Inflation Proofing Your Investments
As of May, the annualized rate of inflation hit 5%. We believe that it is time to start inflation proofing your investments before the ten year Treasury goes to two percent, the Fed starts tapering its stimulus measures, and stocks sell off by fifteen percent or more. The first step is to understand what will be happening in the bond market and with the Fed as the year moves on.
Investing As Interest Rates Go Up
When the yield on ten-year Treasuries hit 1.7% earlier this year the market panicked. It could happen again or ever be worse when they hit two percent. Predictions of 2.25% or 2.5% by the end of 2022 are realistic. The labor market is tight so wage growth is very likely. Higher rates will stress many businesses that have been beaten down by the pandemic-driven recession. The decade-long stock market recovery and rally has been largely driven by low interest rates and as that comes to an end investors will start looking at bonds and other interest-bearing investments instead of uncertain stocks.
Investing As the Fed Tapers Its Stimulus Measures
Although Mr. Powell, the Fed chairman, has said that there is no immediate need for tapering, half of the members of the FOMC (Federal Open Market Committee) have admitted to discussing the possibility. The Fed’s balancing act of continuing to support economic recovery versus heading off inflation will become more and trickier as inflation pressures increase. Reducing stimulus measures will mean cashing their bond purchases as they come due and not buying new. This will serve to tighten money supply and slow economic growth. Be ready for another so-called taper tantrum when this becomes evident.
How to Prepare Your Investments for Inflation
How will stocks respond to higher yields on bonds and Fed tapering? Although the general view is that this will choke off economic growth that is not really true. When the Fed tightens for good reasons, market valuations will reset after an initial panic selloff. Dealing with inflation will result in stronger economic growth, a stronger market, and stock valuations back down to less-stratospheric levels. This will bring money back into the market. Expect P/E ratios to come back to what was normal from 1990 going forward, about 18 or 19 on the S&P 500.
Steps to Inflation Proofing Your Investments
Be careful of so-called defensive stocks when the economy is growing. Jumping into utilities, for example, as rates go higher is self-defeating because these stocks are interest rate-sensitive as so much of their value is tied to the dividends they pay. Rather look to which companies will prosper as the economy digs itself out of the K-shaped recession and which will benefit as the Biden infrastructure proposals bear fruit. Likewise be careful about dumping all of your stocks and jumping into bonds as your bonds will lose value as rates go up.
Companies that benefit from economic growth are commonly industrials, some international stocks, selected small-caps, and basic materials. Cruise lines have been moribund due to the pandemic and will benefit from all of that money on the sidelines as wealthy retirees start to travel again. Credit card companies like VISA will prosper as spending picks up as well.
Although there will be overpriced stocks that you probably ought to dump, the better choice will be to apply what you know about intrinsic stock value and pick up bargains when the market has its next taper tantrum. Now may be the time to build up a cash reserve instead of pouring money into more stocks that are likely to correct but inflation proofing your investments does not mean getting out of the stock market at this time.
Inflation Proofing Your Investments – Slideshare Version
Tax Rates for the Ultra Rich
Even staunch Republicans were shocked recently when ProPublica published secret IRS files showing that the richest Americans routinely pay a small fraction of their income in income taxes and in some years pay no taxes at all. They note that tax rates for the ultra rich in the last few years have run at about 3.4% of their incomes while Americans earning $70,000 a year routinely pay 14%. Talk of reinstating a minimum tax is already happening in congress. Our concern is how efforts to regulate tax rates for the ultra rich will affect taxes on the average American taxpayer.
Legal Ways to Avoid Paying Taxes
There are lots of legal ways to avoid paying taxes starting with the mortgage interest deduction used by every American who pays a mortgage on their home. The reasoning behind virtually all of these tax deductions (tax avoidance measures) is to use the tax law to help achieve social and economic goals. When people own their own home it typically becomes their biggest asset at the end of their working lives. Home ownership is a stabilizing influence in society. Other deductions have to do with encouraging investment. Folks like Donald Trump have benefited for years from tax laws favoring real estate developers. Today the likes of Jeff Bezos, Elon Musk, Warren Buffett, Michael Bloomberg, and more occasionally pay no taxes in a given year despite billions of dollars in income.
