stock market Archives - The Free Financial Advisor

Crypto, Reddit, Stock Market Thoughts

February 10, 2021 by Jacob Sensiba Leave a Comment

The last couple of weeks have been crazy in the stock market. With Reddit putting a short squeeze on Wall Street, crypto assets going gangbusters, and speculation about what inflation will do in the near future, there’s a lot to talk about.

Reddit vs Wall Street

Gamestop and AMC Entertainment are the two biggest names when we talk about Reddit investors.

A large number of shorts were put in by hedge funds and other big players on Wall Street. A specific Reddit account “recruited” its following to pile into the two companies named above. This group of “retail” investors drove the stock price up (as well as other investors that caught wind of their efforts).

Those hedge funds were forced to cover their shorts so they didn’t lose more money. The stock price for those two companies plummeted in the following days, but that doesn’t negate what Reddit did – they beat the big guys.

What’s a short?

A short is a type of trade. What you do is you borrow shares of a stock at a specific price in hopes that the stock price will drop. If it does, you buy back those shares at a lower price and collect the difference.

For example, if you bought shares of XYZ company at $20 and the share price of XYZ drops to $10, you would cover your short and earn $10 per share as a return.

It’s not for the faint of heart because stock prices effectively have no ceiling, so you could lose A LOT of money.

Crypto

Cryptocurrencies gained traction over the last few years as investors saw potential. After Bitcoin rose to $20,000 per BTC and crashed, it lost its allure.

Social media brought it back, thanks to Elon Musk. Slight changes in his Twitter bio moved the needle very effectively. Bitcoin is now hovering at $50,000 per BTC. Tesla invested a healthy sum in Bitcoin and will now accept payments in Bitcoin.

I believe other companies will adopt this policy and we will see Bitcoin used for purchases more regularly. There is a place for cryptocurrencies in this world, but it’s uncertain what kind of role it will play.

Short-term Thoughts

I go through quite a bit of research each week to get an idea of what the market environment looks like, what the economy is doing, and where there are risks and opportunities in the market.

With that said, the amount of times I’ve read the word “bubble” is alarming. The comparisons to the Dot Com Bubble and the Great Financial Crisis (GFC) are also a cause for concern.

Pundits are using the word “euphoria” more often.

There are a few things to pay attention to:

The divergence between the stock market and the economy. Typically, near the end of the business cycle, a difference between how the market is doing and how the economy is doing grows. Eventually, things will revert to the mean. That’s to say, the difference between the two will shrink.
Inflation. The Biden Administration is taking a different stance from past presidents. Inflation and overstimulation of the economy were areas of concern. President Biden is taking the other side of this argument, saying that he’d rather do too much, than not enough. Look for increased stimulus and less regard for inflation. If inflation starts to run hot, expect the FED to cool it down somehow.

Conclusion

Short-term policy changes and speculative movements in the stock market have little to no impact on the long-term performance of your portfolio. The one thing that really moves the needle is your behavior and how you respond to the news.

If you keep your long-term perspective in mind and keep your emotions in check, you should fare better than those that don’t.

A Shaky Earnings Season Might Be Your Wallet’s Best Friend

July 10, 2012 by Average Joe 11 Comments

There’s baseball season, football season, the holiday season and, of course, earnings season. While the first three may fill you with happiness and (in the holiday case) good cheer, earnings season fills new investors with confusion.

Why do I bring this up?

I woke yesterday morning to a nerve-wracking CNBC.com headline: Investors Brace for Shaky U.S. Earnings Season.

What is Earnings Season? Is It Contagious?

The good news: earnings season affects you directly, but not in the harmful way you may think.

Earnings season is the time (quarterly) when the majority of companies that move financial markets with their results declare how well they’ve performed recently. This news is for the prior quarter.

It’s important, when listening to reports about earnings, to listen for any future forecasting and to also determine what might have been the culprit behind a great or lousy prior quarter. If it’s increased sales on the same-old widget the company’s always sold, fantastic! If the company had a one-time mistake, things might still be looking up. If products just aren’t selling or management is quitting, it might spell bad news.

What Do I Need to Know?

Corporate earnings reports drive the stock market. Sure, financial markets respond to other pressures, but over time the stock market is simply a reflection of the economy. So, if you reread the headline above, Investors Brace for Shaky U.S. Earnings Season, what does that really mean?

