The Market 2022-2023-2024

[Yuma]

The federal funds rate is the rate at which banks can lend to each other. It heavily influences market rates, but it does not set them. The closest market equivalent of the fed funds rate is the 2 year treasury which is just over 4%. The fed funds rate was just increased to 3.25% today. This tells us bond investors are expecting the fed fund rate to hit 4% in the short term. I believe the fed eluded to the vicinity of 4.5% being their target.

4% isn't blowing anybody over, but it does cause investors to pause especially when considering long duration equities (companies or assets that won't be profitable until years down the road or ever). If I'm getting zero interest on my cash, I'm not missing out if I invest it into a fast growing business that may be years away from profitability. See 2021 and Cathie Wood as well as the huge asset bubble. We are already seeing what an increase of a few percentage points in mortgage rates is doing to home purchases.

That easy money is now gone and the yield curve is hinting if not screaming that a recession is coming and with that a likely decline in earnings. Do you want to invest in the face of a potential recession and falling earnings or take the sure 4%?

It's important to remember you are not buying a stock, but a business that has a valuation based on future earnings and market sentiment that can be disconnected from the fundamentals. If you buy a business, you should be expecting to at minimum make your money back by it generating income/dividends and/or selling it at a later date for a higher price.

Those fast growing, but unprofitable companies were able fuel their growth by borrowing at ultra low rates and further fuel growth by issuing shares at extreme valuations. This would dilute shareholders, but investors kept lining up and the price kept going higher. That worked great until it didn't. Now it's too expensive to borrow and their share price has collapsed with the euphoria gone.

So if you want to buy stocks, stick with high quality, profitable companies that are growing revenue and profits with strong balance sheets. Which is pretty good advice all the time. That or stick with index funds and just dollar cost average as that strategy will likely outperform all of us.

I get all that. I am just thinking like the little guys. When I was a kid and interest rates were double digits, every retiree I knew was putting money into CDs, etc. Eventually inflation stopped because money got sucked off the street into savings. So I am just remembering my experience and thinking, 4% isn't going to make me move off buying discounted stocks that have historically averaged 8%. You get to that sure thing around 8% THEN I am trying to buy interest based investments for as long as I can lock them in.

 

[Folster]

We're just off the June lows for the S&P 500. This could get interesting.

 

[elindholm]

Yeah it's been a horrible couple of weeks. It looks like the third quarter will finish in the red, whereas it had been providing some salvation for a while.

 

[Folster]

I get all that. I am just thinking like the little guys. When I was a kid and interest rates were double digits, every retiree I knew was putting money into CDs, etc. Eventually inflation stopped because money got sucked off the street into savings. So I am just remembering my experience and thinking, 4% isn't going to make me move off buying discounted stocks that have historically averaged 8%. You get to that sure thing around 8% THEN I am trying to buy interest based investments for as long as I can lock them in.

I tend to agree over the long run, but consider that not everybody has capital appreciation as their primary goal. A lot of people, particularly those in retirement are investing for income primarily. With low interest rates many were forced to pursue stocks and they typically prefer dividend payers. Dividend payers are usually more stable, but they certainly can still take a tumble as we have seen. Now that retiree that just needs a consistent 4-5% return off their nest egg every year has a much less volatile option for that income.

 

[Folster]

Yeah it's been a horrible couple of weeks. It looks like the third quarter will finish in the red, whereas it had been providing some salvation for a while.

I read that October is historically the most volatile month of the year which kinda makes sense as it is right before holiday spending ratchets up. I could see a bad October and a rally to close the year.

 

[dscher]

I read that October is historically the most volatile month of the year which kinda makes sense as it is right before holiday spending ratchets up. I could see a bad October and a rally to close the year.

This is my thinking. By then, we'll be pretty deep set into a secular bear market. But this initial decline could be a doozy. At the very least...it will be the capitulation that many have been looking for.

 

[Devilmaycare]

I read that October is historically the most volatile month of the year which kinda makes sense as it is right before holiday spending ratchets up. I could see a bad October and a rally to close the year.

I think we're ready to start the march to the floor and that we'll see a declining trend line down to 300 maybe as low as 280 for $SPY. How quick that goes will partially depend on what the Fed does with rates and how quick they ramp up QT. I'd like to see the band-aide ripped off already but I think they'll slow play it at least until November due to midterms.

 

[dscher]

I think we're ready to start the march to the floor and that we'll see a declining trend line down to 300 maybe as low as 280 for $SPY. How quick that goes will partially depend on what the Fed does with rates and how quick they ramp up QT. I'd like to see the band-aide ripped off already but I think they'll slow play it at least until November due to midterms.

Next up will be cuts IMO. They can't raise anymore. It would absolutely destroy the marketplace and global economy. Even though thats what they want to a degree to cool off the hyperinflation they helped create. The consumer can't handle rates where they are...and with the dollar strength it would be catastrophic. The bond market is telling them they need to cut as well. The Japan playbook is uncanny. But you're not wrong... Pulling off the bandaid needs to happen. It will be scary for many investors. But could be worse in the long haul if they keep being tepid.

 

[Folster]

I think we're ready to start the march to the floor and that we'll see a declining trend line down to 300 maybe as low as 280 for $SPY. How quick that goes will partially depend on what the Fed does with rates and how quick they ramp up QT. I'd like to see the band-aide ripped off already but I think they'll slow play it at least until November due to midterms.