How Will They Fix the Tax System?
Lobbyists are a fact of life in Washington. They promote various causes including tax relief for those they represent. Unfortunately, not all of these causes rise to the societal value of the deduction on home mortgage interest for owners of single homes. They become tax loopholes that allow folks making lots of money to pay less in taxes or none at all. Fixing this sounds easy. Cut out the deductions. But, which ones need to go and which ones should stay? Fighting every single special interest group would be a nightmare. As such, we predict that there will be a minimum tax imposed so that tax rates for the ultra rich will come in closer to average working Americans no matter what tax loopholes they choose to employ.
What Will Your Taxes Be if They Go After the Super Rich?
Ideally, more taxes paid by the ultra rich should help balance the budget and reduce taxes for average taxpayers. However, the IRS collects about $3 trillion a year after factoring in refunds. And, the US budget shortfall has been getting bigger every year after the Trump tax cuts coming in at around $500 billion a year now. Thus it would require extra taxes of $500 billion just to balance the budget. On the other hand, according to ProPublica the amount of money in taxes that the 25 richest Americans avoid paying is pretty impressive.
Our analysis of tax data for the 25 richest Americans quantifies just how unfair the system has become.
By the end of 2018, the 25 were worth $1.1 trillion.
For comparison, it would take 14.3 million ordinary American wage earners put together to equal that same amount of wealth.
The personal federal tax bill for the top 25 in 2018: $1.9 billion.
The bill for the wage earners: $143 billion.
Thus it would seem that finding a way to bring the tax rates for the ultra rich up to what the average taxpayer pays could net $143 billion minus $1.9 billion which is $141.1 billion. That is a lot of money but it does not pay the current $500 billion deficit. We can assume that by including more than the top 25 in the USA that the “recovery” from those paying little in taxes might be a lot more. But, how far down the income bracket will any changes go?
The effects on your taxes will have to do with the approach that the government takes in rectifying this situation. Our prediction is that rather than going after every single possible deduction that Congress will pass a minimum tax tailored so that the tax rates for the ultra rich will more closely resemble those of ordinary Americans. Then, of course, there will be the matter of paying for Biden’s infrastructure proposals and the question if this would work out well, boost the economy and bring in more in taxes.
Tax Rates for the Ultra Rich – Slideshare Version
How to Invest in Marijuana Stocks
Spending on marijuana is going up by about 21% a year from just under $30 billion in 2020 to an estimated $63.5 billion by the end of 2024. Thus marijuana stocks are potentially very attractive investments. The issue, like with any growth sector is how to invest in marijuana stocks. We look at the basic steps to understanding the sector with its opportunities and risks and then choosing individual stocks or ETFs. This will be a fluid industry as it evolves which will make sound management as important as the type and quality of the products that companies offer.
Marijuana Products
Marijuana (cannabis) has two separate uses. It can be used for recreational purposes, medicinal purposes, or both. Marijuana for recreational use is legal in Canada and in fifteen states in the US and the number of US states where it is legal is likely to increase. Medical marijuana is legal in thirty-five states in the USA as well as Canada. Cannabis for health reasons requires a prescription and is broadly used to treat depression, anxiety, stress, and chronic pain as well as nausea caused by treatments for cancer. The chief ingredient that helps people medically is CBD.
What Is CBD?
CBD stands for cannabidiol. After THC it is the most prevalent ingredient in marijuana and the one primarily responsible for marijuana’s therapeutic effects. CBD does not cause a “high” so it has no abuse potential. It is found in prescribed seizure medicine and is likely to have wider and wider use over the years making this a second market-maker for cannabis products beyond recreational use.
