Lexicon Financial Group Weekly Update — May 29, 2024
“Humans are startlingly bad at detecting fraud. Even when we’re on the lookout for signs of deception, studies show, our accuracy is hardly better than chance. ”
From the desk of Craig Swistun, CIM, MFA-P, Portfolio Manager, Raymond James Investment Counsel, and Wayne Hendry, Client Relationship Manager, Raymond James Investment Counsel
Looking Around
Not a week goes by that we don’t see evidence of deception and fraud in the financial industry. It’s understandable; the industry is built around money and there are criminals who want to find an easy way to extract that cash from their marks.
It’s not like financial fraud is new. In 300 BC, two Greek sea merchants — Hegestratos and Zenosthemis — devised a plan to enrich themselves by taking out a bottomry- an insurance policy on their ship and cargo. According to the agreement, they were required to repay loaned money with interest after selling their merchandise. If they failed to repay the loan, the lender would gain possession of the ship and its cargo. After leaving the dock, they decided to sink the ship so they could pocket all the loaned money. But they were caught in the act and Hegestratos lost his life while attempting to escape, and Zenosthemis faced the law’s wrath in the Athenian courts.
But they were hardly the first.
Thanks to the technological advances of the digital age that we are in, fraud is now more sophisticated than ever.
In simple terms, fraud is defined as deceit with an intent to illegally gain a financial advantage over a person or an entity. It usually refers to dishonest acts that deprive an individual or entity of money or legal rights. Fraud requires that the perpetrator be aware that the statement or claim provided is false or altered.
Fraud takes different forms and insurance scams like the one that our Greek fraudsters tried to pull off is just one of many. Today, the most prevalent are:
Phishing, smishing and vishing
Credit card and debit card fraud
Remote banking fraud
Identity theft and identity fraud
Advance fee fraud
Authorized Push Payment (APP) fraud
Account takeover
Card not present (CNP) fraud
Covid 19 fraud
Cyber fraud
Ponzi schemes or other investment fraud
Since the late 1980s, advances in technology have seen fraud evolve into more complex forms- from handing out bad cheques and fake currency to replicating credit cards. The internet changed how fraud is perpetrated and it is now available to anyone with access to a computer. The number of fraud cases continues to grow at an unprecedented rate. A report by the United States (U.S.) federal trade commission revealed in 2021 that of the over 4.2 million fraud cases reported, 2.8 million were fraud related complaints and 1.4 were identity theft complaints in the U.S. It is notable that, although the U.S. has a population almost five times greater than the United Kingdom, only 445,357 fraud cases were reported there in 2021.
Fraudsters are always looking for new ways to ply their trade. For example, they took advantage of the Covid-19 pandemic by sending phishing emails, making false stimulus claims, and running fake charities using digital technology. They have also targeted cryptocurrency transactions for digital assets such as Bitcoin. On top of this, Non-Fungible Tokens (NFTs) have also attracted fraudsters as they use their tactics to phish for their victims’ personal information to take over their crypto accounts and wallets to steal their funds and assets. (1)
If an ounce of prevention is worth a pound of cure, here are a few important ideas for your consideration.
Guard your online information - Be sure to continually maintain the security software of your computers and avoid entering personal information (like financial information and log-in credentials) into public computers, which may contain software that captures passwords or other information upon entry. Look for HTTPS at the start of a URL on a website when logging into an account or exchanging data with, such as banking or ordering items online.
Monitor your accounts – Check your financial account regularly for any unusual account activity and unauthorized transactions.
Email Compromise - Be wary of emails that contain attachments, links, unusual content and requests.
Shred sensitive documents – Shred banking and investment statements as well as monthly bills as you do not know who will go through your garbage. Better still, register for online access and electronic statements and bills.
Check your credit report - Review your credit reports for any suspicious activity, such as accounts you didn't open. You can purchase a copy of your credit report through providers such as Equifax or get a free credit report from Credit Karma that will also let you know of any changes to your credit score.
Do not share your information freely - Think twice about sharing your information with any one or any organization. Be wary of calls or emails that request sensitive information. Never give out confidential information unless you know it's a trusted and verified source. By using fraudulent messages that appear to come from trustworthy sources, a scammer can try to obtain information to exploit you. This is called phishing and it is one of the most significant Internet fraud issues that is often conducted via email, text message, or phone call.
Report suspicious activity immediately - If you think you're a victim of actual or attempted financial fraud, contact your financial institution as soon as possible. The sooner they are made aware, the better the chances are that your hard-earned funds can be recovered or the fraud stopped. (2)
This prevention should also extend to your investments. The common red flags to watch out for when dealing with a financial advisor include guaranteed investment returns, writing checks directly to an advisor, and a lack of transparency. (3)
We’re doing our part to fight fraud on our end, too.
For example, we encourage everyone to have a trusted contact person listed on their account. A trusted contact is someone who we can reach out to if we suspect that something is amiss with the instructions. It goes a long way to prevent a situation where a client is pressured to make changes against their will to an investment portfolio.
Other ways that we help fight fraud is to protect your information by using encrypted emails in communication. Additionally, we employ a “two factor” method for verifying instructions – if we receive an email recommending a course of action, we must follow up with a phone call to verify that the information is correct.
Do these extra steps add some administrative burden to our daily lives? Sure, but we’d rather do this to prevent fraud from happening at all.
