All things STOCKS

[Firebirdparts]

Since I’m newer to this and trying to learn as much as possible, can someone explain to me why the feds raising interest rates affects the market so much? I don’t understand why there’s so much volatility. Thank you.

Anything that produces future cash has to be evaluated today based on the cost of money. Future money is discounted back to "what would I pay today to get that future money". So unfortunately for us, at times like these, both stocks and tradeable bonds move in the same direction on the same day when people think they got some new info on interest rates. This is right and proper and fundamental to investing. Investing is this concept where I give money today and I get money back later. Interest rates are fundamental to this process.

In general, inflation might inflate the company's earnings. So when interest rates are going up because inflation is high, like now, the stocks may take a step down in one day but they might recover in a little while if the company has its earnings growing with inflation.

 

[Thunder Good-Oil]

I’m still actively shorting AAPL and have picked up FB. Adding to VDE, LMT on every red day.

Holy ****. AAPL is the best brand in tech and the most innovative company. But they do have a China problem. However, I’ll be keeping my shares forever.

 

[ninerplaya57]

I think that is as simple as it’s more expensive to conduct business. Also consumers have less money to buy stuff when their mortgages and credit card (and other) loans cost more. Companies that sell bonds to finance their operations pay more. Municipalities and other government entities pay more for their borrowing which leads to higher taxes (which also drags on commerce). So higher interest costs reduce bottom lines of public companies and a multiple of their earning per share (measured as p/e ratios) is the most basic method for determining the valuation of a company.

As far as equity securities (stocks), owning bonds becomes a more desirable option to invest in as interest rates increase. Some companies must pay higher dividends to keep pace with investors deciding whether to buy stocks or owning debt alternatives. Also, when borrowing costs more - the demand for stocks and their derivatives falls when it is more expensive for investors and speculators to buy securities using margin.

I think that one of the big ones is the higher cost to borrow for governments. Each quarter point interest hike at the federal level costs billions annually which leads to higher taxes or bigger deficits which is a drag on the economy.

Another really big aspect is the higher mortgage costs. Home construction is a huge component of the economy. Higher rates slow down the purchasing and if the home buyers can only afford $xxx per month, the cost of the units must go down to keep the selling activity up.

Higher interest rates contribute to more inflation as well from the cost angle. But rising rates will also cool off the economy which could reduce inflation. However if production falls, less supply can keep the inflation levels high.

Much of it is just noise in the investment universe. Rates have been really low for a long time. Higher interest rates from here aren’t really historically oppressive. Things should stabilize as the rate hikes level off.

Thank you! I always appreciate your insight!I guess I just don’t understand why mortgage rates were in the 3 and 4% pre-pandemic and there was no panic( that I knew of) with inflation and the stock market crashing and the extreme volatility of the market and even before that growing up I remember it more being the market swung 50-100 points every now and then but we didn’t have the 300-500 ups downs every other day or maybe even in the same day (I was a kid and didn’t follow it as closely so maybe I’m way off base there).
Now I’m trying to figure out how to invest and it feels like there are no safe options that offer any type of interest. CDS and High Yield Savings pay practically no interest, the bond that pays the most interest that I saw was capped at $10,000. I’m worried about the stock market and when I talked to someone I used to work with with who handles investing now she said their safest option portfolio which is bonds lost 5% last year and really had no answer on what to do. In the meantime I sold my house and have money sitting in an acct making .001% and need to do something with it. Originally I was going to use it to build a property, but if I could grow it a lot more I would hold off on that.

 

[ninerplaya57]

Anything that produces future cash has to be evaluated today based on the cost of money. Future money is discounted back to "what would I pay today to get that future money". So unfortunately for us, at times like these, both stocks and tradeable bonds move in the same direction on the same day when people think they got some new info on interest rates. This is right and proper and fundamental to investing. Investing is this concept where I give money today and I get money back later. Interest rates are fundamental to this process.

In general, inflation might inflate the company's earnings. So when interest rates are going up because inflation is high, like now, the stocks may take a step down in one day but they might recover in a little while if the company has its earnings growing with inflation.

Thank you! Always appreciate the insight.

 

[walkenvol]

Thank you! I always appreciate your insight!I guess I just don’t understand why mortgage rates were in the 3 and 4% pre-pandemic and there was no panic( that I knew of) with inflation and the stock market crashing and the extreme volatility of the market and even before that growing up I remember it more being the market swung 50-100 points every now and then but we didn’t have the 300-500 ups downs every other day or maybe even in the same day (I was a kid and didn’t follow it as closely so maybe I’m way off base there).
Now I’m trying to figure out how to invest and it feels like there are no safe options that offer any type of interest. CDS and High Yield Savings pay practically no interest, the bond that pays the most interest that I saw was capped at $10,000. I’m worried about the stock market and when I talked to someone I used to work with with who handles investing now she said their safest option portfolio which is bonds lost 5% last year and really had no answer on what to do. In the meantime I sold my house and have money sitting in an acct making .001% and need to do something with it. Originally I was going to use it to build a property, but if I could grow it a lot more I would hold off on that.

