Stock Trading Blog

Overconfidence by Investors Could be a Harbinger of Things to Come

stock exchange

Market optimism is at an all-time high based on investor sentiment. The markets have entered the new year at record highs, while the current bull market is now the second longest in U.S. history. Yet no one seems to be uncertain about where its headed. There’s no evidence of hedging in the markets or bearish sentiment anywhere.

A survey by Investors Intelligence revealed that 64.4 percent of investors expect the market to keep moving higher, while just 13.5 percent expressed more bearish thoughts. But some analysts view this overconfidence as a dark omen. The last time the spread between bulls and bears was so wide was right before a stock market crash in 1986. In other words, it could be the calm before the storm.

The only thing we have to fear is a lack of fear altogether

One way investors can get a sense of risk and uncertainty in the markets is to look at the CBOE Volatility Index, affectionately referred to as the VIX. Typically, a level of 20 or more means elevated risk in the markets, while anything under 15 means investors aren’t all that concerned about risk. Right now the VIX is just over 10. Moreover it hasn’t even breached the 15 mark more than a couple of times in the past year. On the surface it would seem as if investors think there isn’t a risk in the world that could derail this market.

But despite what it looks like, there are warning signs that the market is becoming overextended. The first thing we can take a look at is how much stocks are overvalued right now. The average median P/E for the S&P 500 is 14.68 – as of today, it stands at 26.78. What’s more is that, as interest rates climb, earnings should fall as companies spend more on loans and other financing expenses, making valuations even more unrealistic to maintain.

It’s hard to see problems when optimism is so high. It seems as if good news is priced into the markets, while bad news has gone largely unnoticed. With the current environment of rising interest rates, investors would be wise to exercise caution going into the new year. Only time will tell if the optimism continues throughout the rest of the year.

One thing investors need to keep in mind, though, is that the markets could easily keep rising throughout 2018, even as P/E ratios climb and earnings fall. Oftentimes, the fundamentals take a back seat to trading activity. If enough investors are bullish and buying stocks, then regardless of intrinsic values, stocks will rise. Historically, markets have continued to flourish even with extremely high P/E ratios. But as with all things, eventually balance must be reached.

 

 

Where Will Interest Rates Go in 2018 ?

interest rate graph on tablet

The Federal Reserve raised interest rates three times throughout 2017 with the current benchmark rate between 1.25 and 1.50 percent. The sharp uptick in bond yields towards the end of December could be a harbinger of things to come and investors are gearing up for a possibly volatile year.

The yield on the 10-year treasury is currently around 2.50 percent – a large gain from where it stood just a few weeks ago when it was in the 2.30 percent range. The threat of a larger deficit and expanding economy means rates may have only just begun to rise. As we head into the new year, the big question that looms is what actions will the Fed take and where will interest rates end up?

Interest rates and the economy

There’s some disagreement about how interest rates actually impact the stock market. Typically, a higher interest rate translates to lower stock prices because companies pay more for loans and operations financing, thus negatively impacting earnings.

But in practice, it seems higher interest rates don’t have a long term impact on markets in either direction. There may be some short term fluctuations, but overall companies and the economy as a whole is able to absorb the affect higher interest rates have on business. Already it looks like higher interest rates haven’t hurt stock prices. Last year, we saw interest rates jump three times, yet the markets continued to hit new highs on a regular basis.

For 2018, the Fed should continue raising short term rates due to a tightening labor market and rising inflation. As of November, the inflation rate stood at 2.2 percent and looked to be heading higher. The Fed will want to stay ahead of inflation and will likely keep raising rates to keep inflation in check.

The Fed is continuing to pull back bond purchases as well, bringing the total to $20 billion less per month. As it stands, there’s estimated to be $1 trillion less liquidity for 2018. Overall, analysts expect to see at least three more rate hikes before the end of the year.

By the end of 2018, investors can expect to see the yield on the 10-year treasury at 3 percent or even higher. For the foreseeable future, though, short term rates will outpace long term rates. Eventually, the long term rates will rise as well, but it will take a few quarters before investors start seeing that happen.

The Fed has been one of the biggest movers in the market over the past several years, with actions like quantitative easing influencing the markets. With the Fed taking the reigns, investors will likely base trading decisions off of what the Fed says. Markets are headed toward more volatile trading this year, but savvy investors should be able to profit from it.