Looking Back
The Toronto Stock Exchange’s S&P/TSX composite index (TSX) posted its lowest closing level in nearly three weeks on Thursday last week. For the week, the index was slightly down. Data on Tuesday last week revealed that Canada’s annual inflation rate fell to a three-year low of 2.7 per cent in April. This raised hopes that the Bank of Canada (BoC) would begin cutting interest rates in sooner (maybe in June) rather than later. This would be good news for interest rate sensitive stocks such as financials, utilities and real estate which account for 35 per cent of the TSX. (4)l. (4)
Weekly North American Market Statistics
| Index | Week's Change | Year to Date |
| S&P 500 | 0.1% | 11.2% |
| Nasdaq Composite | 1.4% | 12.7% |
| Dow Jones Industrial Average | -2.3% | 3.7% |
| S&P/TSX Composite Index | -0.6% | 6.5% |
Source: Associated Press and Morningstar Direct 05/24/2024
The Dow Jones Industrial Average, S&P 500 Index, and Nasdaq Composite all ended higher last week, with the Dow crossing the 40,000 threshold for the first time. Thanks to inflation and interest rate worries appearing to dissipate, growth stocks outperformed. All of this is partly due to the lower implied discount placed on future earnings.
Source: Bloomberg. Dow Jones Industrial Average Index
Major equity markets in the United States (U.S.) have slid downwards this week amid renewed anxiety about interest rate cuts this year. The focus is on the release of the Federal Reserve’s (Fed) preferred inflation gauge — personal consumption expenditure (PCE) — this Friday. All eyes are firmly focused on the coming release of PCE data for April. Core inflation is expected to come in at 0.2 per cent, slightly better than the 0.3 per cent rate seen in March, according to a Wall Street Journal survey. This would be the lowest reading since December. (5)
That said, these same markets recorded widely varying results last week: the Dow Jones Industrial Average recording its biggest weekly loss (-2.33 per cent) since early April, while the technology-heavy Nasdaq Composite continued its recent march into record territory and the broad S&P 500 Index was flat. A primary factor driving this divergence was the gain in shares of artificial intelligence chipmaker NVIDIA, which is now the third-largest company in the S&P 500 by market capitalization and trailing only Apple and Microsoft.
Read and Watch
Want deeper insight into topics in your Weekly Update? Then, read and/or right click:
From Losses to Lessons: Assessing the Full Spectrum of the Cost of Fraud
Ancient scams to modern threats: How financial fraud costs us $3.7 trillion annually
Anti-Money Laundering (AML): What It Is, Its History, and How It Works
The positive news about NVIDIA did not translate into broader gains for the market. Nearly 90 per cent of the stocks in the S&P 500 closed lower on Thursday, seemingly due to data suggesting a rebound in economic growth in May. This leads, in turn, to speculation that the Federal Reserve would wait longer to cut interest rates. S&P Global reported that its composite index of business activity had jumped unexpectedly to 54.4 in May, its highest level in just over two years. As you may know, readings above 50 indicate expansion. According to S&P Global the main inflationary stimulus is now coming from manufacturing rather than services, which means rates of inflation for costs and selling prices are now somewhat elevated. This suggests that the final move down to the Fed’s two per cent target may be longer than expected.
Last Friday also brought further evidence that growth might be picking up in the second quarter. The U.S. Department of Commerce reported that orders for durable goods excluding the volatile aircraft and defence orders—typically considered an indicator of business capital investment—rose a more-than-expected 0.3 per cent in April, after remaining roughly flat over the first three months of this year.
In local currency terms, the pan-European STOXX Europe 600 Index ended 0.45 per cent lower, as questions emerged about the pace of potential interest rate cuts this year. Major stock indexes were mixed. Italy’s FTSE MIB lost 2.57 per cent, while France’s CAC 40 Index declined 0.89 per cent. Germany’s DAX was little changed. The UK’s FTSE 100 Index slid 1.22 per cent on news that annual growth in the UK consumer prices slowed less sharply than expected to 2.3 per cent in April—the lowest level in almost three years—from 3.2 per cent in March.
Japanese markets ended lower last week. The Nikkei 225 Index fell 0.36 per cent and the broader TOPIX Index experienced a marginal decline. The stellar earnings update from U.S. chip giant NVIDIA helped lift Japanese technology stocks but all gains were lost on Friday as Japanese indexes tracked Wall Street lower after U.S. data pushed the timing of a Fed interest rate cut further out. It was a notable week for Japanese bond markets though as 10-year government bond yields reached the 1.0 per cent level for the first time in 11 years.
Chinese equity markets were little changed after the central government unveiled a historic rescue package to stabilize the country’s ailing property sector last Friday. The Shanghai Composite Index was broadly flat, while the blue chip CSI 300 added 0.32 per cent. In Hong Kong, the benchmark Hang Seng Index gained 3.11 per cent. (6)
Given all of this, it appears that interest rates and inflation continue to impact global markets and economies. This, however, may be the darkness just before dawn for markets, economies, investors and consumers.
The opinions expressed are those of Craig Swistun and not necessarily those of Raymond James Investment Counsel which is a subsidiary of Raymond James Ltd. Statistics and factual data and other information presented are from sources believed to be reliable, but their accuracy cannot be guaranteed. It is furnished on the basis and understanding that Raymond James is to be under no liability whatsoever in respect thereof. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. Raymond James advisors are not tax advisors, and we recommend that clients seek independent advice from a professional advisor on tax-related matters.
The History and Evolution of Fraud, fraud.com
8 Ways to Protect Yourself from Fraud, Rockland Trust Bank
How to avoid financial advisor scams, Brian Baker, CFA, August 24, 2023
The close: Stocks rebound amid encouraging U.S. economic data, TSX rises on upbeat earnings, The Globe and Mail, May 24, 2024
Stock Market News: Nvidia, Tech Stocks Lift Nasdaq to New Record, Adam Clark, Barrons, May 28, 2024
Global Markets Weekly Update, T. Rowe Price, May 24, 2024
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Looking to Learn?
If you want to know more about some of the topics we wrote about this week, just click on the links below:
What is phishing, smishing and vishing?