2017 Investment Outlook Seminar – The Answers
Congratulations for completing the 2017 Investment Outlook Seminar Quiz.
Please check your responses against the answers below.
1. Bob showed a gift presented to him by 10-year-old Brooklyn Becker. What was it?
d. A sign she had made out of Popsicle sticks. (photo by Reuben Neese)
The sign said “earnings and interest rates.” At every seminar, Bob reminds investors those are the two fundamental determinants of whether stock prices go up or down over the long run. He said, “The relationship between earnings and interest rates has never been more important.”
2. Bob cited a relatively rare occurrence as one of the bright spots for the U.S. economy now. He was referring to:
c. Synchronized global growth
Slow economic growth broadly spread across the world’s developed economies has helped U.S. companies improve sales and earnings abroad.
(Learn more by viewing “Investing amid synchronized growth,” a Money Talk Video with Mark Amateis.)
3. Which one of the following IS NOT a reason to believe the second-longest bull market in history still can continue?
d. Stocks have relatively high valuations.
As a short-term measure, high valuations have almost no predictive value. However, bear markets never start during periods of low valuation. High valuations suggest caution is in order, and investors anticipating extraordinary expenses in the next year might consider taking some profits in advance to cover those costs.
4. Which is Bob’s preferred price-earnings ratio to use when valuing the stock market?
b. Forward P/E.
“I don’t care about what’s been,” Bob says of the trailing P/E. “I care about what’s going to come.” He points out that each kind of P/E has its pros and cons.
(Learn more by viewing “Valuing Investments: Price-Earnings Ratio,” a Money Talk Video with Dave Sandstrom.)
5. Which is the bigger number – 5.6 or 2.1?
Of course, it’s 5.6. That’s the recent percentage yield on S&P 500 earnings. The yield on the 10-year Treasury note at the time of the seminar was 2.1%. When the earnings yield is higher than the 10-year, it’s a sign that investors are getting paid for the risk they’re taking by investing in stocks rather than bonds.
(Learn more by viewing “Earnings Yield: Valuing Stocks vs. Bonds,” a Money Talk Video with Kyle Tetting.)
6. Why would investment advisors obsess about inflation in the second half of a business cycle?
a. They fear the Federal Reserve would raise interest rates.
Most recessions are caused by high inflation, when the Federal Reserve has dramatically raised short-term interest rates to reduce economic activity. However, there is a big difference between the Fed raising rates to combat inflation and – as it’s currently doing – trying to bring rates back up to normal after years of record lows.
7. Which of the following IS NOT a reason for inflation being so low for so long?
a. Low unemployment
Theoretically, lower unemployment should result in higher inflation. The fact that it has not is confounding economists and has kept interest rates historically low.
8. Which of the following is NOT TRUE about growth stocks?
c. They have outperformed value stocks in the last 20 years – and in the last 30 years.
In the longer run, value stocks, which by definition have lower-than-average P/Es, have had higher total returns than growth stocks. “Not only is it the most conservative area of the market,” Bob said of value stocks, “but for the last 30 years, it has been the most profitable.”
9. The yield curve has flattened since the Fed began raising short-term interest rates. What does that suggest to investors?
b. The markets anticipate continued moderate growth with low inflation.
That would suggest the next recession is not imminent. When the yield curve inverts – with long-term bond yields dipping below the short-term federal funds rate – it’s among the most accurate indicators of a coming recession. It inverted before each of the last seven recessions.
10. Which of the following did Bob NOT SAY with this illustration of the efficient frontier?
Bob said just the opposite of anyone investing 100% of a portfolio in stocks over the 30-year period. He noted that the 100% stock portfolio earned a return of only eight-tenths of a percentage point more than a mix of 60% in stocks and 40% in bonds. For that small difference in return, the all-in portfolio took more than 50% more risk.
(initially posted September 27, 2017)