foxex: High Anxiety

Insight after the bell

By Caleb Silver, Editor in Chief

Monday:

High Anxiety
The Most Important Research Report in the World
Google is having a Facebook Moment
Fear Index spikes, then retreats. It will be back!

#1 High anxiety
It looked like the losing streak for U.S. markets was going to bleed into a third day, but a late afternoon buying surge managed to kick the DJIA into the green. The Nasdaq took a bit of a beating, which has been a recurring theme over the past week or so. You'll likely see a lot of headlines about stocks selling off or poised to sell-off due to fears of higher interest rates, and that might be true, but keep these things in mind:

Interest rates are still very low by historical measures. We've had our heads in the Fed's punch bowl for so long we forgot what a 'normal' level of interest rates feels like in a healthy economy.

Even when interest rates rise it does not automatically mean that stocks will fall. Far from it. The 10-year Treasury yield has increased 1.87 percent from an all-time low of 1.36 percent to 3.23 percent as of last week. What have stocks done since 10-year yields hit lows on July 8, 2016? Glad you asked:

Nasdaq 100: +63.94%

Russell 2000: +41.48%

S&P 500: +35%

U.S. markets are mostly higher so far this year, and not many people thought that would be the case. To be sure, we still have 56 trading days left in the year and a lot can happen. But, even if the S&P 500 fell ten percent, we'd only be 3 percent lower than where we started the year. Could markets fall more than 10 percent? Absolutely. Will they? If we knew that…

Granted, these points don't make it easier to swallow a sell-off if you are long stocks. In fact, we are all downright ANXIOUS. The Investopedia Anxiety Index, which tracks increases in search volume around 13 'fear-based' terms, is screeching like a two year-old who just dropped his ice cream. The VIX (Volatility Index) hit its highest level in more than 3 months today.

Why it Matters: Fear is a primitive instinct that causes us to do irrational things sometimes. Our 'flight or fight' instinct is irrepressible. But as investors and market participants we need to muzzle it. The only way to do that is to have a real plan and strategy for investing that takes into account our risk tolerance and our long-term goals. If you think you can time the bottom or know when stocks will break out, you are probably not reading this email. Most of us need a disciplined plan to handle market volatility for times like these. If you need help making one or just want extra guidance from a certified professional, we have about 40,000 we'd like you to meet.

What's Next: Earnings season is barely underway and we'll hear from the big banks on Friday. They will tell us about lending activity, trading activity and the real impact of rising rates on their business and the global consumer. Financial stocks have been loving the rising rate environment, so business should be good -- but pay attention to what they say about us, the consumer. We're anxious… we know. Take a few deep breaths and a hard look at your asset allocation to make sure you are not over-exposed if this losing streak persists.

#2 - This is not just a science report!
The UN Intergovernmental Panel on Climate Change (IPCC) issued its report today and it tells us what most of us believe is happening to our planet, but puts it in shocking and critical detail.

Read the report here:

http://report.ipcc.ch/sr15/pdf/sr15_spm_final.pdf

A few key takeaways:

Earth will reach the crucial threshold of 1.5 degrees Celsius (2.7 degrees Fahrenheit) as early as 2030, precipitating the risk of extreme drought, wildfires, floods and food shortages for hundreds of millions of people.
We are already two thirds of the way there as global temperatures have risen by 1 degree celsius in record time
Global net emissions of carbon dioxide would need to decline by 45 percent by 2030 to keep global warming at around 1.5 degrees celsius
1.5 degrees celsius is already extremely dangerous
Unprecedented international cooperation is required to limit warming to 1.5 degrees celsius. We are not moving in that direction

Why it Matters: The massive devastation that comes with global warming is already apparent. We can see it in the destruction of coral reefs, rampant wildfires, rising sea levels that overwhelm densely populated islands and communities, more frequent hurricanes and other catastrophes. The IPCC report illustrates many of them in data-rich detail, but the signs are all around us and becoming more frequent. As investors and consumers, climate change presents very real risks that we can't model or prepare for. There is no investing model that accounts for rising sea levels that threaten cities like Miami and Amsterdam. We don't know what the impact of 'climate refugees', overwhelming cities in Europe, Africa and the U.S. looks like or the strain they would put on weakening infrastructures. These are just a couple of the new possibilities that will become the new normal inside the next decade. EY lists at least 11 sectors that will be directly impacted in their 2016 Report on Climate Change, including:

Coal Mining and Transportation
Oil and Gas
Natural Resource Extraction
Power generation and utilities
Chemicals
Steel
Industrial Manufacturing
Construction
Transportation
Agribusiness
Forestry

There are many more that we aren't even aware of, but this problem isn't going anywhere unless we do the hard work as consumers and investors of re-thinking our uses of capital and our own economic models. I'm not talking about recycling more, or shutting off your AC when you leave the house (You should do both, by the way). This is way bigger than that.

What's Next: The U.S. withdrew from the 2015 Paris Climate Agreement, from which the IPCC report emerged. President Trump had his reasons for doing so which are hard to interpret. The US policy seems to be moving away from cooperative measures to combat climate change, but other countries are taking the lead. As investors, if you care about this issue, read all you can about SRI (Socially Responsible Investing), ESG (Environmental and Social Governance) and Impact Investing. We have a special page that covers the tenets and key aspects of Impact Investing for your review. If you care about the impact of climate change and you want to align your money with your ethics, there are plenty of ways to do that. Explore away!
Read More:
What Does It Mean To Be Green?
Green Chip Stocks
Top 4 Alternative Energy Stocks as of September 2018

#3 Google is a having Facebook problem

Alphabet, Inc. the parent company of Google, said up to 500,000 Google+ accounts may have been exposed to external developers through a software bug, and it will be shutting down the platform. What's worse, is that the WSJ reported that Google opted not to disclose the issues fearing regulatory scrutiny. If that's true, this will only get uglier.

Why it Matters: Beyond the privacy concerns that seem limited to people's names, email addresses, occupations, genders and ages, Google says it has no evidence that any profile data was misused - at this point. That's allegedly why Google decided not to publicize the breach. That and they didn't want the regulatory backlash that Facebook faced with its Cambridge Analytica data fiasco. Shares of Facebook have yet to recover from that incident and the multiple trips by its executives to Capitol Hill who have had to answer for it. Google's shares fell just under 1 percent today, but the entire Nasdaq sector got crushed so it is difficult to paint the correlation. But, this is far from over.

What's Next: If the WSJ's reporting is accurate, the cover-up is bigger than the crime for Alphabet. It has managed to avoid the negative headlines about mismanaging user data and privacy that have swarmed Facebook like poison ivy in the summertime. While only 500,000 accounts were impacted on Google+, Alphabet's products pervade our lives in ways Facebook doesn't even come close. Our searches, Maps, Gmail… you get the point. If this gets worse, and we are not saying it will or hoping it might, the reckoning will be massive.

Alphabet Shuts Google+ Social Site After User Data Exposed

Common Cybersecurity Threats and How to Protect Yourself

How Blockchain Can Solve Social Media Privacy Problem

Chart of the Day: Fear index surges to 3-month high

The VIX, or Volatility Index, hit a high on Monday that has not been seen since late June, as investors' fears of rising interest rates helped lead to some intraday stock market declines. The benchmark gauge of interest rate expectations is the yield on the 10-year Treasury note, which remained elevated just off Friday's new seven-year high around 3.24 percent, leading to increased nervousness in the markets. Of course, it doesn't help matters that major stock indexes like the Dow are just starting to come down from recent all-time highs.

The VIX, which is often referred to as the fear index, has become the primary measure of overall market anxiety. The index works by inferring investor expectations of near-future market volatility through S&P 500 options prices (calls and puts). The higher the reading on the VIX, the more fear and volatility are considered to be present in the markets.

The vast majority of the time, the index remains below 20, with infrequent spikes above that level occurring when panic strikes. One prominent example of such a spike was during the financial crisis in late 2008, when the VIX hit its all-time closing high of 80.86. A more recent example occurred just this year, when a closing high of 37.32 was reached in early February as stock markets tumbled.

Though the current spike is still well below 20 (around 16-17 as of Monday afternoon), the sharp rise within the past few days from last week's 11-area lows is both dramatic and worrying for many investors. Any further VIX surge that extends its climb above 20 could signal an even bigger sell-off in equity markets.