Yeah. I'm watching the S&P 500 levels especially, but also AAPL, TSLA, and bitcoin as key indicators of investors and speculators throwing in the towel.

 

[Folster]

Next up will be cuts IMO. They can't raise anymore. It would absolutely destroy the marketplace and global economy. Even though thats what they want to a degree to cool off the hyperinflation they helped create. The consumer can't handle rates where they are...and with the dollar strength it would be catastrophic. The bond market is telling them they need to cut as well. The Japan playbook is uncanny. But you're not wrong... Pulling off the bandaid needs to happen. It will be scary for many investors. But could be worse in the long haul if they keep being tepid.

I think they pause for a while before they pivot.

 

[dscher]

I think they pause for a while before they pivot.

Yeah. We'll see. Things like this can turn into crises pretty quick if they don't act quick.

 

[dscher]

300 maybe as low as 280 for $SPY.

If volatility stays where the charts are indicating they want to stay... 2200 on the SPX would be the likely target as a true capitulatory bottom. We also have gaps to fill down there. ( Unfilled market action from overnight pajama traders).

 

[Folster]

If volatility stays where the charts are indicating they want to stay... 2200 on the SPX would be the likely target as a true capitulatory bottom. We also have gaps to fill down there. ( Unfilled market action from overnight pajama traders).

2200 would be a 40% drop from current levels and a 54% drop from the all time high. That's got to be worse case scenario.

 

[dscher]

2200 would be a 40% drop from current levels and a 54% drop from the all time high. That's got to be worse case scenario.

Not really. When volatility(fear) trends to the upside and markets begin to trend to the downside with momentum it can be just like short squeezes. But instead with dip buying. Fear is stronger than greed. That's why stairs up... elevator down, exists.

 

[dscher]

We could be in crash mode. Be prepared.


JMO.

 

[dscher]

We are in active freefall inside the debt market. Protect yourselves here. Looks like the Fed wasn't messing around after all...

 

[Folster]

We are in active freefall inside the debt market. Protect yourselves here. Looks like the Fed wasn't messing around after all...

We're getting a lot of interest and action on brokered CDs at my firm.

 

[elindholm]

We're getting a lot of interest and action on brokered CDs at my firm.

One thing this dip has taught me is never to trust bond funds again. They've been worse than useless over the past few years. Limited growth potential and basically no downside protection. The only reason I haven't dumped the ones I have is that I'm already maxed out on tax-harvestable losses for the foreseeable foreseeable future.

 

[dscher]

We're getting a lot of interest and action on brokered CDs at my firm.

I'm still thinking a massive short squeeze in T bonds is on the horizon. If things break, it will move monumental money into US backed treasuries because of the dollar strength. Only place to be as a safe haven.

 

[Folster]

One thing this dip has taught me is never to trust bond funds again. They've been worse than useless over the past few years. Limited growth potential and basically no downside protection. The only reason I haven't dumped the ones I have is that I'm already maxed out on tax-harvestable losses for the foreseeable foreseeable future.

They have their place long term. But exposure should have been reduced once rates hit zero. I don't recall anybody sounding the alarm in 2021 though. At that point there was little to no upside with values set to plummet once rates were inevitably increased. The longer the duration of the bond fund the harder you were going to get hit.

 

[elindholm]

They have their place long term. But exposure should have been reduced once rates hit zero. I don't recall anybody sounding the alarm in 2021 though. At that point there was little to no upside with values set to plummet once rates were inevitably increased. The longer the duration of the bond fund the harder you were going to get hit.

Yeah theoretically my funds were engineered to have downside protection, but that was overridden by the NAV plummetting through normal market movement. People who were happy enough to hold them when they weren't earning any interest suddenly decided that they had to dump them once inflation hit. What surprises me is that they've been hardly any less bad than my vanilla stock funds. Basically I've been sacrificing gains for an insurance policy that turned out to be worthless.

 

[82CardsGrad]

Yeah theoretically my funds were engineered to have downside protection, but that was overridden by the NAV plummetting through normal market movement. People who were happy enough to hold them when they weren't earning any interest suddenly decided that they had to dump them once inflation hit. What surprises me is that they've been hardly any less bad than my vanilla stock funds. Basically I've been sacrificing gains for an insurance policy that turned out to be worthless.

I believe Bonds are a very good investment now, and likely will be over the next several months.

 

[elindholm]

I believe Bonds are a very good investment now, and likely will be over the next several months.

Happy to sell you mine for what I paid for them.

 

[Folster]

Yeah theoretically my funds were engineered to have downside protection, but that was overridden by the NAV plummetting through normal market movement. People who were happy enough to hold them when they weren't earning any interest suddenly decided that they had to dump them once inflation hit. What surprises me is that they've been hardly any less bad than my vanilla stock funds. Basically I've been sacrificing gains for an insurance policy that turned out to be worthless.

Yeah I get it. It seems like a better idea to buy a few treasuries and or investment grade corporates and not have to worry about panic sellers depressing your values. If you hold to maturity, you're good whereas bond funds are forced to sell off.

 

[dscher]

xc_hide_links_from_guests_guests_error_hide_media