Based on the information I told you above, it means this: companies didn’t have stellar profits last quarter.

That’s not nearly as shocking a headline, is it? In fact, I’ll bet you already knew that.

Move On, Nothing to See Here…..

Many investors read the CNBC headline above and think: I’ve gotta sell right now! If you’ve read my ramblings before, you’ll know that I think the opposite. I’m looking to buy when prices are low and sell when they’re high.

Here’s what I recommend instead of having a panic attack:

1) Rebalance your portfolio. Here’s how it works: if you’ve determined how much stock and bond exposure you want (among other asset classes), skim off the areas that have done well to fill in non-performing areas. Low markets are ideal times to rebalance because you’ll reaffirm your long term strategy, take gains from performing spots and redeploy in assets you already own that are low today. Smart move. Then, schedule another rebalance six months from now on your calendar.

2) Look for buying opportunities. If you’re interested in investing, shaky markets are a great place to place your first buys. Make your list of stocks to watch. Wait for earnings reports. Read what companies report, and make your move! Don’t make a common mistake and go whole-hog on a “can’t lose” investment. I’ve been involved with too many “can’t lose” things. I also told my dad I couldn’t lose my hair like he did. Glad I didn’t bet on that….

Not excited to make your own stock picks? Read our pieces on how to evaluate mutual funds and how Exchange-Traded Funds work.

3) If you’re nervous, put defensive measures in place. Use stop losses on individual stocks and exchange traded funds. Monitor fund results more frequently and establish a “worst case scenario” strategy. Remember this: never buy or sell everything on one day or at one time. It’s safer to march in slowly and march out slowly. An orderly walk toward the exit beats a panicked race to the door. Often, down markets rebound quickly.

CNBC, like other publications, is in the business of selling advertising. If the elevator is labeled “Up” or “Down” it’ll be a smooth and steady ride, but I’m sure CNBC knows that “Soar” and “Plummet” garner readers…and then advertiser dollars.

Federal Reserve Report: Hang On For Rough Ride…

September 26, 2011 by The Other Guy 1 Comment

Here’s a depressing recent headline. Today the Federal Reserve Bank of San Francisco released a report predicting that the financial markets are unlikely to be strong for the next…drum roll please…16 years!

Can this be accurate?

The report, titled “Boomer Retirement: Headwind for U.S. Equity Markets?” illustrates long-range, historical data which suggests that as the boomer generation moves into retirement, they’ll pull an increasing amount of money out of equity funds. This can only mean increased pressure on stocks for years to come.

This is classic ‘supply & demand’ economics at work here, folks.

Roughly 10,000 baby-boomers turn 60 EVERY DAY, a trend that will continue for the foreseeable future. As each of these 10,000 individuals leaves the workforce, they need money to spend in retirement. Where will their meals come from? That’s right. Their spending money will come, in part, from investment portfolios.

As the report points out “…to finance retirement, they are likely to sell off acquired assets, especially risky assets. A looming concern is that this massive sell-off might depress equity values.”

Take a look at this projection:

According to the research in this report, P/E ratios, an indicator of potential stock prices, is slated to continue downward through the early 2020s before rebounding in the latter half of that decade.

“Figure 2 shows that P/E should decline persistently from about 15 in 2010 to about 8.4 in 2025, before recovering to 9.14 in 2030.”

The report continues: “The model-generated path for real stock prices implied by demographic trends is quite bearish. Real stock prices follow a downward trend until 2021, cumulatively declining 13% relative to 2010…real stock prices are not expected to return to their 2010 levels until 2027.”

Ouch. That could sting a little.

So what does this data imply?

Should we all be in bonds until 2030? Quite the contrary. There will likely still be bullish trends throughout the upcoming cycle, so it pays to be vigilant.

Instead, I believe this heralds the end of “buy and hold and you’ll be fine” investing.

This mean you’ll need to be cognizant of market trends and invest accordingly. What does your advisor think about this report? In all likelihood, he’s never heard of it, and will probably say something like “Just invest and stick with the plan, and you’ll be OK.”

You can do better. If you just pay attention to the signs, you can profit from both sides of the market, both the ups and downs. You just have to pay attention.

If you’d like to read this report for yourself, it’s available here or type in http://www.frbsf.org/publications/economics/letter/2011/el2011-26.html to read for yourself.

I’m interested in your thoughts…post your comments below.