For the average investor, this week was like going to the dentist office, something that I did this week. This week was filled with news media hype about how bad things are and computer program trading that gyrated investments. This week, I was asked this question by my favorite client. First is the info from Vanguard. Last is some trivia on the Tomb of the Unknown Soldier.
What was very significant this week but not reported was something that probably will never happen again. This event was the 10 year US Treasury Bond went below 2% which suggests that we are on the verge of a depression, which does not make sense.
To answer the question, it depends. A short term investor, less than 6 months, the answer is to always be out of the stock market and in cash. For a longer term investor the answer is yes. I will explain below. The key to the answer is that an investor must invest in something that beats inflation.
Vanguard
Volatility in the financial markets dominated the news, as the U.S. economic outlook and Europe's fiscal woes weighed on investors. Economic reports didn't help matters—two regional manufacturing surveys reported glum results, housing remains in the doldrums—despite positive news about national production and future economic activity. For the week ended August 19, the S&P 500 Index fell 4.7% to 1,124 (for a year-to-date total return, including price change plus dividends, of about –9.5%). The yield on the 10-year U.S. Treasury note slipped below 2%, its lowest level since at least the 1960s. Stressed investors often flee to Treasury securities, which has the effect of lowering yields. The note's yield for the week dropped 17 basis points to 2.07% (for a year-to-date decline of 123 basis points).
Should I be in the Stock Market - Long Term Investor
My answer is that the Stock Market is one of the only places to invest. Let's look at the options and remember that a long term investment must beat inflation, historically 3%.
Treasury Bonds: With bonds below the historical inflation rate it does make sense to invest unless the inflation rate for the next 10 years is going to be negative, illogical. Currently, the inflation rate is about 2% per year. Also, a stock that pays a dividend of 3% is a better option right now.
Gold: At $1850 per ounce this seems like an unsustainable level.
Cash or Money Market Funds: At less than 1% it is lower than the inflation rate. An investor will only stay in cash for a short period when fear is prevalent.
The bottom line: When the craziness ends, cash will come out and invest. The only place that makes sense for it to go is the Stock Market for a rational long term investor. My belief is that prudent long term investors are buying stock not acting in fear.
Tomb of the Unknown Soldier - History
On March 4, 1921, the United States Congress approved the burial of an unidentified American serviceman from World War I in the plaza of the new Memorial Amphi-theater. The tomb’s design was selected in a competition won by architect Lorimer Rich. The sculpture was by Thomas Hudson Jones.
The white marble sarcophagus has a flat-faced form and is relieved at the corners and along the sides by neo-classical pilasters set into the surface. The stone was quarried in Marble, CO from the Yule Marble Quarry. The tomb was fabricated in Proctor, VT. In the east panel that faces Washington, DC are sculpted three Greek figures repre-senting Peace, Victory and Valor. Inscribed on the western panel are the words – “Here rests in honored glory an American soldier known but to God.”
The six wreaths carved into the North and South sides of the Tomb represent six major battles of WW I - Ardennes, Belleau Wood, Château-Thierry, Meuse-Argonne, Oise-Aisne and Somme. West of the Tomb are the crypts of Unknowns from World War II, Korea and Viet Nam. The Unknown from Viet Nam was later identified in 1998 through DNA and was removed and buried in his hometown. This crypt remains empty.
Because of age and weathering, cracks have begun to ap-pear on the Tomb. In 2009, it was announced that the long 28.4-foot and the 16.2-foot cracks would be re-paired.
Showing posts with label US Stock Market. Show all posts
Showing posts with label US Stock Market. Show all posts
Sunday, August 21, 2011
Monday, December 8, 2008
US Stock Market and Inverted Yield Curve
A previous blog stated that an inverted bond yield curve was a good indicator of a recession and when it occurs it means that it is time to switch from stocks to bonds. The below article from Wikipedia explains it.
Inverted Yield Curve
An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the same credit quality. This type of yield curve is the rarest of the three main curve types and is considered to be a predictor of economic recession.
Partial inversion occurs when only some of the short-term Treasuries (five or 10 years) have higher yields than the 30-year Treasuries do. An inverted yield curve is sometimes referred to as a "negative yield curve".
Historically, inversions of the yield curve have preceded many of the U.S. recessions. Due to this historical correlation, the yield curve is often seen as an accurate forecast of the turning points of the business cycle. A recent example is when the U.S. Treasury yield curve inverted in 2000 just before the U.S. equity markets collapsed. An inverse yield curve predicts lower interest rates in the future as longer-term bonds are being demanded, sending the yields down.
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To explain further, normally a longer maturity bond has a higher rate due to inflation and to compensate for risk in holding it for a longer period. When the curve changes shape from normal to inverted this is a very bad sign for the stock market and it is time to move to bonds.
Inverted Yield Curve
An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the same credit quality. This type of yield curve is the rarest of the three main curve types and is considered to be a predictor of economic recession.
Partial inversion occurs when only some of the short-term Treasuries (five or 10 years) have higher yields than the 30-year Treasuries do. An inverted yield curve is sometimes referred to as a "negative yield curve".
Historically, inversions of the yield curve have preceded many of the U.S. recessions. Due to this historical correlation, the yield curve is often seen as an accurate forecast of the turning points of the business cycle. A recent example is when the U.S. Treasury yield curve inverted in 2000 just before the U.S. equity markets collapsed. An inverse yield curve predicts lower interest rates in the future as longer-term bonds are being demanded, sending the yields down.