 

 

The Business of Space Travel

space travel

Since the advent of the space program, the realm of space exploration and science has been almost completely government-led. But those days are over with a number of new ventures, including Richard Branson’s Virgin Galactic, Amazon’s Blue Origin and of course Elon Musk’s SpaceX company.

Private funding has greatly advance rocket science, leading to reduced launch costs and reusable vehicles. NASA has even begun using private companies like SpaceX’s Dragon capsule to deliver supplies to the International Space Station. There’s a big push for returning to the moon, exploring asteroids and even going to Mars. That leaves investors with one question – is space profitable?

Don’t start booking a flight to Mars just yet

The only real exposure investors have had to space over the past years has been through defense and communications companies. But with many new entrants in the space exploration business, it’s only a matter of time before investors will be able to directly invest in space endeavors.

Other than scientific pursuits, defense and communications satellites, some are now looking to asteroids as the next big economic boom. Asteroid mining may sound like the realm of science fiction, but there are actually a number of companies working on just that. Ventures such as Deep Space Industries and Planetary Resources are looking at mining asteroids within the next decade.

There have been a number of reports suggesting that even a single asteroid has enough gold and platinum to equal a trillion dollars or more, but investors shouldn’t put much stock in the idea of mining metals in space. If a company were to mine an asteroid for precious metals, they would bring back so much that it would essentially crash the market, making the metal worthless.

The alternative would be to slowly dole out the metal to avoid crashing the market similar to how diamond companies operate. The problem with that is the cost needed to launch into space and mine an asteroid makes that plan nonsensical compared to just opening up a mine here on Earth.

The real value of asteroid mining is water – something essential for long term sustainability and fuel in space exploration. But in order for asteroid mining to become a profitable business, there needs to be some type of space infrastructure already in place. There needs to be a demand for outer space waystations and refueling depots.

As launch costs keep diving lower, more possibilities open up for businesses interested in outer space ventures. One real possibility is real estate. As technology advances, setting up permanent colonies in space, on the moon, or even Mars is going to be inevitable. Experimental systems like Asgardia, the first self-named “space nation,” could become a reality in the next few decades.

 

 

Risk and Allocation Basics

investing

Investing in the markets is a bit of a double-edged sword. The higher the potential for gain, the greater the risk becomes. It works the other way too – the less risk you take on, the fewer gains you’re likely to have. Striking the right balance is essential for building the ideal portfolio. Taking on more risk than you’re able to handle is just as bad as taking on too little and ending up with a smaller investment than you planned for.

Some advisers place investors in one of two risk categories – aggressive and conservative. But in reality, there are many shades of risk tolerance that need to accounted for. Knowing what your own risk tolerance is and how to build a portfolio that meets those expectations is critical to long term successful investing.

Gauging your risk tolerance

One of the first things to consider when assessing your risk tolerance is how far away your investment time horizon is. The further away it is, the more risk you can take on since there’s more time to recoup from economic pullbacks and poor investment choices.

One simple way to determine what allocation you need is to take your age and subtract from 100. For example, if you’re 30 years old, then you would put 70 percent of your portfolio into riskier assets, like stocks, and 30 percent into more conservative investments, like bonds.

But that doesn’t take into account personal risk preferences. If you’re more aggressive, you can subtract from a higher number like 115 and then see what allocation you end up with. One of the most common allocations you’ll find in mixed mutual funds is a 60 – 40 split of equities and bonds.

There are plenty of easy online quizzes you can take to determine your personal risk preference. But you can probably figure out yourself by asking one question – how would you feel if your portfolio dropped 10 percent in a single day? If you’re the kind of person who would check their account multiple times in a trading day to see if you’ve lost money, you’re probably risk-adverse and need a more conservative portfolio.

Currently, advisers are recommending that investors lean more on the risk side than conservative. Even for those nearing retirement, keeping more in stocks than bonds will help keep your portfolio growing at a reasonable rate relative to withdraws. For those approaching, or in, retirement, the trick of subtracting from 100 doesn’t really work. You would end up with a heavily conservative portfolio and with interest rates as low as they are, the odds of growth in excess of withdraws is very low.

Proper allocation is not a reason to ignore due diligence. Just because you design a portfolio with the ideal mix of stocks and bonds doesn’t mean that it’s diversified or that the assets chosen really fit your investment objective. Make sure you make investment choices that align with your risk tolerance before committing yourself.