Types of Marijuana Stocks
As with any business sector, there are some companies that offer the entire range of services necessary to produce, distribute and sell products and others that fill just one niche within the sector. In the marijuana industry there are growers, distributors, and retailers of various strains of marijuana. For normal use of pot, retailers also include folks who make, distribute, and retail smoking paraphernalia. And, there are biotech companies that are working to fine tune the use of CBD and other ingredients in marijuana for specific medical uses. The old saying from the days of the California gold rush may well apply in your choice of types of marijuana stocks. When everyone is digging for gold you can generally make more money selling picks and shovels. Likewise, those that effectively retail the final products may be more reliable choices when it comes to how to invest in marijuana stocks.
Top Marijuana Stocks
Canopy Growth comes to mind as a leading company that cultivates cannabis. GW Pharmaceuticals is a leader in developing drugs based on cannabinoids. And, not surprisingly, a leader when it comes to supplying the fertilizers, hydroponics, lighting, and other means for growing marijuana including managing and packaging services, is Scotts Miracle-Gro.
Risks of Marijuana Investing
A basic risk in the marijuana industry is that marijuana is illegal to grow, sell, and consume according to U.S. Federal Law. This makes it difficult for companies in the sector to get financing, ship across states lines where marijuana is not legalized for recreational use or as a medicine. Despite movement to decriminalize marijuana on a national level there is no guarantee that it will happen or that there will not be a huge crackdown by the Feds at some point in the future.
As more and more states have made marijuana legal for medicinal or recreational use, many companies jumped into the fray. They geared up for huge demand and then had to scale back. Cash management and business efficiency will be major factors in determining which companies will survive and succeed. A company like Scotts Miracle-Gro is positioned better than many because it has a huge lawn and garden business to help balance their efforts in the marijuana realm.
Many marijuana stocks trade over the counter, are penny stocks and prone to manipulation and trade very thinly making them investment risks.
When looking at marijuana stocks consider how long they have been in business, how well they are currently doing financially, and what sort of protective moat they have as an investment. For example, do they make a steady income selling materials to growers as well as selling exotic marijuana strains that could go out of favor?
And, how much pot do they produce at what overhead cost compared to their competitors? The most efficient companies will be the best long term investments.
How to Invest in Marijuana Stocks – Slideshare Version
Global Tax Deal and Your Investments
Starting with the Group of 7 Financial Ministers there is a movement to institute a global minimum tax on multinational corporations. The tax rate being pitched is 15% and the idea is that taxes will be paid where the company does business and makes sales instead of somewhere they merely set up a corporate office. The opinion of the International Monetary Fund is that hundreds of billions in taxes are lost due to such tax havens. Our concerns have to do with a global tax deal and your investments.
How Soon Do You Need to Worry about a Global Tax Deal and Your Investments?
The discussions about a global minimum tax took place at a meeting of the Financial Ministers of the Group of 7 which is the USA, Canada, the UK, Germany, France, Italy, and Japan. To a large degree these are the countries that are most hurt by current tax avoidance by multinational companies. They are also the strongest economies and the folks most able to force and enforce changes to tax codes around the world. The next stop will be the Group of 20 which includes Argentina, Australia, Brazil, China, India, Indonesia, Mexico, Russia, South Africa, Saudi Arabia, South Korea, Turkey, and EU in addition to the Group of 7 members. As a consensus is built the power to enforce will grow but the tax deal itself may be watered down.
The problem with making this happen is that countries like Ireland benefit from offering a 12.5% corporate tax rate in return for lots of foreign investment. Places like the Isle of Man or other tiny jurisdictions that benefit greatly from their arrangements and have so much to lose. The point is that it will take quite a while for any changes to be negotiated down to everyone concerned including setting up ways to enforce any new rules. As such, it will likely be years before you have to worry about a global tax deal and your investments.
