You’d have been a fool to try it it 2007 and you’d be a fool to try it now.
Seriously, go look at the charts. If you rode out 2007 and stayed in the market, your investments are substantially up over a ten year period. Yes, with a crystall ball that allowed perfect market timing, you could pull out and get back in at just the right time, but such a crystal ball only exists in hindsight. Don’t confuse hindsight with foresight.
What you should do is evaluate your tolerance for risk and ensure that you have a diversified portfolio that has the correct risk profile.
And indeed I did ‘ride it out’ and my investments increased.
As for foresight/hindsight, I could see what was happening with the price of gas and houses. I tried to call my investment company, but it was impossible to get through every time I tried. When, eventually, the stocks started plummeting, I wanted – at that time – to cash out. Had the market rebounded right after, I would have lost two or three thousand dollars. But it didn’t. When the Sow hit 7,500, I thought it couldn’t go lower, and I would have re-invested then. It did go down another thousand, so I would have lost money. But I would have been buying $xx,xxx worth of investments at the $7,500 price. So I would have more than doubled my retirement investment. But I couldn’t reach my investment company, so all I could do was watch.
This is not hindsight. This is what I wanted to do at the time.
Having said that, the DJIA has recovered and I would have bet wrong this morning. But I still think we’re headed for another recession.
Fair enough. But all you have there is one example of where you would have got it right. This time it could be different. Even professional fund managers/investors tend not to make big calls on selling out/holding large amounts of cash, because they know that they are just as likely to miss the recovery as save their clients money. Best of luck to you whatever you decide.
That much is a given. But even the pros don’t know when or how bad well enough to call it with any certainty. Better to hunker down and ride it out, unless you are heavily invested in thins that may not be around in 4 years.
I am thinking abt interest rates…here in India, central bank tries to have 1.5% real rates…so if CPI inflation is 5%, central bank’s lending rate is 6.5%…
how is the ‘rate normalisation’ process going to be in the US? USA is currently having negative real rates…
In a scenario where there is no GDP growth and zero real interest rate ( real interest rate = actual interest rate - inflation ), my thinking tells that** in long term, the stock market should trade near the book value.**
The stock market is back up because it’s focusing right now on tax cuts boosting growth, since this is something that will boost the domestic economy. At the same time, it will increase inflation and the budget deficit, so interest rates are going up. The prospect of higher rates has boosted the $.
The potential black swan for the global economy is Trump’s protectionist agenda. The market is, correctly I think, pricing in only a small probability of anything substantial happening on this front (withdrawal from NAFTA, for example) on the assumption that Congress will temper Trump’s hyperbole. However, we are seeing emerging markets get slammed, because for them the uncertainty over potential US protectionism outweighs any benefit from increased US demand from higher US growth.
So, Trump’s protectionist agenda is the thing to watch closely. Protectionism is almost always ultimately a net non-zero-sum negative for everyone (and the pro-business Republic Congress know this), but people who have lost jobs overseas quite understandably don’t see it that way. So, I think protectionist measures will be important in Trump’s popularity with his rust-belt type voters. I can see some friction between Trump and Congress on this, since his main concern is his ego. On the other hand, Trump is probably smart enough to realize that a major protectionist clash with (most significantly) China could cause a huge global recession and 2007-style crash, and of course he won’t want that to be his legacy. China is a proud and assertive nation and they will not be cowed by Trumps bluster: in extremis, they could threaten to dump US assets, and even the threat of that would be highly destabilizing. My guess is that Trump will continue to bluster on this, and there will a few frights, but in the end Congress will at most tolerate some token populist protectionist measures that allow him to save face but have little overall impact.
Apple would benefit from Trump’s proposed 10% tax on repatriating its overseas cash hoard, since it has allowed for 35% tax in its accounts on most of the money. However, at the moment, the market feels that the risk of protectionism is greater for Apple than this one-off benefit, not unreasonable since Trump has specifically mentioned Apple’s China-based production. As mentioned, I tend to think this is ultimately overblown, but nobody wants uncertainty, so there’s risk in Apple short term. ~2/3 of Apple’s revenues are foreign, and since the main boost for the market as a whole is from anticipated US growth, that is less of a positive for Apple than it is for the broader market.
