RE:When markets stop making sense due to over analysisMarner16 wrote: The stock market tumbled last Friday on the fear of rising interest rates.
The fear of rising interest rates was spurred by the increase in the yield of US treasury 10 year bonds based upon concerns that the new stimulas package could be inflationary.
The thinking behind the fear of higher rates is that if the yield of the 10 year treasuries is rising, then all rates will rise and that will be the end of cheap money.
OK...that makes sense so far.
Now here is where the thinking process breaks down.
There are 6.1mm people officially unemployed today in the USA vs 1.7mm a year ago.
The US economby continues to stumble as there have been more than 700,000 new UIC applications in each of the last two weeks.
The FED has made it clear that it doesn't intend to increase rates until at least 2023
So, what is really going on?
When the big money was concerned about the stock market a year ago, funds rushed into bonds, driving the the US 10 year treasury yields down to 0.6%. In other words, funds moved to safety on the sidelines.
Now that an end to the pandemic is in sight, money is moving back into the market in anticipation of a recovering economy and a pant load of new money being created (the latest being the new stimulus package).
So what happens when money leaves the bond market? Prices of the bonds go down and yields go up. Woohoo.
Wall St. of course needs to over analyze everything. If Wall St didn't have a new idea every day, then the traders wouldn't have anything to trade as nobody moves if there isn't any news. No trading means no profits and that is simply not acceptable.
If you are looking for an example of what I'm talking about, think back to Dec 24, 2018. The market had been booming for years. Earlier in the year, the FED increased interest rates twice by 1/4% and rates had been artificially held down for years. The rates had been held down because of the $3.5 trillion that the FED injected into the econom to prop up the system following the crash in the housing bubble. Just before Xmas 2018, Wall St started sounding alarms that it expected the FED to bump rates 3 more times in 2019 to curb inflation.
What happened?
The market crashed 19.8% (just slightly short of a bear market) in a couple of days. The sky is falling....the sky is falling.
What happened next?
The FED comes out and says that rates will be held....the sky isn't falling anymore
The stock market resumes its drive upwards in 2019, stronger than ever.
Many years ago, Mackenzie Financial in Canada was killing it. Their advertising was based upon "looking both ways" which was a play on the advice to children to look both ways before crossing the street. The inference of the advertising was that future investors should look back at the strong financial returns that Mackenzie had delivered in the past as an indicator that Mackenzie would continue to deliver superior returns.
My point is that history repeats itself. Yes, there will always be new shiny objects in the market to get excited about, but things always return to the basics.
The basics are that the FED has pumped multiple times more money into the system in the past year than it did in 2008/2009. Therefore, interest rates are going to be artificially held down again as the economy is not strong enough to pay higher interest rates on the crazy amount of money that has been created and the FED can't have mass loan failures.
If the stock market gets antsy, it will just take a quiet word from the FED that business is usual and the march of the Dow to 80,000 will be inevitable. Why 80,000? That is approximately 4x of where the Dow bottomed in March 2020, which is the same 4x factor that the Dow increased from 2009 until the pandemic. This time around, the FED has probably created 5 times more money than it did in 2008/2009, so who knows how high the markets will go.
What does all of the above mean? Buy the Dip!
Hey Marner,No doubt you have experience in the market that I can only dream of, however this is how I see it.
What we saw was the 10 year spike to 1.6 from 1.38. This caused a ruckus in the stock market and a big sell-off. Lo and behold the ten year is going right back to the 1.6 and the Fed will speak to calm the marketrs. Life will go on, however the 10 year is going to keep going up....seems like it is on steroids these last few weeks.... and I'm quite sure that as it keeps going up, the FED will sweat bullets and keep doing what it needs to do to keep it from going to high too fast. Try as it might, for those invested in the market, they will want the FED to succeed, other wise if and when it hits 2 or higher, there will be a huge shift back into bonds. Sad to say that means stocks get left holding the bag.
That 2 me is the dip.....
I think it will be interesting to see if the FED will have to raise rates before 24 or even 23. Once the genie gets out of the bottle, she is very hard to get back in. Inflation is a killer.....
Cheers!