Tax Losses Due to Tax Havens
The IMF wrote about the issue of tax havens more than a decade ago. They noted that no one was very concerned about the issue until the Financial Crisis when it became apparent that there would have been more tax money available to deal with problems then if companies had not been finding ways to shift their tax liabilities offshore and away from where they worked, produced things, and sold things. They estimate a $500 billion to $600 billion yearly loss in global tax collections due to the use of tax havens by corporations and about $200 billion a year by individuals hiding wealth in tax haven countries. Interestingly, they say that nearly $200 billion in lost tax collections is from poorer countries making this issue more important for these countries than for the G7 or G20 members. That is pertinent because this information could speed agreement for institution of a global minimum corporate tax system.
How Could a Global Minimum Corporate Tax Affect Your Investments?
As we noted already, this is not an issue for 2021 and probably not 2022 but somewhere down the road this might take place. The Americans for Tax Fairness website looks at Apple’s setup with Ireland in which for years it paid little or no taxes on billions of dollars in income. The question for Apple investors is just how much of a hit in cash flow will the company take if it is forced to pay 15% in years going forward. Although Apple says it pays a tax rate in the 20+% range, the Tax Fairness folks say it is more like 6% if you factor in offshore profits that are taxed at much lower rate. Since cash flow has been the major driver in the rise of stock prices for companies like Apple that benefit from low offshore rates, you might expect lower share prices and lower dividend payments once a minimum global corporate tax comes into being.
Global Tax Deal and Your Investments – Slideshare Version
How Will Inflation Affect Your Investments?
Inflation is when prices within an economy go up from year to year. For the average person this economic concept is important because it tells us how quickly the purchasing power of money is eroded and how fast an-otherwise stable investment will decrease in value. Because inflation seems to be picking up this is important today. How will inflation affect your investments? From the point of view of an investor, knowing the rate of inflation tells you what rate of return you need to get on your investments in order to retain their purchasing power and for you to maintain your standard of living.
How Does Inflation Work?
As an example, if the rate of inflation with refrigerators is 10% a year, a $700 refrigerator will cost you $770 next year, $847 the year after, and $931.70 the following year. From the viewpoint of the value of your money, $1,000 today will be worth $900 next year in purchasing power compared to today, $810 the next year, and $729 the following year. Inflation does not just happen. It is caused by a broadly based cascade of price increases affecting prices and wages with each increase in prices causing a drive for higher wages. Economists say that this is simply too much money chasing not that many products.
Why Is Inflation a Concern Today?
The huge sums of money spent by the U.S. government to rescue Americans from the economic effects of the Covid-19 crisis were life-saving for many who were out of work and in danger of being thrown out of their home. But, as the economy shows signs of recovering, some of that money may be falling into the “too much money going after too few products” category. The same could be true with Biden’s proposed spending on infrastructure. To the extent that money flows into the economy faster than it can be applied to producing products and services we will have inflation.
How Does the Government Fight Inflation?
At the beginning of the 1970s when inflation was driven up by spending for the Vietnam War and new social programs, President Nixon imposed wage and price controls which were a disaster. The eventual solutions were for the Federal Reserve to reduce their bond purchases and raise interest rates and raise reserve requirement for banks. Raising rates tend to drive money into bonds and long term savings accounts and out of circulation. As rates go up so does the value of the dollar so that imports become cheaper and exports become more expensive and less competitive. The end result is to slow the economy.
How Will Inflation Affect Your Investments?
Extremely low interest rates ever since the Financial Crisis have favored stocks as investments over bonds and bank savings. The stock market today is probably overpriced if compared to what it would be if interest rates were two, three, or four percent higher. If rates were to go up to the teens like in the 1970s we would probably see stagflation in which the economy stagnates while prices keep going up. During the 1970s the best performing investments were gold and real estate. The stock market basically traded sideways during this period. Considering that much of today’s stock market is perhaps overpriced we can probably expect a correction before it goes into sideways mode. This is probably a good time to look at which investments will prosper during an inflationary cycle and which will do poorly and then to adjust your portfolio accordingly.
