Quote of the Week

“You can often play with fire and not have anything untoward happen, but if you do it too much, you eventually get burned.” – Lawrence Summers, economist, Treasury Secretary and Director of the National Economic Council

Technical Corner 

Stocks declined for the third straight week on persisting signs of a global economic slowdown and renewed inverted yield-curve worries. The Dow Jones dropped just over 800 points on the day of the news of the inverted yield curve. It rallied back over 400 points the next two days and was up substantially yesterday (Monday).

An inverted yield curve has been a strong indicator of a coming recession by predicting seven out of the last seven recessions. The 10yr U.S. Treasury rate dipped below the 2-year rate for the first time since 2007, and we know about the “great recession” that happened in 2008 and 2009. The 30-year yield on the U.S. Treasury fell to 1.95% for just a short moment, which was an all-time record low.

The White House announcement that some tariffs scheduled to take place in September would be delayed until December instigated a short-lived market rally. This rally was later reversed by disappointing German and Chinese economic data.

The bright spot in the forest of bad news was that U.S. retail sales for the month of July were up the most in four months. The other side of that news is that Consumer Confidence is declining.

It is too early to tell if we will decline into a recession. What worries me is that the White House has admitted that they don’t have any plans to get us out of recession if one does occur. They are saying the economy is in great shape. Larry Kudlow, Mr. Trump’s economic advisor interviewed on the Sunday talk shows said: “we should give optimism a chance.” I’m sorry, optimism is not an investment or economic strategy.

What if a recession does occur? The normal way to get us out of a recession is through the use of Monetary Policy. Interest rates are near all-time lows, so the Fed lowering interest rates further doesn’t give the economy much of a burst of fuel. Putting more money into the system via quantitate easing is problematic because we still have a hangover of $4 trillion from the last recession. There just aren’t many bullets to bring us out of a recession.

Unfortunately, we didn’t do an Infrastructure Bill when Mr. Trump first took office. By now, many of those projects would be underway, and many more skilled labor people would be employed. Instead, we gave a giant tax cut which created a rising stock market but didn’t really benefit Joe Lunchbucket. The sugar high of the tax cut has now worn off, and the tax cut didn’t pay for itself. So the cost is just added on to our National Debt. Just let our children pay the bill.

Larry’s Thoughts

Higher SAT or ACT Scores Can Save Parents a Fortune

Seven testing realities you should know about.  Lynn O’Shaughnessy | Aug 15, 2019

Standardized test scores remain one of the most important college admission factors.

Studies have shown that high school grade point averages continue to experience grade inflation across the country. This has made it difficult for colleges to assume that an “A” average, for instance, really represents excellence.

In my last column, I focused on a new SAT adversity index, which has triggered controversy among the sort of parents who financial professionals advise. There is, however, much more to know about SAT and ACT developments that could impact the children and grandchildren of your clients.

Standardized test scores are important because they can be highly relevant to a student’s admission decisions, as well as to what kind of financial aid packages and/or merit scholarships an applicant receives. Higher scores can reduce the cost of college by tens of thousands of dollars and sometimes even more.

I decided to write this column about standardized test scores after recently attending a highly informative webinar about SAT/ACT developments that was conducted by Jeb Applerouth, the founder of Applerouth Tutoring, whom I consider to be a top source for what’s happening in the testing world. I have included some of his observations along with some of my own thoughts.

Here are seven testing realities that you should know about:

1.   The ACT and SAT are not clones, which makes it challenging for students to know what test to take. Some students will do equally well with either one, but a significant number will fare better with one or the other.

Taking a practice SAT and ACT under testing conditions can help a student determine which is the optimum one to tackle. It should be easy for families to find a test-prep firm in their community that will provide free practice tests.

2.   According to Applerouth, most students, while prepping in earnest for the SAT or ACT, see score gains through taking three official tests. There is a solid jump from test one to test two with gains in most or all of the sections. Some students take one test and do well enough to quit, but students should plan on three tests in case they need them.

In this chart, you can see the significant growth after students took the test three times. These students finished the third test at the end of their junior year in high school.


3.   The SAT and ACT have roughly 80% overlapping content, Applerouth says.

The ACT includes more advanced science and math while the SAT has more advanced reading and word problems.

