The Finance Gourmet

Personal Financial Advice from a former Certified Financial Planner

Stock Market Correction

Written by 1 Comment

After Monday’s stock market fall, there was a run up yesterday on Tuesday, then a little drop on Wednesday, and now a 1000+ point market drop again today. So, let’s get a headcount before we proceed.

Stock Market Results Last Few Days

  • Monday: -1175
  • Tuesday: +567
  • Wednesday: -19
  • Thursday: -1033

Add it all up, and you get -1,660 for the week. Oh, and by the way, the market was down 666 points last Friday. From the market’s high point, this equates to a drop of a little over 10% putting us into correction territory. (A correction is usually defined as a drop of 10%.)

Do We Panic Now?

Take a look at what I wrote about Monday’s big stock market drop. Although the market has dipped even further, the result remains the same. For long-term investors with a well diversified portfolio, the best course of action is to ignore all short-term market moves. Even if this is the beginning of a recession (We are totally due for one) the long-term scenario is still the same. The ever higher march of inflation, plus a U.S. economy that always comes back eventually means that holding on, and continuing to invest is the best solution for long-term investing such as retirement, or even college savings for children 7 to 10 years out.

For shorter-term investors, it is time to look at what is going on.

The markets are reacting to a few different things.

First, the stock market has gone up and up, with almost no pullbacks for a very long time now. That really makes no sense considering the overall economy is not racing ahead that quickly. The overall optimism that business and consumers have is real, but this isn’t some boom times. As a result, a correction here is very healthy, and perhaps even necessary.

Second, the Fed has been consistently overplaying it’s hand regarding inflation in order to look like inflation hawks. The reality is that there is no need to keep marching forward with regular rate hikes to keep inflation below 2%, when inflation has never really approached 2 percent. Couple that with the fact that the Fed can remove liquidity (and inflationary pressure) from the market just by unwinding its balance sheet, and one can’t help but wonder if the Fed has finally tried too hard to be tough, and ended up actually breaking the economy. After all, this is right about the time that December rate hike should actually be hitting the economy.

Third, the bond markets (which are also very concerned about the second point above) have started getting skittish. There is a new Federal Reserve Chairman coming in. Trump has proven very erratic, and Congress is looking to pass a new budget that while politically savvy, is — economically speaking — the equivalent of passing a stimulus package of domestic and defense spending just while people are starting to wonder about inflation.

Add it all up, and the markets don’t like the upcoming scenario where the Fed is thrust into a position where it will likely confront inflation either too strongly (and upset the economy) or too softly (and get behind on booming inflation), unless it exactly threads the needle.

Who Crashed The Market

Of course, these days, the daily action of the markets is highly influenced by machine, or computer, trading. It’s no secret to the people programming these machines that the market is overvalued, and that the economy may be tipping, and that the Fed may be killing the whole thing, or inflation may kick in. While the machines themselves have no fear, the same cannot be said for those who program them.

It is likely that the safeties, and sell triggers have been ratcheted up, and these kinds of big moves are the result of one program after another running for safety, or cashing in profits.

Either way, expect a volatile February, at least.

Stock Market Plunges – Shall We Panic?

Written by 1 Comment

The Dow Jones Industrial Average fell almost 1,200 points. The headlines scream “Largest 1-Day Point Drop in History.” — They say “point drop,” because as a percentage, this declines isn’t even close to the worst. As the Dow increases in value, the percentage of a point becomes a smaller number.

This 1,200 points is equal to 4.6%. That’s nothing to sneeze at, but it is not anywhere near as bad on a percentage basis as the 508 point Black Monday crash, which at the time was a drop of 22%. (Could a Black Monday type crash happen again?)

Perspective is fun!

The 2018 Crash

Before we decide to panic, let’s look into our crystal ball and see what will happen in the next few days.

First, don’t expect any of the politicians who were taking credit for the stock market rising to come out and accept any blame for the market falling, even though, if one is true, the other must be true as well. The reality is that politicians are never responsible for short-term market moves, no matter how much they try and take the credit. So, this crash isn’t their fault, but the runup wasn’t to their credit either.

Second, watch for the “I told you so” crowd who have been “predicting” a crash of some sort. However, before you give out any kudos, be sure and look at just how long they have been predicting this crash. That guy on the side of the road with the sign that says, “The End Is Near,” will be right one day, but that doesn’t make you smart, unless you haven’t been out there for several years.

Check out my Credit Karma tax review.

Most of the “I told you so,” folks have been out here predicting gloom for a long time. If you listened to them when they actually said to get out, you would have lost more money by not participating in the market’s forward progress than you are going to lose now. Look at how much upside you lost getting out on that “expert’s” call in 2016, or even 2017.