 

 

Dogs of the Dow and Other Popular Portfolio Strategies

stock market loss

Successful investing requires more than just picking winning stocks. It takes planning and strategy to incorporate all assets in a portfolio in order to accomplish a goal. Some investors prefer growth stocks, while others like value stocks more. But there are other kinds of strategies that don’t require a lot of thought or analysis to work.

One of the oldest methods is known as “buy and hold.” It’s exactly what it sounds like. Investors pick a handful of stocks and keep them for years – many times over a decade. The idea is that the stock market trends higher over time, so holding stocks over the long term eliminates short term fluctuations in value. The problem with this plan though, is it doesn’t take into account the very real possibility of picking poor stocks that never pan out as expected.

One strategy allows for annual changes to stay on top of things, but doesn’t require more effort than simply checking yearly gains on a list of 30 stocks.

A method to the madness

The “Dogs of the Dow” is a rather unique investment strategy. Basically all that’s involved is taking the worst performing members of the Dow Jones for the year and building a portfolio made up of just those stocks. It seems counter-intuitive to pick only losers, but the data actually shows otherwise. There’s a strong correlation between members of the Dow that under-perform one year and then outperform the following year.

Here’s why this works – stocks that are part of the Dow are usually well-established brands that pay a consistent dividend. Since they are unlikely to alter their dividend payments, that means that stocks paying a high dividend relative to its stock prices in near the bottom of the business cycle and should move higher in the coming year.

For the most part, this simple strategy seems to work. Other than outlier years like the financial crisis in 2008, the Dogs of the Dow tend to outperform the Dow Jones average. It’s also a strategy best utilized by investors with a long time horizon who can withstand down years in a portfolio.

While there’s plenty of evidence to suggest that under-performing members of the Dow will outperform the next year, past performance is never a guarantee of future performance. Picking stocks and building a portfolio without giving proper consideration to diversification and fundamental analysis is akin to gambling – not investing.

The key takeaway from this esoteric investment strategy is that investors can use this methodology to apply to their own analysis. Finding quality name, out of favor stocks whose fundamental story is still sound is exactly what value investors do so well. By sticking with well-established companies whose long-term growth story is still valid, investors can make a profit by buying their stocks when they’re out of favor.

 

 

Trading Futures: The Essential Guide for Beginners

businessman

Most investors are familiar with investment vehicles like mutual funds, stocks, bonds, ETF’s and even commodities, but few are knowledgeable about futures. A basic futures contract is simply an agreement between a buyer and seller to buy or sell a particular asset at a specified price on a specified date.

Futures were originally designed for farmers who wanted to be able to hedge their bets against price changes in the crops they grew. Between the time a crop is planted and the time a crop is harvested, the price of that commodity could change for the worse. Instead of risking loss on a crop, a farmer can instead trade a futures contract that locks in an earlier price where a profit will be guaranteed. Of course, if the price of the crop goes up the farmer will miss out on the opportunity to sell at the higher price.

While futures started as agricultural commodities, they now cover oil, natural gas, metals, interest rates, foreign currencies, bonds and even stock indexes and are available to anyone to trade.

Dipping your feet in the futures market

Investors who are familiar with stock trading may find it difficult to adjust to certain peculiarities of futures. One of the biggest differences is the way futures are settled. A method known as a mark-to-market accounting means that positions are tallied up at the end of every business day to ensure that margin requirements are met. While that might not seem like a major obstacle to deal with, the fact that futures tend to use leverage means investors could theoretically lose their investment in a single trading day.

Leverage in stock accounts usually means borrowing money on margin in order to invest more money into stocks. But the leverage is less than double the initial amount, making it much safer than futures. Futures contracts can use leverage as high as 200:1, making even a 1 percent change in a single day a huge deal. Investors can earn profits far in excess of those they could earn in stocks, but at an equally high cost with the risk of losing it all just as easily.

With mark-to-market accounting, investors can actually be right in the long-term about an asset, but due to a single day fluctuation, lose their investment principle. Investors need to consider the risks before investing in futures.

While many brokers allow futures trading, most have fairly strict requirements that need to be met in order to trade. A margin account is a must, meaning your credit score comes into play, while the initial amount needed to trade a futures contract can be in excess of $50,000 per trade. For investors interested in trading futures, they should carefully consider how it fits into their portfolio strategy.