Math represents the greatest divergence between the two tests, with the ACT having harder content. With the SAT, trigonometry is barely tested, and geometry doesn’t make much of an appearance.

In this chart from Applerouth, you can easily see the differences in what each test measures in math:

In comparing science testing, the SAT assesses the ability to read charts, tables and graphs and expects a high reading level on science passages. The ACT has a greater focus on science fluency and has six to seven questions that require outside science knowledge.

4.   The optional ACT and SAT essay is not a big deal and really never has been. Most schools do not care if students tackle either test’s essay. Nonetheless, roughly 70% of SAT takers and over 50% of ACT takers do the optional essay.

Just 23 schools say they require the essay, and the biggest source of this requirements are the University of California campuses. Here are schools that require it:

All University of California campuses

Claremont McKenna College

Manhattan College

Martin Luther College

Sam Houston State University

Schreiner University

Soka University

University of Minnesota, Morris

University of Montana Western (Only requires with ACT).

University of North Texas

Wellesley College (Only requires with ACT.)

United State Military Academy

5.   SAT Subject Tests are also waning in popularity, especially after the University of California system dropped the requirement, but they remain important to some prestigious colleges. Every year more schools drop the subject test requirements, as they present an access issue to low-income students.

Very few colleges either require SAT Subject Tests for admission or require them for certain majors. Intensive STEM institutions—Caltech, MIT and Harvey Mudd—require them for all applicants, but they are the outliers. A few more schools recommend or encourage submission of subject tests, so students will want to inquire about this with individual institutions.

Over time, the math and science subject tests have come to account for a larger share of participants in the subject tests. Meanwhile, the mean scores for nearly all of the subject tests have been rising, as the smaller pool of test takers is stronger.

Some predict that the language tests, which are the least popular, may eventually be phased out. Modern Hebrew attracted the fewest takers with 330 students. Spanish was the most popular with 19,302 test takers. In comparison, the most popular test was Math Level 2 with 144,772 students sitting for the exam.

6.  The number of colleges that are going the test-optional route continues to grow, with the University of Chicago as the most highly ranked university to ditch the rankings. Years ago it was small liberal arts colleges, which conduct holistic admissions, that favored test-optional policies, but now larger institutions are gravitating to it, including such universities as Wake Forest, University of Denver, Marquette and Creighton.

Schools say they have made score submission optional to give low-income student a chance, since test scores are highly correlated with income. Of course, these institutions have always been free to give these students a break regardless of their scores! I believe a bigger motivator is giving themselves a competitive advantage and attracting  more affluent students, who happen to have subpar test scores.

7.    The testing requirements have changed for the National Merit Scholarship contest. Previously, scores earned on the PSAT (pre-SAT) and SAT were the only tests permitted that would allow a student to become eligible for National Merit Scholarship honors. The National Merit Scholarship Corp, however, is now accepting the ACT for teenagers to qualify.

O’Shaughnessy, Lynn. “Higher SAT or ACT Scores Can Save Parents a Fortune.” https://www.wealthmanagement.com/college-planning/higher-sat-or-act-scores-can-save-parents-fortune. Accessed August 15, 2019

By the Numbers

BROKE BOOMERS – 12.2% of individual bankruptcy filers were at least age 65 in 2016, i.e., 1 out of every 8 bankruptcies. 2.1% of individual bankruptcy filers were at least age 65 in 1991, i.e., 1 out of every 48 bankruptcies (source: “Graying of U.S. Bankruptcy: Fallout from Life in a Risk Society). Michael A. Higley, BTN 08-19-2019  — Michael A. Higley, BTN 08-19-2019

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These are the opinions of Larry Lof and Stephanie Mayoral and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Past performance is not indicative of future results. Due to our compliance review process, delayed dissemination of this commentary occurs.

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Technical analysis represents an observation of past performance and trend, and past performance and trend are no guarantee of future performance, price, or trend. The price movements within capital markets cannot be guaranteed and always remain uncertain. The allocation discussed herein is not designed based on the individual needs of any one specific client or investor. In other words, it is not a customized strategy designed on the specific financial circumstances of the client. Please consult an advisor to discuss your individual situation before making any investments decision. Investing in securities involves risk of loss. Further, depending on the different types of investments, there may be varying degrees of risk including loss of original principal.

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