How Will Inflation Affect Your Investments? – Slideshare Version
Energy Investments for 2021 and Beyond
The legacy energy sector has been hurting ever since oil prices fell a few years ago. Add the global pandemic, recession, and k-shaped recovery and energy has had a bad time of it. However, things are looking up all across the energy industry. The pandemic is getting better in the USA, UK, Europe and elsewhere as vaccinations take hold. We can expect to see an economic boom at least this year and perhaps for several years if Biden’s infrastructure plans work out. In this like we are looking at energy investments for 2021 and beyond.
Best Renewable Energy Stocks for 2021
The Motley Fool discusses the best renewable energy stocks for 2021. The world is steadily moving towards renewable, clean sources of energy and, especially, away from hydrocarbon sources like oil and coal. Wind, solar, geothermal, biomass, green hydrogen, and ocean currents and waves are all renewable, clean energy sources. Transitioning to these energy sources will require trillions in capital and will happen over decades. Choosing the right renewable energy stocks in 2021 could result in handsome profits for decades to come.
Their top three choices are Brookfield Renewable Partners, First Solar, and NextEra Energy. A mix of these three companies would give you access to solar panel technology, utilities heavy in solar, and multiple renewable energy approaches worldwide.
Best Solar Energy Stocks for 2021
If you are specifically interested in solar energy investments, you can break this down into the operation of solar power generation facilities, solar panel installation, batteries and other devices to store energy, and the design and manufacture of solar panels. Two of the companies mentioned I regard to renewable energy are top picks for solar as well. These are First Solar and Brookfield Renewable Partners. The third is Solar Edge Technologies. First Solar makes solar panels and Solar Edge makes solar power optimizers. And, Brookfield operates across the entire renewable and solar spectrum.
Energy Transition Investment Trends 2021
BloombergNEF published an insightful piece about how investment is transitioning within the energy sector. They consider not only specific renewable energy sources but also heating and vehicle electrification and various carbon capture and low-carbon projects. Their bottom line is that total investment in renewable went over $500 billion last year with the lion’s share going to upgrading renewable energy capacity ($300 billion) and electric vehicles ($139 billion). $50 billion went to offshore wind facilities as well as to home installation of energy-efficient heat pumps. The nations leading the charge are the EU, China and then the USA. Europe increased its investment last year while both China and the USA reduced their money going into this sector.
Top Energy Stocks for 2021
Despite the fact that the world will gradually move away from carbon-based fuels, they are still the major part of energy production and a necessary one during years when it rains less and hydro is down or when the wind does not blow or at night! As the pandemic relents and the economy booms, companies like Exxon and a legacy energy investment like Kinder Morgan will do well. Market Watch has a very thorough article about energy investments for 2021 that are expected to go up nicely.
Energy Investments for 2021 and Beyond – Slideshare Version
Investment Leverage Risks
The average return on investment from the S&P 500 is 10% averaged out over the years. However, an investment portfolio that follows the S&P 500 may gain twenty percent or more some years and lose nearly as much in other years. Patience is the key to investing in stocks successfully over the long term, and knowing how to access intrinsic stock value. However, many investors would like to make more money faster than the 10% average and are willing to leverage their investments in the process. Here are a few thoughts about investment leverage risks.
What Does It Mean to Leverage an Investment?
In the case of the stock market, leverage is when investors use various strategies to increase their buying power. All of these tend to add risk to their investing. Shorting a stock is one way to leverage an investment. The trader borrows the stock for which they pay interest and then sell it. They are betting that the price of the stock will fall in which case they will buy it at the now-lower price, return the shares that they borrowed, and pocket a profit. Unfortunately, stocks do not always fall in price and if the price goes up they get caught in a short squeeze and have to buy the stock for more thus losing money. We wrote about the Tesla short squeeze and the same thing happened with Gamestop.
What Is Synthetic Stock?
