econlife - Why It’s Tough to Make Stock Market Predictions by Elaine Schwartz

Yogi Berra reputedly said that “It’s tough to make predictions, especially about the future.”

But some believe it’s not difficult to make stock market predictions when the S&P 500 and the Dow continue going up. (I’ve inserted the arrow.):

It is difficult.

Stock Market Predictions

In 1929, two famous economists thought they could predict the direction of the Dow. Basing their expectations on business cycles, each one thought he could figure out when a recession was imminent. During the 1920s, each believed the moment to sell was just before the downturn began.

Irving Fisher:

Irving Fisher (1867-1947) was a Yale professor, a mathematician, an economist, a columnist, an inventor, an investor, and a health zealot who ate salad for breakfast, drank no coffee, no tea, no alcohol. Because he thought (and said) that, “Stock prices have reached what looks like a permanently high plateau, he lost his entire fortune– maybe $10 million–during the October, 1929 crash. After, pursuing an investing strategy that continued to predict the business cycle, he never made it back.

John Maynard Keynes:

John Maynard Keynes

Meanwhile, on the other side of the Atlantic in Great Britain, an equally auspicious economist also expected to outsmart financial markets. John Maynard Keynes (1883-1946) was the offset to Adam Smith. In the midst of the 1930s Great Depression, he explained that laissez-faire was not always best when a bit of government could help to “prime the pump” until all was well again. Since then, we’ve all become Keynesians. However, in 1929, Keynes, like Fisher, misjudged the economy’s trajectory and lost millions. He though changed how he invested, amassed a new fortune, and concluded that forecasting business cycles was impossible.

Keynes was right.

Stock Market Predictions

According to University of Pennsylvania finance Professor Jeremy Siegel, investors who  “switched from stocks to cash four months before the beginning of a recession and back to stocks four months before the end of the recession…” would accelerate their gains considerably. The problem is that no one can time the switch because (like Fisher and Keynes) recession forecasters have a dismal record.

In his book, Stocks for the Long Run, after charting how stock prices echoed the business cycle (below), Dr. Siegel warns us that we won’t beat the stock market by trying to predict the economy:

Our Bottom Line: Business Cycles

As the group that formally identifies business cycles, the NBER (National Bureau of Economic Research) tells us that the length of our current expansion has surpassed the March 1991 to March 2001 120-month record holder. The current expansion began with the June 2009 trough. At the end of the expansion it will peak, contract, trough at the bottom, expand, and go through the cycle again.

Instead of assuming that two successive quarters of a GDP decline identify a recession, the NBER says its criteria are slightly different. Not necessarily during two successive quarters (as most of us assume), the depth of the GDP decline matters as do employment and other data that range from payrolls to income.

It took until September 2010 for the NBER to confirm the Dec. 2007-June 2009 recession. So you can see why, “It’s tough to make predictions, especially about the future.”

My sources and more: First, the Cautionary Tales podcast and then the NY Times and Dr. Siegel (Chapter 15) all looked at forecasting. As for the business cycle, the NBER website is the place to go for all the facts you could possibly need.

Ideal for the classroom, econlife.com reflects Elaine Schwartz’s work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.

econlife - The Baby Boomer Home Sale Surge by Elaine Schwartz

Recently, homes.com identified the cities that were best for each generation.

For the Baby Boomers, they named places with good healthcare and retiree-friendly taxes. The group behind them, the Gen X’ers, cared about management jobs and local schools. And the Millennials tended toward entry-level work and affordable starter homes.

Then, after checking who lived where, researchers created the ranking:

Meanwhile other groups have looked at where the elderly live:

And where they are migrating:

What does it all mean? A huge baby boomer impact.

The Baby Boomer Impact

We should start by identifying the boomers:

Housing Markets

Baby Boomers will have to decide whether to move, stay put, rent, or downsize. Seeing their health decline, some will look for retirement communities. So yes, their decisions will vary but the results will not. They will be selling their houses. Because close to one in every three 60 year olds owns a home, the result could be an avalanche hitting the market. Some estimate it could be 21 million houses for sale by 2037:

These areas could be hit the hardest:

Our Bottom Line:  Supply and Demand

Numbering more than 75 million, Baby Boomers will have a huge impact on housing markets. The good news is that a surge in supply could make homes more affordable. Adding detail from the demand side, a Harvard report projects that Millennials will (finally) have the spouses and children that make them decide to buy a house. And, while not as high as in the past, home ownership rates have been picking up.

