices fell. The yield on the 10-year Treasury note rose to 2.39 percent. U.S. crude for October delivery rose 51 cents to $93.86 a barrel. In metals trading, gold rose $6.30 to $1,285.20 an ounce, silver rose three cents to $19.39 an ounce and copper fell three cents to $3.19 a pound.

Among the stocks making big moves Tuesday:

— Amazon rose 2.3 percent after saying that it would buy video streaming company Twitch for $970 million. The stock climbed $7.81 to $341.83.

— Best Buy fell $2.19, or 6.8 percent, to $29.80 after the electronics retailer reported that its fiscal second-quarter net income plunged 45 percent as sales weakened.

— Orbitz fell 4.6 percent after American Airlines and US Airways disclosed they are pulling flight listings from the site because they have not been able to reach agreement on a long-term contract with the travel booking website operator. Orbitz shed 39 cents to $8.04.

MONEY Behavioral Economics

Why You Shouldn’t Overplay a Hot Hand — in Basketball or Investing

Miami Heat's LeBron James
© Mike Stone—Reuters

New research says there is such a thing as a hot hand in basketball — like momentum in investing. Trouble is, hot hands lead to overconfidence, which leads to cold spells.

A couple of winters ago, Larry Summers gave a 30-minute talk to the Harvard’s men’s basketball team over pizza. During the peroration, per Adam Davidson in the New York Times, the former Treasury Secretary and Harvard president engaged in a bit of Socratic dialogue.

He asked the students if they thought a player could have a “hot hand” and go on a streak in which he made shot after shot after shot? All the players nodded uniformly. Summers paused, relishing the moment.

“The answer is no,” he said. “People apply patterns to random data.”

In this case, Summers may be wrong.

A new study by three Harvard grads — using data based on tracking cameras in 15 arenas that captured 83,000 shot attempts in the 2012-13 NBA season — found that “players who are outperforming (i.e. are ‘hot’) are more likely to make their next shot if we control for the difficulty of that shot.”

When you account for the difficulty of the shot, the authors discovered “a small yet significant hot hand effect.” To put a number on it, a player’s chance of making his next shot increases by 1.2% for each prior shot he made.

So what?

While your basketball skills may never carry you to the NBA, there is a lesson to be learned from the paper’s findings.

And it has to do with how you invest.

The study’s authors concluded the following: “Players who perceive themselves to be hot based on previous shot outcomes shoot from significantly further away, face tighter defense, are more likely to take their team’s subsequent shot, and take more difficult shots.”

This basically means when someone makes certain shots (think three-pointers) at a higher percentage than they normally do, the opposing defense reacts by guarding the player more closely. And as defenders start paying more attention to the shooter, he has to take shots from longer range, which are inherently more difficult.

What does this have to do with your portfolio?

Well, consider what’s going on. A player makes a few shots and gets “hot.” He’s in the zone, so he starts growing overconfident. Not only does he start to take more shots, but he starts taking increasingly difficult shots.

While he may be more likely to make those difficult shots at the outset since he’s on a roll, the more difficult shots come with a lower percentage of accuracy. Which means he will eventually start to miss more and cool down. In other words, his overconfidence leads him to take shots that eventually take him “out of the zone.”

This is a lot like momentum investing.

Momentum is a real force in the markets. History, for instance, shows that investors — at least in the short run — are much better off riding last year’s winners than the laggards, says Sam Stovall, managing director for U.S. equity strategy at S&P Capital IQ.

So investors who ride the market’s momentum invest in a winning stock or sector. Those investments rise in value. This trend repeats a few times and before long investors believe their skills as a trader are leading to the gains, rather than the momentum effect. Before long, these investors are trading more frequently to capitalize on their “hot hands.” But this has the effect of racking up trading costs and mistakes, which are a headwind to investors that eventually cools them down.

This doesn’t mean you should eschew momentum altogether. As MONEY’s Paul Lim noted in his March 2014 article, “A decent body of research suggests that entire asset classes that shine in one year have a better-than-average chance of outperforming in the next.”

The trick is to find a way to ride the hot hand without taking increasingly inefficient shots.

One idea is to minimize your trading costs by limiting your trading to just once a year. According to researchers at the asset-management firm Leuthold Group, a time-tested way to do this is to buy last year’s second-best performing asset class and hold that for a year (last year’s second-best asset class was large, U.S. stocks). Then repeat the process the following year. Historically, such a strategy returned five points more annually than the S&P 500, while experiencing only slightly more volatility. (Of course, you shouldn’t tilt your entire portfolio toward momentum sectors. Think 10%.)

By incorporating a little bit of the “hot hand” into your investing strategy, you should be able to book slightly higher returns. And you don’t even have to go to the gym.