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To explain further, normally a longer maturity bond has a higher rate due to inflation and to compensate for risk in holding it for a longer period. When the curve changes shape from normal to inverted this is a very bad sign for the stock market and it is time to move to bonds.
US Stock Market & Fed Funds Rate
The previous blog stated that the Fed funds rate was a good indicator for the US stock market. The below table shows the date that Fed changed the rate and the new rate. Note that the rate was well above the 3% target.
If you remember that the stock market reached a high on October 10, 2007. If money had been moved from stocks to bonds the stock market crash would have been avoided.
Date / Fed Funds Rate
September 18, 2007 / 4.75%
October 31, 2007 / 4.50%
December 11, 2007 / 4.25%
January 22, 2008 / 3.50%
January 30, 2008 / 3.00%
March 18, 2008 / 2.25%
April 30, 2008 / 2.00%
October 8, 2008 / 1.50%
Bottom Line: The stock market and Fed funds rate do not move perfectly together. Acting on the change of the Fed funds rate is very important as it is a very powerful signal.
If you remember that the stock market reached a high on October 10, 2007. If money had been moved from stocks to bonds the stock market crash would have been avoided.
Date / Fed Funds Rate
September 18, 2007 / 4.75%
October 31, 2007 / 4.50%
December 11, 2007 / 4.25%
January 22, 2008 / 3.50%
January 30, 2008 / 3.00%
March 18, 2008 / 2.25%
April 30, 2008 / 2.00%
October 8, 2008 / 1.50%
Bottom Line: The stock market and Fed funds rate do not move perfectly together. Acting on the change of the Fed funds rate is very important as it is a very powerful signal.
Sunday, December 7, 2008
US Stock Market & Fed Funds Rate
The Federal Reserve controls an interest rate called the Fed Funds Rate. What does it mean for the US Stock Market when the rate goes up or down?
An objective of the Fed is to control the growth rate of the economy, aka the rate of inflation. Typically this inflation rate is about 3% per year. Having inflation significantly above or below this rate is bad for the long term health of the economy. Deflation, something that we are seeing now, is viewed as especially bad for the US stock market.
When the Fed increases this rate it means that economy is growing faster than the 3% target. Conversely, when the Fed decreases this rate it means that the economy is not growing as fast as the 3% target.
The US stock market grows as the economy grows. A direct link exists between the performance of the economy and the stock market. From a macroeconomic perspective, a growing economy would result in growth for the publicly traded companies. This means that as the Fed funds rate is increasing the stock market should do well. Conversely, as the Fed funds rate is decreasing the stock market should do poorly.
The Fed funds rate is essentially an indicator of the direction of the stock market. It is important to watch the Fed funds rate, especially when it gets above the target 3% rate.
In 2000 and 2007 when the Fed funds rate were well above 3% the stock market was doing well. When the Fed lowered the rate, indicating a slowdown in the economy, it would have been wise to have moved most of the money from the stock market and put it in bonds. Also, an inverted bond yield curve condition existed in both time periods.
Did I move my money stocks to bonds in 2000 and 2007? No, I did not and it cost me lots of money. Will I make this same mistake again? Never again, I will not make this mistake a 3rd time.
Why didn't I make the move? Partially, it was due to listening to the experts who have jobs to write articles to make money for publications. Partially, it was due to a bad model that I was taught that showed the stock value increase as the interest rates decrease.
The higher the deviation from the Fed funds rate the larger the move with the rate changes. When the Fed begins to raise this rate, which will occur in the future, this is a very positive indicator for the stock market.
The bottom line: Do not listen the experts and watch for changes in the Fed funds rate. As it is going up be heavier in stocks for your long term investments and as it is going down be heavier in bonds for your long term investments.
An objective of the Fed is to control the growth rate of the economy, aka the rate of inflation. Typically this inflation rate is about 3% per year. Having inflation significantly above or below this rate is bad for the long term health of the economy. Deflation, something that we are seeing now, is viewed as especially bad for the US stock market.
When the Fed increases this rate it means that economy is growing faster than the 3% target. Conversely, when the Fed decreases this rate it means that the economy is not growing as fast as the 3% target.
The US stock market grows as the economy grows. A direct link exists between the performance of the economy and the stock market. From a macroeconomic perspective, a growing economy would result in growth for the publicly traded companies. This means that as the Fed funds rate is increasing the stock market should do well. Conversely, as the Fed funds rate is decreasing the stock market should do poorly.
The Fed funds rate is essentially an indicator of the direction of the stock market. It is important to watch the Fed funds rate, especially when it gets above the target 3% rate.
In 2000 and 2007 when the Fed funds rate were well above 3% the stock market was doing well. When the Fed lowered the rate, indicating a slowdown in the economy, it would have been wise to have moved most of the money from the stock market and put it in bonds. Also, an inverted bond yield curve condition existed in both time periods.
Did I move my money stocks to bonds in 2000 and 2007? No, I did not and it cost me lots of money. Will I make this same mistake again? Never again, I will not make this mistake a 3rd time.
Why didn't I make the move? Partially, it was due to listening to the experts who have jobs to write articles to make money for publications. Partially, it was due to a bad model that I was taught that showed the stock value increase as the interest rates decrease.
The higher the deviation from the Fed funds rate the larger the move with the rate changes. When the Fed begins to raise this rate, which will occur in the future, this is a very positive indicator for the stock market.
The bottom line: Do not listen the experts and watch for changes in the Fed funds rate. As it is going up be heavier in stocks for your long term investments and as it is going down be heavier in bonds for your long term investments.
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