A way that options traders reduce their cost of a “long” stock position is by creating “synthetic stock.” What the trader does is buy at-the-money calls on a stock that they believe will rise in price. At the same time they sell at-the-money puts on the same stock for the same strike price and same expiration date. The money earned by selling the puts covers the cost of buying the calls so the trader is in a situation similar to owning the stock (or simply buying calls) but without having had to buy the stock or pay the entire price of the calls. When the stock goes up the trader can then buy the stock at the strike price and own it at the currently higher market price or simply exit the trade with a profit. The problem is that if the stock price collapses there is essentially no bottom to their losses.
The Taiwan Stock Market Example
The issue of investing with borrowed money or leverage investing came to mind after the recent correction in the Taiwan stock market as noted by Bloomberg.
Taiwan stocks sank for a third day in volatile trading, extending a rout that’s triggered the fastest liquidation of leveraged positions since 2018. Forced selling has compounded this week’s losses, with the level of margin debt falling by a net NT$12.9 billion ($461 million) on Wednesday, according to exchange data compiled by Bloomberg.
The correction started because Taiwan is having another surge of Covid-19 but was made a lot worse by the amount of leverage in their stock market.
Investing with Borrowed Money
There have been reports of people putting second mortgages on their homes in order to invest using the Robinhood app. The app has addictive aspects and thus can be dangerous for naïve traders. Investing with borrowed money in such situations only makes it worse. A problem when you lost 50% on an investment is that that you cannot get your money back by making 50% the next time around. Rather you need to double your investment in order to recoup your losses.
Taking On Risk to Leverage Your Investment
Synthetic stock is an example of adding risk in order to leverage an investment. The trade works wonderfully well so long as the stock goes up in price. It becomes an unmitigated disaster if the stock falls precipitously. Those who successfully use this approach watch their trades carefully and are skillful at picking the stocks on which to apply this strategy. The same applies even more to the investment leverage risks of using borrowed money.
Investment Leverage Risks – Slideshare Version
Investment Leverage Risks – DOC
Investment Leverage Risks – PDF
Taxation of Cryptocurrency Profits
If you bought bitcoin or any of the other cryptocurrencies just a few years ago you may be sitting on huge potential profits. If you have taken some of those gains you need to be concerned about taxation of cryptocurrency profits. People have bought cryptocurrencies because of the profit potential. They have also been attracted to the idea that the cryptocurrency system operates outside of the normal financial system. As such, many may have been under the belief that they could cash out their bitcoins or other cryptocurrency and not pay any taxes. However, taxation of cryptocurrency profits is real and the IRS is getting very serious.
Is Crypto Taxed in the U.S?
As we noted in our article, Buying Cryptocurrency 101,
Cryptocurrency exchanges in the USA now need to report to the IRS (IRS Form 8949, Schedule D).
The IRS won lawsuits several years ago that allow it to treat gains from cryptocurrency the same as for capital gains from stocks and other assets. Likewise, gifts of cryptocurrencies are also subject to taxation. They have been pursuing this aggressively and have just recently won two more lawsuits forcing cryptocurrency exchanges to provide information about their customers. If you do not get a 1099 form from your cryptocurrency exchange, you are still liable for capital gains taxes! Those who have been thinking about taking a profit on their cryptocurrency investments may wish to do so before capital gains taxes go up under the Biden administration. Those who have previously taken profits and not paid taxes may wish to consult a tax lawyer before they get a summons from the IRS.
How Much Is Crypto Taxed?
Taxation of cryptocurrency profits is like taxation for capital gains on stocks. Currently you have a higher tax rate for short term (less than a year) investments and a lower rate for long term investments. The Biden administration is proposing a substantially higher capital gains rate across the board for those earning more than $400,000 a year. If you are in the potentially higher bracket for capital gains and are thinking of taking a profit, you may wish to act now instead of waiting to see how the tax law reads next year.