MONEY Google

10 Ways Google Has Changed the World

Google Earth view
Google

It's been a decade since Google went public. Here are 10 ways the company has transformed the market—and our lives— since.

Back in 2004, investors weren’t entirely sure what to make of Google, and skeptics abounded. Fast-forward to today, when we can look back at how far the company has come, in ways that inspire both awe and concern. Below are 10 examples of its influence.

1. It has changed our language. Despite Microsoft’s best efforts, there’s a reason “Bing” never caught on as a verb, let alone as a beleaguered anthropomorphic meme. The phrase “to Google” is so popular that the company is actually worried about losing trademark rights if the term becomes generic, like “escalator” and “zipper,” which were once trademarked.

2. It has changed our brains. Recent research has confirmed suspicions that 24/7 access to (near) limitless information is not only bad for human discourse—it’s also making us worse at remembering things, regardless of whether we try. And even if we aren’t conscious of it, our brains are primed to think about the Internet as soon as we start trying to recall the answer to a tough trivia question. Essentially, Google has become our collective mental crutch.

3. It set the stage for Facebook and Twitter’s sky-high valuations. Yes, lofty valuations based on mere speculation were also common back in the dot-com fervor of the ’90s, says Ed Crotty, chief investment officer for Davidson Investment Advisors. But Google broke new ground by proving that even just the potential for a huge audience could pay off in a big way.

“In the early days, when people were thinking in terms of web portals, the barriers to entry didn’t seem high for search,” Crotty says. That meant Google’s competitive advantage wasn’t clear. But “the tipping point was when Google was able to scale up their audience enough to attract ad agencies, and then further improve their algorithms, since those get better with scale. That’s partly why you see tech companies now willing to forgo profits for a period of time in order to build an audience.” And also why investors are willing to throw money their way.

4. It has taken over our cell phones. Since the first Android phone was sold in 2008, Google’s mobile operating system has bulldozed the competition. Today it claims nearly 85% of market share, nearly doubling its hold over the last three years. Next stop, self-driving cars?

5. It has transformed the way we use e-mail. Gmail was invented a decade ago, before bottomless inboxes were a sine qua non. It’s hard even to remember those dark ages when storage space was sacred—and deleting emails was as tedious-but-necessary as flossing. Today our accounts serve as mausoleums, housing long-forgotten files, links, and even whole relationships. Google itself has touted alternative uses for Gmail, such as setting up a virtual time capsule for your newborn—though in practice accounts can’t be owned by anyone under 13. But even that last point is about to change.

6. It’s changed how we collaborate. Back in 2006, Google acquired the company behind an online word processor named Writely. With that bet, Google created a world where it’s taken for granted that people can collaborate on virtually any type of document, whether for work, play, or (literally) revolution.

7. It has allowed us to travel the globe from our desks. Yes, MapQuest was popular first. But Google Maps (and Earth) has become much more than a tool for measuring travel routes and times. Since Google Street View came onto the scene in 2007, it’s been possible to “visit” distant destinations, give friends a virtual tour of your hometown, plan ahead of trips, and waste even more time on the Internet. Of course, the more popular a tool, the more useful it is to those who’d like to spy on us.

8. It has influenced the news we read. Ranking high in Google search results is serious business and can have a profound effect on the success of companies, media outlets, and even politicians. When I just Googled “how SEO affects journalism,” this link was at the top of my search results. How is that significant? Well, for one, that story itself has been so successfully search engine optimized that it still tops the list despite being four years old.

But most importantly, many of the concerns raised in the piece have not gone away—such as the pressure to “file some pithy blog post about the hot topic of the moment” at the expense of covering stories that would be prioritized based on traditional measures of newsworthiness. What that means for you, the reader: more headlines like this and this.

9. It has turned users into commodities. We all love free stuff, but it’s easy to forget that services offered by companies like Google and Facebook aren’t truly “free,” as data expert Bruce Schneier has pointed out. Remember that all of your data (across ALL of the services you use, and that includes Calendar, Maps, and so on) is a valuable good that Google is packaging and selling to its real customers—advertisers.

10. It’s changed how everyone else sees YOU. Unlike your Facebook profile, the links that turn up when potential employers (or love interests) Google you can be near-impossible to erase. Perhaps unsurprisingly, Google uses the fear of embarrassing search results to encourage people to manage their image through Google+ profiles.

Related:
4 Crazy Google Ambitions
The 8 Worst Predictions About Google

TIME stock market

Dow Drops 100 Points on News of Ukraine Violence

Reports say the Ukrainian military destroyed Russian vehicles

The Dow Jones Industrial Average dropped more than 100 points Friday on reports that the Ukrainian military destroyed Russian military vehicles that entered into Ukraine. Investors are concerned about further escalation.