I’ve been investing for over 35 years and agree with you that these are some confusing times for short term (5 years or less) investing. I would encourage you to view the market moves as a percentage rather than a number as the current valuations are so much higher than 10-20 years back. Comparing 300 points today against 50 points in history isn’t apples to apples.

Something has to give with the overheated housing market. Recently bout a sheet of 3/4” sub flooring for $92 that was $32 about 2 years back when I bought last. That pricing is unsustainable. If I was younger I would seriously be considering selling and renting short term looking to buy in a year or 2. Good luck!

 

[Go aeiou]

I’ve been investing for over 35 years and agree with you that these are some confusing times for short term (5 years or less) investing. I would encourage you to view the market moves as a percentage rather than a number as the current valuations are so much higher than 10-20 years back. Good luck!

I've been waiting for bond yields to rise. 2 year treasuries were at 2.5%, 3 year 2.7 earlier this week. CDs have been slightly higher. Finally a small bond yield for retired folks. CDs for the masses.
The stock market has been propped up by zero interest rates.

Stocks usually fair pretty well during inflation, especially those that can raise prices. Think consumer staples/blue chips.
Real Estate, but income producing is preferred by banks.

 

[Go aeiou]

Holy ****. AAPL is the best brand in tech and the most innovative company. But they do have a China problem. However, I’ll be keeping my shares forever.

It can be volatile at times. I tend to buy more on significant dips.
FOREVER is a strong word.

 

[walkenvol]

I've been waiting for bond yields to rise. 2 year treasuries were at 2.5%, 3 year 2.7 earlier this week. CDs have been slightly higher. Finally a small bond yield for retired folks. CDs for the masses.
The stock market has been propped up by zero interest rates.

Stocks usually fair pretty well during inflation, especially those that can raise prices. Think consumer staples/blue chips.
Real Estate, but income producing is preferred by banks.

Not sure that 3% bonds are of much help in 6-9% inflationary times? Recently saw an article saying inflation was the highest it’s been since 1981. In 1981 I recall getting a 1 year CD at the bank at 16%.

 

[Go aeiou]

Not sure that 3% bonds are of much help in 6-9% inflationary times? Recently saw an article saying inflation was the highest it’s been since 1981. In 1981 I recall getting a 1 year CD at the bank at 16%.

If you are retired it is not prudent to keep all you money in stocks. Especially if you believe the market is fully valued.
Until now treasury yields have been almost zero. At 2-3 year maturity you can hold those and buy at higher yields at maturity if available. right now there is very little difference in a 3 year Treasury and a 10 year.

At age 65 most professional planners recommend 30-50% bonds.

 

[Go aeiou]

Not sure that 3% bonds are of much help in 6-9% inflationary times? Recently saw an article saying inflation was the highest it’s been since 1981. In 1981 I recall getting a 1 year CD at the bank at 16%.

Wife and I bought our first home the week before we got married in 1981. Mortgage rates were 18%, and we were tickled pink to get a 10.5% wrap around mortgage.

 

[walkenvol]

Bought our first home in 84 and were excited to assume a 15.5% VA loan

 

[mrorange211]

I've been doing ok on shorts this week.

 

[walkenvol]

If you are retired it is not prudent to keep all you money in stocks. Especially if you believe the market is fully valued.
Until now treasury yields have been almost zero. At 2-3 year maturity you can hold those and buy at higher yields at maturity if available. right now there is very little difference in a 3 year Treasury and a 10 year.

At age 65 most professional planners recommend 30-50% bonds.

Many of the traditional financial planning rules have come under question recently like the 4% withdrawal rate. I’ve substituted blue chip dividend stocks for bonds except for about 10% of my retirement savings that have been locked into a company account at 3.5% and I’ve kept more in cash than has been traditionally recommended. Probably still too risky but these have been untraditional times. Couldn’t bring myself to buy bond funds that you knew you would lose money on as soon as the Fed hiked rates.

 

[Thunder Good-Oil]

Thank you! I always appreciate your insight!I guess I just don’t understand why mortgage rates were in the 3 and 4% pre-pandemic and there was no panic( that I knew of) with inflation and the stock market crashing and the extreme volatility of the market and even before that growing up I remember it more being the market swung 50-100 points every now and then but we didn’t have the 300-500 ups downs every other day or maybe even in the same day (I was a kid and didn’t follow it as closely so maybe I’m way off base there).
Now I’m trying to figure out how to invest and it feels like there are no safe options that offer any type of interest. CDS and High Yield Savings pay practically no interest, the bond that pays the most interest that I saw was capped at $10,000. I’m worried about the stock market and when I talked to someone I used to work with with who handles investing now she said their safest option portfolio which is bonds lost 5% last year and really had no answer on what to do. In the meantime I sold my house and have money sitting in an acct making .001% and need to do something with it. Originally I was going to use it to build a property, but if I could grow it a lot more I would hold off on that.

