Posts filed under “Investing”
One of the oldest rules on Wall Street is, don’t fight the Fed. When the Federal Reserve is cutting rates, you want to be long equities, and when it is tightening, get out of the way. This has been a cause for concern since the Fed began talking of tapering its program of quantitative easing and ending its zero interest-rate policy.
But the knee-jerk response to an over-simplified rule of thumb might be wrong. When we look at the actual data — what happens to stocks when rates rise — we find a very different set of results than this heuristic suggests. Before I get to the numbers let’s look at both the positive and negative sides of increasing rates.
It is understandable that there is concern with a rising-rate environment. Often, higher rates signal an overheating economy, higher costs of credit to purchase goods and services and a potential profit squeeze as operating expenses rise. When the Fed is in its inflation-fighting mode, too much tightening will cause a recession.
However, there are also positives to increasing interest rates. Rates are merely the price of capital. Higher demand for capital means the economy is strengthening, as consumers borrow to spend on goods and to buy homes and companies seek to hire and do more investment spending. Higher rates also mean the risk of deflation is decreasing. Lastly, it reflects a normalization of Fed interventions, which today would suggest that the credit crisis is behind us.
> My Sunday Washington Post business section column is out. This morning, we look at the impact of taxes on personal trading accounts. The print version used the headline A harsh reality for all you stellar active traders; the online version is So you’re the world’s greatest trader? Taxes will fix that. The bottom line…Read More
Regular readers know I enjoy discussing behavioral aspects of investing. The reasons for this are twofold: First, we can’t control the markets, but we can control our own reactions to it (at least we can try). And second, many studies have shown that investors suffer from a behavior gap between what they should garner in…Read More
During the past few months, we have posted a few words here on the quandary that is hedge funds. One such effort was titled “The Hedge-Fund Manager Dilemma,” and it explored the public’s fascination with the hedge-fund crowd. The next, “Why Investors Love Hedge Funds,” looked at why, despite stunning underperformance during the past decade,…Read More
Rob Arnott turned the world of passive index investing upside down. Best known for creating “smart beta,” Arnott creates models weighted b y four factors: Sales, profits, book value and dividends. Market cap is not relevant to him. Funds running Arnott’s models manage about $200 billion dollars in smart-beta strategies. Assets have increased by 59…Read More
Yesterday morning, we learned of Rupert Murdoch’s bid for Time Warner for as much as $85 dollar a share, or more than $75 billion. Soon after, the annotated chart below showing the Standard & Poor’s 500 Index began circulating on trading desks and websites, suggesting Murdoch’s offer signaled a market top. Source: Financial Insyghts LLC…Read More
“All models are wrong; some are useful.” – George E. P. Box The quote above comes from George Box. He was a brilliant statistician and professor, who thought long and hard about the use and misuse of statistics. I was reminded of Box this weekend while watching the thrilling World Cup final between…Read More
Regular readers of mine know I spend lots of time debunking bias and cognitive errors. With the markets up as much as they have been, it has been easier to find examples of that error in the bearish camp than the bullish one (See this as an example of cognitive bias in action). The bulls…Read More
This morning, I want to direct your attention to a Bloomberg News article titled “Individuals Pile Into Stocks as Pros Say Bull Is Spent..” It is a worthwhile read, but a bit of context is required. The article notes that Main Street and Wall Street are allocating money in diametrically opposed ways: “Individual investors are…Read More