Russian military vehicles carrying aid entered Ukraine over night following a days-long standoff over whether the more than 200 vehicles could enter the country, CNBC reports. The Ukrainian military destroyed the vehicles as they crossed, Ukrainian President Petro Poroshenko’s told British Prime Minister David Cameron by phone.

“The President informed that the given information was trustworthy and confirmed because the majority of that machines had been eliminated by the Ukrainian artillery at night,” read a statement on Poroshenko’s website.

The decline around noon Eastern time erased earlier Friday morning gains on news that Coca-Cola had bought a $2 billion stake in Monster. Markets around the world declined similarly.

[CNBC]

MONEY stocks

Has the Bull Market Come to an End?

140806_INV_endofbull_1
Getty Images

As the economy keeps growing, the market will sour on the sunny, putting a damper on stocks.

A version of this article ran in the August 2014 issue of MONEY magazine.

The Dow Jones Industrial Average lost another 140 points on Tuesday, wiping out Monday’s modest bounce-back from what had been the worst weekly decline in over six months. All told, the index has fallen 4.1% since it hit a record high on July 16.

This happened despite some pretty good (though not really good) economic data, like last week’s Labor Department report that the economy added 209,000 new jobs in July.

So what’s going on? In short, I suspect the bull market has entered its next—and perhaps final—phase.

Why a change of heart is due. While equities should reflect the health of the economy, there comes a time in every business cycle in which earnings growth—the real driver of stock prices—peaks. S&P 500 profit margins are already at all-time highs. A better job market shows the economy is improving now, but it also hints that wages could rise down the road, weighing on future profits.

At the same time, better-than-expected news may lead the Federal Reserve to stop trying to stimulate economic activity. And that’s a big concern in the final throes of a bull when investors are trying to ride that last bit of tailwind provided by cheap credit.

What works during the bull’s final stage. As risk taking and speculation fall out of favor, shares of big, dominant companies tend to grow in popularity. Today, these big blue chips have another advantage: They’re cheap relative to smaller-company stocks, says Jack Ablin, chief investment officer for BMO Private Bank.

Indeed, the price/earnings ratio for stocks in the Vanguard Mega Cap ETF (MGC), which owns only the biggest blue chips in the U.S., is 16.8. By comparison, stocks in the Vanguard Small-Cap ETF sport an average P/E more than 15% higher.

Where to seek shelter. The natural inclination at this stage is to hide in stable but slow-growing sectors like utilities, since these stocks pay dividends and are likely to fall less in a market downturn.

However, economically sensitive sectors such as energy and tech perform surprisingly well in the last 12 months of a bull, according to Ned Davis Research. So take refuge in a fund like Fidelity Large Cap Stock (FLCSX), which has big stakes in both sectors and has beaten at least 90% of its peers over the past three, five, and 10 years.

Related:
Goldilocks Jobs Report Calms Down Wall Street’s Bears—for Now
Don’tBe Fooled by the Everything is Awesome Market

MONEY stocks

Goldilocks Jobs Report Calms Down Wall Street’s Bears—For Now

The three bears discover goldilocks asleep in their bed they are not amused...
Chronicle—Alamy

While job growth was tepid in July, this was exactly what the markets needed to reverse Thursday's 317-point decline, as pressure on the Federal Reserve to raise rates subsides.

At first blush, today’s jobs report sure felt underwhelming. The Labor Department said that the economy created 209,000 new jobs in July, not the 233,000 that were expected.

Yet what seemed like disappointing results turned out to be exactly what Wall Street needed.

On the one hand, the economy still managed to produce more than 200,000 jobs in July, which marked the sixth consecutive month in which job creation topped that level. That hasn’t been seen since the late 1990s. “July’s payrolls report helps to confirm the sustainability of the strongest labor market expansion since 1997,” said Guy LeBas, chief fixed income strategist for Janney Montgomery Scott.

On the other hand, the labor market was just tepid enough to cool at least some of the hot debate about how the Federal Reserve needs to stop coddling an economy that’s starting to sizzle and hike rates soon.

Immediately after the jobs report was released Friday morning, investors took a deep breath and calmed down following Thursday’s 317-point drop in the Dow Jones Industrial Average.

Though it seemed as if the markets were headed for another triple-digit down day based on sentiment before the opening bell, the Dow and S&P 500 were relatively flat in early morning trading. By around 11:30 am, the Dow had fallen by around 50 points, but that was pretty much all the bulls could hope for:

^DJI Chart

^DJI data by YCharts

The real question is how long will the bears be kept at bay? A week from now, the government is set to release another batch of data detailing worker productivity and labor costs. And if there’s any whiff of inflation in those figures, the bears are likely to awake once more.

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