There’s a reason people always joke that experts predicted 15 of the last 5 market crashes. The warning signs of a crash may indicate an increased likelihood of a problem, but you don’t get a 1:1 relationship. There are unexpected crashes that defy the signs and there are signs that don’t result in crashes.
It’s very easy to see the correlation in hind sight, but I feel confident that if anyone developed a reliable predictor of crashes, we probably wouldn’t have those crashes in the first place. We’d use the predictor to head off the problems first.
Has that ever actually worked, though? I know it’s a Republican mantra that lowering taxes on corporations and/or the wealthy improves the economy and creates jobs, but my understanding is that there is at best negative evidence that it’s true. Even if it were, civil unrest is typically terrible for the economy, and that seems highly likely in the wake of Trump’s other agendas.
The market goes up and down a little all the time, and we’re reading too much into fluctuations right now, months before Trump actually takes office. The crash or the boom will take longer to play out, just like it did with Brexit.
It’s not just tax cuts, it’s the removal of regulation when Dodd-Frank is repealed that’s got them salivating. We’ll be right back in the same situation that caused the collapse in the first place.
Let’s suppose you have a traditional IRA that you converted from a 401K that still has a little money in it.
Let’s further say that up until last week that IRA was supposedly being managed by someone else so that you didn’t know much about how the market worked, etc., but that aforementioned money manager called you last week and told you that you didn’t have enough money in your account to be worth his time, and cut you loose.
So now you’re on your own in unknown territory.
Is there any place, besides a tin can in the back yard, that you could move that money,
assuming that you didn’t want to pay taxes on it, and you would still like to realize a return or some kind, but you don’t want it to be subject to market fluctuations?
Tax-free municipal bonds might be a good choice. It ties up your money for the term of the bond, of course, but throughout the term of the bond, it pays out dividends that are tax free. I would stick with AAA or AA unless you like sleepless nights or can afford to take a flyer and also afford to lose it. Less interest on your money than, say, a C-rated bond, but much safer.
I’m not an expert on the details of the various US pension accounts, but you can certainly transfer some (all?) types into a low-cost brokerage like TD Ameritrade and just make investment choices yourself, diversified ETFs are a sensible route. They still retain the same beneficial tax treatment. If you’re not a financial expert, diversifying and minimizing costs & fees is the priority.
Tax-free munis don’t make much sense, since the account is tax-free or tax-deferred anyway, and the tax status of munis tends to make them trade at slightly lower yields.
In the current environment, if you don’t want the stress of being in the stock market, the only thing I’d say is this: for the next year or two, just accept the current low interest rates, let your money sit earning nominal interest, in T-Bills or investment-grade corporate bonds of no more than 2 years maturity, just preserving your capital. Interest rates are at unprecedented low levels, and the entire world is “chasing yield” right now, and it’s a very dangerous game. The only way to get extra yield is to take risk, either by buying risky bonds from companies that might go bust, or to buy longer-dated Treasuries that pay a slightly higher (but still low) rate, but lock it in. That’s very dangerous: if inflation kicks in and rates start to go up sharply, the price of those longer-dated bonds will collapse a long way, even if they are Treasury Bonds. Bonds are not the traditionally low risk part of a portfolio right now.
Which makes me wonder if Rienmann understands much about the stock market. Generally, higher interest rates moves money from stocks to interest-based instruments, since higher interest rates not only makes these instruments more attractive, but higher interest rates also increase the cost of capital, which generally lowers stock prices.
So, yes, too much is being read into this. So much as to have people make up the mechanisms of the markets to explain it away.
Now, if the market had gone down, it would be inconvertible proof that the economy was doomed.
Perhaps we might have a more productive conversation if you just presented your views when you disagree, rather than gratuitously insulting me?