Yes, it does seem more volatile than usual ATM. Lots of domestic and geopolitical uncertainty clouding things up. Putin. $30 trillion in national debt that’s growing fast. At least most of the ND is held by US citizens. COVID and probably more pandemics to come. China’s aggressive nature. Mid-term elections. The very real possibility of Biden not being able to complete his term and the uncertainty of what happens after a voluntary or 25th Amendment driven transition. Still, compared to 40 years ago, inflation and interest rates and unemployment are ALL much, much lower.

There is so much cash on the sidelines going after any opportunity to invest right now, it seems like EVERYTHING is expensive. The 2 year bonds look okay… won’t keep up with inflation though and will decrease in value as interest rates rise. But holding to maturity any loss in principle due to market conditions will return. Even 2-2.5% looks good compared to that negative interest rate environment not long ago.

Perhaps high quality equities aren’t a bad place to be. Funds pegged to the DJIA or even some of the component stocks. Or S&P 500 funds. The NASDAQ I’d consider a bit riskier, although those companies aren’t nearly so much on the fringe of the economy as they once were. The 2000 tech bubble is becoming ancient history.

Always like the huge Vanguard funds. VTI and VOO. Maybe blend in VTV and VEA - other $100 billion Vanguard ETFs. They have several others that are $50 billion plus.

Really, the most likely way to get good returns is being patient. When the money is needed in a near term window it is really hard to ensure positive returns. The longer the time frame the easier it becomes to get meaningful returns. If I had to tap into cash within 2 years, I’d worry about everything not short term debt.

 

[Thunder Good-Oil]

Not sure that 3% bonds are of much help in 6-9% inflationary times? Recently saw an article saying inflation was the highest it’s been since 1981. In 1981 I recall getting a 1 year CD at the bank at 16%.

Things didn’t end well for those that bought (non-FDIC) Southern Industrial Banking Corporation CDs from the Butcher brother crooks.

 

[walkenvol]

Things didn’t end well for those that bought (non-FDIC) Southern Industrial Banking Corporation CDs from the Butcher brother crooks.

True - I bought from my local FDIC bank. My FIL lost some on the Butcher fiasco and really despised Butcher personally. Ironically, worked with a guy for several years who married Butcher’s daughter who was a very nice lady. Never told the FIL

 

[Thunder Good-Oil]

Many of the traditional financial planning rules have come under question recently like the 4% withdrawal rate. I’ve substituted blue chip dividend stocks for bonds except for about 10% of my retirement savings that have been locked into a company account at 3.5% and I’ve kept more in cash than has been traditionally recommended. Probably still too risky but these have been untraditional times. Couldn’t bring myself to buy bond funds that you knew you would lose money on as soon as the Fed hiked rates.

I was around 200% plus in equities for most of 2 decades. That was a wild ride.

 

[walkenvol]

I was around 200% plus in equities for most of 2 decades. That was a wild ride.

Margin investing?

 

[Thunder Good-Oil]

Margin investing?

Dancing around many a margin call. Tapping into the buying power is addictive.

 

[Go aeiou]

I was around 200% plus in equities for most of 2 decades. That was a wild ride.

Huh 200% over 20 years?

 

[Go aeiou]

Things didn’t end well for those that bought (non-FDIC) Southern Industrial Banking Corporation CDs from the Butcher brother crooks.

My sister use to baby sit for one of them out on the River near Solway. I bought a Lexus in the mid nineties? and Jake was the business manager.

 

[Thunder Good-Oil]

Huh 200% over 20 years?

Margin calls kick in around 30% equity. I rarely let it go over 50% before using more leverage.

$100 of stock. $50 of margin. $50 net worth. 200% in equities.

 

[Thunder Good-Oil]

My sister use to baby sit for one of them out on the River near Solway. I bought a Lexus in the mid nineties? and Jake was the business manager.

Whirlwind was Jake’s home on the river. CH lived off of Broadway between Fountain City and Halls on Black Oak Ridge.

 

[Firebirdparts]

Not sure that 3% bonds are of much help in 6-9% inflationary times? Recently saw an article saying inflation was the highest it’s been since 1981. In 1981 I recall getting a 1 year CD at the bank at 16%.

I had a 16% CD also.

Somebody pointed out at bogleheads that 10 year TIPS real yields briefly hit zero% (which is really good). Real Tips yields were about minus 1% a year ago. it's a dumb world where we have to get excited about zero% real yields, but that's where we are.

 

[Thunder Good-Oil]

Intuitive Surgical (ISRG) is off 12% today. Nearing the 52 week low. Just reported results pretty much in line with expectations. Actually a little better. Majority of analyst are calling for 15-20% increase from here. Still, there’s a 50x plus P/E.

Put/call ratio is really high. Stock price is maybe due to start trending higher unless these bearish options buyers have it figured out.