2018 crash stock market

You have a long way to go before you can thank an analyst for warning you in February 2017, and even further to go for that analyst that has been beating the warning bell since 2016.

What Now?

As always, for long-term investors with a well-diversified portfolio, the best thing you can do is tune out all of the noise over these events. If you are still investing, trust in dollar cost averaging to turn these ups and downs to your favor.

If you were investing in the shorter term, it’s time to reevaluate, but not time to panic. Remember this market has done nothing but run up, and up, and up. That nearly straight up trajectory is exactly what made so many stock market analysts nervous. A correction here is good, maybe even necessary.

Remember, this was a pretty big hit, and while it does wipe out all of 2018’s gains, that isn’t too hard considering it is only February. You still have a lot of profits on the table from 2017. Maybe it is time for shorter-term investors to lock in a few gains. If you have some investments that are now in the red, consider a sell to lock in some capital losses.

Otherwise, don’t panic. Tomorrow may bring more selling, but watch for the whole week to get an idea of whether this is a very necessary bump in the road, or the start of a rout.

 


 

Is FAANG a Good Investment?

Written by Leave a Comment

Even if you’ve never heard of FAANG, chances are you have heard of all the stock components and maybe even contemplated an investment in one or more members, but is FAANG a good investment or bad investment?

What Is FAANG?

Let’s start from the beginning. FAANG stands for Facebook, Apple, Amazon, Netflix and Google. As you can probably tell, these are very big, very well known, technology stocks. They are also frequent investments among investors who only invest in a few individual stocks, people often called Main Street investors (as opposed to Wall Street investors).

One omission from the list is Microsoft, which is also a very large, very well known, technology company. Unlike the others, however, Microsoft’s stock is not well loved by Wall Street investors and analysts, in large part due to its sideways performance from 2002 to 2013. While its stock has recently done well, it still doesn’t have the same shine, or flair as the others. Perhaps this makes it a less “noisy” investment with fewer fair-weather, amateur, investors? That’s an article for another day.

faang microsoft

For professional stock analysts and investors, FAANG represents a quick look at the “new” titans of American business. Each of these companies represents the mature, profitable, internet-based, mobile, online economy at the level of a full-size, profitable, Fortune 500 company, unlike say Twitter, which still struggles to make money.

For amateur investors, FAANG stocks represent a mirage of investing in “the future.” For these Main Street investors, an investment in Google, or Apple is because they “know” these high-tech companies, and they “know” they will go up because of how great their cutting edge technology is. Unfortunately, everything they know about, say, Apple (they have new iPhones!) is already baked into the price.

Is FAANG a Good Investment?

So, that raises the question of whether FAANG stocks are a smart investment. The answer, as always, depends upon your individual situation and investing goals, but beyond that, there are some things you need to know about investing in FAANG to avoid potential catastrophe.

First, don’t think that you are “special” in knowing about these companies. These are worldwide brands that are closely followed by every kind of investor, from the guy with $3,500 in an Ameritrade account, to billionaire hedge fund managers. And, yes, they know about the new iPhones.

Second, as tech titans, these stocks move both on their own accord (Hey, look! New iPhones are selling really well.), as well as representatives of technology (Uh, oh! Bad news for tech companies today…) Your best buying opportunities will be when the market overreacts to general technology news that doesn’t actually harm these individual stocks over the longer-term.

Third, know that these stocks tend to move together. Yes, only Apple sells iPhones, but more people buying iPhones means more people using Facebook, and more people using Netflix, and so on. These are all technology companies with big, international footprints. As far as your asset allocation goes, these all count as U.S. large-cap stocks. In other words, if you want to own all five FAANG stocks, you are going to need to diversify your portfolio elsewhere. From a diversification standpoint, these stocks are all the same.

Fourth, they won’t always go up. It’s easy to look now and wonder how there can even be a future without these companies, but it happens all the time. Go back to the 1990s and look at how many lists Cisco is on as a sure thing, even as a safe-pick for a 10-year or 20-year investment. Just look up at the top of this article to remember how many years Microsoft was a non-gainer even though there was once a time where a world without Microsoft was an anarchist pipe dream. Treat these investments like any other stock. Management and execution are crucial.

Fifth, these companies can be very volatile. If you are putting these in your diversified portfolio, they’ll need to be offset with more stable, value stocks, a nice stable mutual fund, or even bonds.

Finally, there will be news. The old maxim to buy the rumor and sell the news doesn’t always work as well with these companies as with others because so many people are constantly trying to predict what their next move will be. That beings said, buying the NEWS on these companies is a fool’s errand. Often the news gets overbought by household investors leading to a drop in the next few days. Couple that with some bad news, and you have a ‘bought at the top’ situation. Buy these stocks based on their long-term prospects and historical value only.