In any event:
This is a nonsensical statement. When interest rates rise, by definition the price of bonds go down. The yield on a bond is an inverse function of its price. There are rare situations where the short end and long end go in opposite directions, but this is not one of those times. When we say bond rates are going up, by definition we mean there are more sellers than buyers of bonds and the price of bonds is going down.
The impact of interest rates on the stock market is less clear-cut. If interest rates were rising because inflation were rising without growth, that’s negative for stocks.
However, that’s not what’s happening here. The focus of the markets right now is an expectation that Trump will cut taxes and stimulate growth. An expanding economy is certainly good for stocks. The expectation is that inflation and interest rates will rise because of the increased demand that comes from economic expansion, and stocks are fine with that, especially when we’re starting from such low levels of growth and inflation, with even a risk of recession and deflation if growth doesn’t stay on track.
Are the markets right in this? I don’t know, but I’ve been involved in the markets for long enough that I do understand their reasoning.
Rates rose to curb inflation which was a product of a growing economy and rising prices - all good for stocks, especially cyclical stocks. That is no guarantee of the same happening in the future but I’m guessing most who are interested would expect this.
But, it’s been so long since stocks have risen that there could be unintended consequences. Economics isn’t an exact science, and there are as many opinions as there are economists.
I’m vaguely amused by coverage so far. Stocks went down the night of the election – “The market hates Trump as President!” They went up the next day - “Stock market surges with elation for Trump Presidency!” By the end of the day, they were net down a few percent. “Stock market plunges on election outcome!”
At the moment, I’m not seeing much beyond normal fluctuations while the market figures out what to do with this news it wasn’t expecting.
Riemann said tax cuts without spending cuts will increase inflation and the budget deficit. Totally standard economics there. So probably the Fed will raise interest rates. That’s a quasi-political call, but certainly matches the conventional wisdom. Next he says higher interest rates will make the US dollar more valuable versus foreign currencies. Again standard economics.
Not to pile on, but historically there actually is no reliable relationship between bond yields/prices* and stock prices. It’s somewhat ambiguous to speak of ‘rates’, short term rates (directly influenced by central banks), long term rates (not as directly)? But in case of medium or long term US govt bond prices v US stock market, the correlation of daily bond and stock price movements over multi decades has been close to zero.
And that’s because as others said there are different and opposing plausible mechanisms by which stock prices can be related to ‘riskless’ interest rates, and different ones prevail at different times.
I take your point that narrative explanations of market movements are somewhat arbitrary, but not entirely. It’s reasonable to suppose from recent market action in the wake of the US election, say after the bottom around midnight on Tuesday, is the market coming to believe Trump’s policies will promote US growth**. Higher rates because of better growth, thus lower bond prices and higher US stocks prices. However in case of stocks more sensitive to interest rates than the whole US stock market is, there’s been a sell off. And more still for the US$ value of stocks particularly negatively affected by higher rates, with units of account in non-US$, and potentially negatively affected by slower growth in world trade (the threat of Trumpian protectionism): ie. emerging market stocks have sold off sharply in USD terms the last three days.
And best way IMO to look at the turnaround from Tuesday night in US stocks is to think of the value of stocks as the discounted value of a future stream of dividends. At first the market might have believed the future dividends’ expected value was rising, but also wanted to discount them to present value at a higher rate, a higher risk premium on top of the riskless rate, to cover for Trumpian unpredictability. After Trump’s initial reaction to his own election during the night, seemingly reasonable and magnanimous relatively speaking, a lot of that higher risk premium for US stocks unwound. Or just participants changed their view, or different participants woke up, or whatever. But a higher risk premium persists in some other stock markets.
*which as mentioned is just two different ways of expressing the same thing. And the quote you responded to by Riemann didn’t actually give a relationship between stocks and rates anyway.
**you can argue endlessly politically whether GOP-type lower regulation and tax policies ‘ever work’, but markets believe they deliver more profit in the short run, and though stocks are perpetual instruments in theory they tend to react a lot more to short term expectations. Anyway longer term negative side effects from short term tax/regulation cuts (which could be part of one’s political argument against them) are by definition more obscure. As was said, it’s hard to predict, especially about the future, but more so about the distant future.