A fly in the ointment in the case of cryptocurrencies is that they can be used as currencies as was the original purpose of bitcoin. So, if you have not bought and sold bitcoin but have used it to gamble at a bitcoin casino, purchase a car, or otherwise engage in a financial transaction by exchanging cryptocurrency for goods, services, or real currency, you have probably created a tax liability. This has to do with whether or not the cash basis of the cryptocurrency at the time you made a transaction was less than the value of the transaction. In other words, you bought bitcoin for $100 and now are buying a $50,000 car, you have a tax problem. On the other hand, you could also have had a loss in which case it would be beneficial to report to the IRS and use the loss as a write off.
How Do I Avoid Crypto Taxes?
You can avoid taxes on cryptocurrency if you lose money. You can also avoid taxes if you never sell your cryptocurrency and never engage in a financial transaction with any of your bitcoins. Otherwise, the days of hiding assets in the bitcoin realm are coming to an end. While the chief aim of the IRS and FBI has been to track down drug money, money used for terrorism, and other nefarious purposes, the net is being broadly cast and anyone who wants to take a profit or use their bitcoin wealth to live a better life will need to pay their taxes as they go.
Taxation of Cryptocurrency Profits – Slideshare Version
Taxation of Cryptocurrency Profits – DOC
Taxation of Cryptocurrency Profits – PDF
Stock Market Correction, Crash or Bear Market
The stock market goes up and it goes down. Many times your investments rise and fall as much from overall market activity as from specific intrinsic stock value factors. How much and for how long the stock market goes down can be a stock market correction, crash or bear market. Since 1950 temporary stock market drops of more than 10% have happened on the average every 23 months! Because at any time a stock market correction, crash or bear market may be just around the corner, investors need to be prepared.
What Is a Stock Market Correction?
When the stock market goes down ten percent or more over several days to a week, or even a month, that is a correction. This happens in US markets a bit more often than every two years on the average. Usually, the market recovers over the next few months. That is because there is quite a bit of panic selling when a correction occurs. There may even be instances of speculators being caught in a short squeeze as well. Because the fundamentals of the market are generally sound, corrections recover.
What Is a Stock Market Crash?
In a stock market crash stocks fall by ten percent or more but it all happens in a single day. When the market crashes there is a widespread loss of confidence. The most devastating stock market crash in US history was Black Thursday, October 24, 1929. This was the beginning of the gigantic slide in the market that brought on the Great Depression. But, the 1987 Black Monday crash began to recover the next day and the total market came back by 1989. Although the initial damage of a crash may be no worse than a correction, it happens a lot faster and tends to be associated with further problems in the market, sometimes for years.
What Is a Bear Market?
A bear market may start with a slow correction or a rapid crash but in this case the market falls by more than 20%. When bear markets occur market sentiment expects long term, fundamental problems and a prolonged fall in cash flow. This happens when there is a severe economic recession. While individual stocks may enter their own bear market, the term is generally used for the whole market and affects the whole economy. In fact, some selected stocks may do very well during a bear market. Many investors pivot into consumer stocks or even stock like beer companies as these businesses keep making money even in a weak economy.
Is a Stock Market Crash Coming?
The stock market has been going up ever since the depths of the Financial Crisis. Over the last dozen years there have been a few corrections but always recoveries. Those who have predicted a severe, prolonged bear market had been wrong until the Covid-19 crisis and then they were only partially right as the shape of the recovery turned into a K-shape that allowed tech to prosper while transportation, hospitality, and other sectors languished. But, as the Covid-19 crisis promises to improve, the issue is still here. Is a stock market crash coming?
What Is the CAPE Ratio?
As noted by The Motley Fool, the persistently high CAPE ratio is the leading indicator of a coming stock market crash. The CAPE ratio is the P/E ratio averaged out over the preceding ten years. It provides a longer-term view of stock prices and their relation to earnings. The CAPE is currently greater than 30 and the last four times it remained in that region, the S&P 500 suffered losses between 20% and 80%. If you believe that the high CAPE ratio is of concern the answer is not to put all of your money under a mattress but to prepare. How can you prepare for a stock market correction, crash or bear market’
How Can You Prepare for a Stock Market Correction, Crash or Bear Market?