But the bad news is the diminished financial security created by the Great Recession, new student debt highs, and, returning to where we began, Millennials and Gen X’ers might not want to live where the homes will be sold.

My sources and more: The NY Times tells us where the boomers will live. From there, the housing facts multiplied. For much more detail, you might want to look at WSJ, BusinessInsider, MarketWatch, and The Washington Post. And finally, the research was at Harvard’s Joint Center for Housing Studies and the Stanford Center on Longevity.

Ideal for the classroom, econlife.com reflects Elaine Schwartz’s work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.

econlife - The Best Way to Reduce Fare Evasion by Elaine Schwartz

It might be the subway emergency exits or perhaps a culture that condones it. But even with more police, fare evasion is up in NYC.

A behavioral scientist says New York needs a different solution.

Fare Evasion

Our story starts in the UK. Home to a Nudge squad, the British government looked to behavioral economics for some policy insight. They believe that the structure within which people make decisions–their choice architecture–shapes how they think.  They tell us that a default for a health plan attracts more people. Car dealerships create option packages because it is easier for people to choose them. And, when the Nudge Squad had too many tax “procrastinators,” they sent a letter that said, “The great majority of people in your local area pay their tax on time…”

And it worked.

Similarly, behavioral scientists suggest that it could be wiser to focus on the good behavior of the fare payers rather than the evaders. At Australia’s Monash University, they asked why people evade fares. The answers took them to:

1. accidental (Never do it. Just happened.)
2. unintentional (Hassled from a situation like no ticket from machine.)
3. deliberate (Does it whenever the tradeoff makes sense.)

Example of #2, Unintentional:

Knowing more about the evaders lets policy makers target each group. So they sought to make ticketing easier and less complex for the first two groups. But also, they wanted less acceptance of the deliberate evaders. That meant replacing an emphasis on punishment with a condemnation of the fare evaders. It required complimenting the payers, emphasizing honesty, and calling farebeaters cheats and freeloaders.

Our Bottom Line: Social Norms

We could say that social norms are our society’s glue. Determining what we expect from ourselves and others, as a common bond, they shape our behavior. With fare evasion, acceptance erodes the social norm of honesty. Calling the evades freeloaders and cheats creates a support for a social norm that will encourage the behavior that preserves it.

Or, as one social scientist said, “if everyone else is doing it, it’s probably okay for me to do it as well.”

My sources and more: Yesterday’s WSJ alerted me to the fare evasion studies. From there, hoping to learn more about the solutions, I went to The Atlantic and Monash University study.

Ideal for the classroom, econlife.com reflects Elaine Schwartz’s work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.

econlife - Why Online Grocery Shopping Is Good for Us by Elaine Schwartz

In many places, at most times, within two hours, an Amazon Prime member can have a Whole Foods grocery order in his fridge.

It sounds good. But not necessarily.

The Stores

The delivery people are changing the shopping experience. Some regular shoppers complain that they are getting elbowed out of where they are going by a harried person filling an order. Deli counter customers report that service is slower because of the larger orders the professional shoppers have to fill. Others say hard-to-get items like wild salmon run out by midmorning because of the online demand.

An Instacart professional shopper:

But most of us still go to the grocery store.

Online Grocery Shopping

What we buy at the store though is different from when we order online. According to a recent study, online, we tend to order healthier foods. We get more dairy, fruits, and vegetables and fewer sweets and snacks. Perhaps because we are distracted less and we get the groceries sooner, we have more self-control. It’s also possible that pictures of snacks are less compelling than the real thing.

In addition, one economist suggests that online ordering could help us lose weight. She observed that households purchase fewer calories when shopping online. At two calories less per ounce, we consume 53 calories fewer calories a day. Just from shopping online, we could lose five pounds a year! (But do we gain the weight from staying at home rather than running around the store?)

Our Bottom Line: Behavioral Economics

Behavioral economists tell us that we tend to make healthy plans for the future rather than for now. The best example is the sports club membership that we never use. It’s the New Year’s diet that we sincerely expect to follow.

When buying our groceries online, we are also contemplating the future.  Online, we activate our long-term selves. In the store, it’s the short term version. Ordering from home, we tend to select the “shoulds.” In the store, we can grab our “wants.”

So maybe it’s okay that those Prime shoppers are destroying our in-store experience. We might be healthier ordering from home.

My sources and more: WSJ started me thinking about the impact of online grocery shopping. Then, for the home side, this paper said all you could want to know about the online grocery shopper.

Ideal for the classroom, econlife.com reflects Elaine Schwartz’s work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.