The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: NYD3030 on June 26, 2013, 01:26:11 PM
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Last week, the Fed indicated that it expects the economy to continue to improve and the market freaked out.
Today, revised GDP numbers for Q1 show that the economy is doing much worse than we thought, and the market breathes a sigh of relief...
Is it just me, or is this system officially bonkers?
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Yeah, I had that same thought while reading the headlines this afternoon. Crazy.
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NYD - It's not a "system" gone bonkers - it's (a bunch of) markets.
Going back to the beginning of human commerce, markets have been driven by facts* and emotion. Sometimes it's more of one or the other. In times of bubble or bust, markets are driven almost purely by greed or fear.
Don't try to relate announcements like "We might taper quantitative easing" or facts like GDP to market movement. They rarely correlate.
Finally, remember that indices like the Dow are selected samples of the market. So you're not seeing the performance of every publicly traded equity. (Which is why indices like the Dow and NASDAQ never perform the identically.)
Keep calm and carry on indexing (tm)
*Keep in mind not everyone has access to all information. So even if all trading were 100% fact-based, it still wouldn't be an equal playing field.
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A strong economy means the Fed is likely to withdraw the liquidity punch bowl.
A weak economy means the continued flow of cheap money.
No contradiction, just serious manipulation.
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Along the lines of what footenote said, don't make the mistake of ascribing a single-minded intent to the market. People buy and sell stocks on any given day for reasons that have nothing to do with the day's headlines.
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Markets work based on expectations of the future relative to what previous expectations were. If news comes out that things will be bad but not as bad as the market previously expected, prices will rise. The reverse is also true. It's not at all contradictory for the market to go up on bad news and down on good news. There are a lot of factors at play.
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A strong economy means the Fed is likely to withdraw the liquidity punch bowl.
A weak economy means the continued flow of cheap money.
No contradiction, just serious manipulation.
I would think that Fed's manipulation should reduce volatility by making it easier to predict where the market will be in the future -- it will either perform mediocre because the economy improved but the Fed withdrew stimulus or it will perform mediocre because the economy did not improve but the Fed continued stimulus.
It seems to me that this short term volatility should be inefficient and I don't understand why it's not eliminated by i.e. traders buying/selling on the huge random down/up spikes respectively that seem to be caused by snippets from Bernanke/BLS reports that are relatively irrelevant long term. Another way of looking at it: when the markets are moving up and down this much, *someone* must be buying high/selling low and losing lots of money. Why do they continue to do that?
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It seems crazy to me too. Bernanke's words were essentially "the economy is strong" and the markets freaked out. I used it as an opportunity to buy some more stock because it almost seemed too good too be true.
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Here's the way I understand it:
Economy getting better -> Fed may ease QE
QE is keeping interest rates down, encouraging investors to buy riskier assets
If interest rates go up, investors may sell riskier assets (stocks) and move to less risky ones (bonds, savings accounts)
In theory, anyway. Bottom line is that the Fed is perceived to be propping up asset prices via QE, as opposed to asset prices being supported by underlying economics. Thus, economy gets better -> market drops. Economy gets worse, by inference QE "taper" may get delayed -> market rises.
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I am not a finance person, but it seems that the people freaking out are traders, not investors. Traders seek short term gain. Investors seek long term gain. The traders see the tapering of quantative easing as reducing the prices of stocks vs. other forms of investing in the short run, so they're trying to sell before the other traders. For long term mutual fund investors like myself, this is a blip.
This reminds me of the situation in the early Clinton Administration. Whenever the economic numbers looked good, the stock market would go down. The fear of higher interest rates would send the Dow down 100 points (back when that was a big deal). Yet the stock market ended up going way up with an economy that was actually improving. The stock market went up 1000 points from about 3000 to about 4000 from 1993 to 1995. This occurred even before the dot.com bubble. In 1995, I don't think the WWW or the Internet had really affected market expectations yet.
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yes, it is some combination of sweet irony or just an oxymoron
Market diving on news that it might be strong enough to not need QE = WTF
Market surging on news that... *phew*, we probably still need QE = LOL
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IIRC.
I thought it was a well researched and known fact that the market does not move in conjunction with the economy...but it does move in conjunction with the interest rates.
If looked at this way the reaction of the market makes perfect sense.
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see? I need to stick to indexing. I always thought it was about earnings season and assumed growth trajectories. Various macro factors function (I thought) as just little currents or winds. Perhaps it's actually a stage 6 tornado and earnings are like crumbs.
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Last week, the Fed indicated that it expects the economy to continue to improve and the market freaked out.
Today, revised GDP numbers for Q1 show that the economy is doing much worse than we thought, and the market breathes a sigh of relief...
Is it just me, or is this system officially bonkers?
The market in general is worried about interest rates going up. When the Fed indicates that the economy is improving, this increases the likely-hood that the Fed will decide that it is a good time to raise interest rates (which they control by way of how QE is going into the system).
A huge number of people are invested in bonds right now and when interest rates go up the value of those bonds goes down, thus people in bonds loss money (this is because they are invested in bonds that are locked with the older, lower interest rates; whereas the newer higher interest rate ones are more desirable).
Also stocks may possibly drop when interest rates rise because it means it costs businesses more money to borrow money.
An interesting point though is that for future Mustachian savers, interest rate hikes are a good thing, in general, because you will have the opportunity to buy bonds with higher interest rates to help fund your lifestyle for FI with more passive income. Thus, cheer on the Fed for higher rates.
Also, if we ever go back to the high interest rates that we got in the Carter years, i.e. 10-15% for a government bond, buy a bunch of those for 30 year terms to lock in the high rates. Avoiding buying any bonds now because they don't pay crap.
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No worries guys, I continue to DCA my index funds as planned, even the bond funds and REITs that are "overvalued". I know that day-to-day movements in the markets don't change anything for me personally. I just was thinking about this system as a whole, as a means of generating and directing human efforts. I understand the interest rate effect on the economy, but still, the fact that strong growth makes the markets drop perhaps exposes an absurdity in the system.
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Keep calm and carry on.