The Fool gives us five suggestions for how to prepare for a down market. These are generally good investment suggestions to keep in mind at all times.
- Assess and understand your risk tolerance
- Review your portfolio with a down market in mind
- Hold some cash
- Consider dividend stocks
- Focus on value when searching for bargains and in the early stages of a recovery
There is a mindlessness that creeps into one’s investing as a bull market continues. There comes a point at which no matter where you put your money it grows. And, then it doesn’t. Don’t gamble with money that you cannot afford to lose and have a plan for when you will start taking profits and rotating into safe value investments.
Warren Buffett famously got out of the market in the run up to the dot com crash as he said the market no longer made sense. Thus he was sitting on a pile of cash that he employed to pick up bargains afterward. This has, in fact, been what he has done in virtually every crash and bear market for decades. His example is a good one to follow.
Folks nearing or in retirement typically need or at least like a steady income stream. Dividend stocks are always good to have in your portfolio and this is especially true when there is a risk of a stock market correction, crash or bear market.
Every time that the market corrects, smart investors buy the dip on solid investments. Having cash on hand gives you power when the market weakens. Couple with this the realization that you have not made a true profit from your investments in a soaring market until you have taken a profit and you have another reason to have cash on hand.
Stock Market Correction, Crash or Bear Market – Slideshare Version
Stock Market Correction, Crash or Bear Market – DOC
Stock Market Correction, Crash or Bear Market – PDF
Tech Stock Selloff
After rallying once again to new highs, the stock market is selling the same tech stocks that drove the pandemic stock rally. Many have been waiting for something to change the positive market sentiment that has made the stock market diverge from the economy. As the wider economy starts to regain strength there is a concern among tech investors that many of the work-from-home and other factors that have supported big tech in the last year will fade along with Covid-19 restrictions now that the vaccination campaign is protecting more and more Americans. What does the current tech stock selloff mean?
What Is the Meaning of the Tech Stock Selloff?
A selloff in big tech stocks including the FAANG darlings has been repeatedly predicted for years. But, these money-making machines keeping going up in price as their earnings keep rising. After an initial scare at the beginning of the Covid-19 pandemic these companies saw higher stock prices as Covid-19 restrictions drove so much of our lives online. These companies have become what IBM and Phillip Morris once were, reliable investments that just seem to keep growing and growing. So, what does the current tech stock selloff mean? Is the long-anticipated correction in the works? Is this just another “buy the dip” moment?
Why Is There a Tech Selloff Now?
Treasury Secretary Janet Yellen just said that a slight rise in interest rates may be necessary to stem inflation. Because low interest rates have been a major driver of the stock market it is a reasonable assumption that farsighted investors are rotating their portfolios out of high tech and into companies that serve the general economy. And, since no stock rally lasts forever, it was reasonable to expect corrections in tech from time to time. A long term underlying concern is that the government may decide to treat big tech companies like utilities because they are so basic and so central to the economy and our way of life. When companies like Amazon.com, Alphabet, Microsoft, and Facebook become so dominant in their market niches, antitrust concerns arise which could lead to the breaking up of some of these tech giants. All of that having been said, the market was probably just looking for a reason for a selloff and used Janet Yellen’s comments as an excuse.
When Will the Tech Selloff End?
This really is the question that investors want answered. Do these stocks have some sort of intrinsic weakness that has been ignored? Are their prices really beyond reason considering that they really are part of the technological backbone of the country? Investors who use intrinsic stock value as a guide will probably be buying the dip in the coming days. Their underlying assumption will be that these companies are central to our economy and will remain so well into the 21st century. These investors will consider a possible bump up in interest rates, how fast the economy will recover from the Covid-19 crisis, and whether or not Biden’s infrastructure proposal will come to fruition and drive both the creation of jobs and higher stock prices for years to come.
Tech Stock Selloff – Slideshare Version