FAANG stocks are a good investment for the long-term, but they aren’t magic. They need to be monitored, and gains should be taken along the way, just like any other stock.

This is not an offer, or recommendation, to buy or sell securities. As the time of publication, the author owned Apple and Microsoft stock, however, that may change at any time. The author is not a financial advisor and does not hold himself out to be one. Consult your financial professionals for advice on your specific situation.

 

November Looking Funky for Stock Market

Written by Leave a Comment

These last few weeks have dumped piles of external events onto the stock markets. As usual, the market overreacts to many of these and under-reacts to others. For long-term investors, this is just another reason to have a well diversified portfolio that you rebalance regularly.

Market Data and Other Stuff

Just because you aren’t going to panic sell (right?) or run out and buy fearing you are missing the start of another rally (right?), doesn’t mean that we can’t take a look at what is going on in the economy, markets, and politics that might affect our investments over the coming months.

First up? The Fed!

President Trump has announced his pick for the next Federal Reserve Chairman, and it’s a known quantity. Jerome Powell is already on the Federal Reserve Board and holds views that are considered mostly similar to those of current Fed Chair Janet Yellen. In fact, many analysts suggest that there is no real purpose in replacing Yellen with Powell other than for the President to put his stamp on the board.

stock market end of year economy

It all adds up to more of the same. A Federal Reserve focused on “normalizing” interest rates (raising them) despite the economy coming in well below anything approaching the Fed’s so-called 2% inflation target. Look for one more rate increase in 2017, or a January 2018 increase unless something goes kablooey between now and then.

Next? The Economy!

Jobless claims were up, but everyone is attributing that to the effect of the hurricanes. This analysis is borne out by the fact that continuing unemployment claims (people who were already on unemployment last period continuing to be on it this period) falling. Add it up and the job market is doing fine. Not on fire, but not shedding jobs either.

The Big Bad Wolf in our story, however is the Producer Price Index. Expected to come in with a 0.1% gain, the report showed the index rose 0.4% in October. Typically, big surprises like this get revised back the following month, but even a 0.3% increase is a pretty big deal. This finally is actual evidence that inflation may be building in the economy.

Check out my Credit Karma reviews.

So, the rub is that the latest increase the Fed made to interest rates is still working its way through the economy. The question is, would that increase be enough to slow inflation, or do we need another? The answer, whether it is right or wrong, according to the Fed is that we need another increase. With this report, there is no doubt we’ll get one, unless there is a kablooey.

How about Earnings?

Stocks have performed almost exactly like you would expect them too. Companies that have been troubled lately reported earnings that were troubling. Companies that people expected to be doing well, had good earnings. Maybe the only surprise was Wal-mart, who did even better than expected, after doing better than expected already earlier this year.

For doomsayers who worried about the company’s future in the wake of its decision to boost up the minimum wage it pays employees, it looks like Wal-mart has figured out how to make money anyway.

Finally… Politics!

Tax cuts are coming! Tax cuts are coming! Or maybe not. You never know with Washington. Wall Street loves a tax cut, and the Fed loves calling tax cuts inflationary, but the current tax cut bill in Washington doesn’t really cut taxes so much as move them around a bit.

It takes back certain itemized deductions, in order to give out a bigger standard deduction. If anything, this tax bill might make your taxes a tiny bit simpler if you are one of those taxpayers who it near the break-even point on itemizing versus taking the standard deduction.

Now What?

It’s end of year time! That means that all of this is about to become meaningless background noise. When it comes to the U.S. economy, nothing is more important than holiday shopping season. If analysts get worried about holiday spending, the markets are heading down. If they like what they see, they’ll get a boost.

Often no one can tell if things are good or bad until the companies tell us next year. That’s why you often see a Santa Claus rally in December when in the face of limited data, spending seems good enough.

Here is a review of Digit.

Watch out for a bumpy January though. A Fed rate hike, plus actual holiday data, plus a new year, might just set us up for a solid correction in early 2018. Whether it sticks around, or is a temporary blip will depend almost entirely on if the job market keeps on going.

Kablooey!

You never know what will happen that has nothing to do with balance sheets, interest rates and economic data that can send everything sideways.

Kablooey is when something blows up (usually metaphorically, but not always) that causes a shock to the markets. There seems to be a lot of potential kablooey out there ranging from increasingly bizarre politics only loosely tethered to reality, to North Korea, to Russia, to the Russia investigation, to environmental issues, to terrorism. If something goes kablooey all this analysis goes out the window and we start over.

Google+

Other Useful Money Advice Topics

Ebates Review

Credit Sesame Review