 

 

Here’s Why You Should Stay Far Away from Bitcoin

new year predictions

Regardless of whether you’re an active trader or just someone with internet access, you’ve probably been hearing a lot about Bitcoin. The crypto-currency can’t seem to avoid the headlines right now and it’s because of the incredible growth its undergoing.

In the past three months, Bitcoin has risen nearly 400 percent, going from around $4,000 per coin to roughly $19,500 per coin. That kind of explosive growth has investors reeling, wondering if they missed the boat or if they can still hop on now. But with quick gains comes extreme volatility, with Bitcoin rising and falling more than 10 percent over the course of any given 24 hour period.

As crypto-currencies become more popular with offshoots like Ethereum and Litecoin already following in Bitcoin’s footsteps, investors need to understand what these types of currencies are and what their real worth is.

The idea of value

One of the biggest criticisms of Bitcoin is the fact that it only exists as computer information – there is no physical or tangible asset to hold. But many fail to realize that the U.S. dollar technically falls into the same category. Originally the dollar was a note that was backed by a physical asset – gold. The dollar could be exchanged for it’s equal value in gold and vice versa.

But the modern banking system has moved far away from the gold standard and consumers place their trust in fiat money instead. The dollar isn’t backed by a physical commodity, but is backed by the full faith and security of the U.S. government. They allow the laws of supply and demand to determine value, rather than assign value based on a material.

Despite not being supported by a physical asset, the dollar holds value around the globe. Foreign countries like China hold billions of dollars worth of U.S. treasuries, so keeping the dollar’s value high is in the best interests of everyone.

On the other hand, Bitcoin is not only unsupported by a physical asset, but it’s unsupported by a government. The lack of government might appeal to some consumers, but it also makes it far more volatile and subject to fraudulent activities.

The sudden rise in value might have some investors nervous, but others take it as a sign that Bitcoin is now a bubble that will eventually collapse. It’s reminiscent of the infamous tulip craze that happened in the Dutch republic in the 17th century. Speculators began buying up tulip bulbs and the demand and price went far beyond any kind of real value one could attribute to actual tulip bulbs. Eventually the price became unsustainable with no more new buyers to support the high valuations and the bubble collapsed, leading many to bankruptcy.

Analysts predicting Bitcoin to rise to $200,000 or more are only feeding the bubble. Without any real support, the real value of Bitcoin is best compared to the value of the dollar – that is, only valued by supply and demand. Once buyers begin to taper off, Bitcoin will likely fall, taking investors down with it.

 

 

The Hidden Dangers of Defensive Stocks

bull and bear market

Holding defensive stocks is important to even the most aggressive portfolio. They can help balance out volatility and returns through steady gains and dividend payments. If the market undergoes a correction, defensive stocks typically hold their ground relatively well – and could even go higher depending on the industry. But defensive stocks are often misunderstood by investors who think that they are immune to danger.

All stocks, defense included, are subject to similar risks, like interest rates, foreign exchange rates, economics and more. What makes a stock defensive is it’s resistance to economic pullbacks. Typically a stock that has a large market cap, pays a dividend and in an industry that’s non-cyclical is considered defensive. Investors need to keep in mind though that defensive stocks have weaknesses all their own though and aren’t always the best choice to load up in your portfolio.

Key dangers of defensive stocks

One of the most common risks associated with defensive stocks is opportunity cost. Hedging your bets can help reduce your exposure to risk, but it comes with a price. Taking the safer course can sometimes mean missing out on better gains elsewhere.

When the economy is strong, being more aggressive is a better strategy, even if you’re conservative. Being too safe with your investment picks means under-performing indexes like the S&P 500 and resulting in a portfolio that doesn’t meet expectations. Avoiding loss doesn’t mean much if the end result is still too low to provide for retirement.

Another risk that can be associated with any stock is overvaluation. Many conservative investors tend to ignore the fact that defensive stocks can become overvalued, but when demand is high and volatility is trending higher, defensive stocks slowly lose their power. Investors begin buying these types of stocks en masse and valuations grow higher defeating the purpose of holding a stock with a low price-to-earnings ratio.

Finally, one of the biggest benefits to holding a defensive stock is the dividend yield. This steady stream of income not only helps bolsters total annual returns, but also provides some downside protection. But dividends can make some investors complacent when they should be concerned.

Dividends aren’t guaranteed. Some companies offer dividends that exceed income making them poor choices for an investment. Eventually the company will have to cut its dividend to reduce outgoing payments and become cash flow positive. Investors should be wary of companies that are paying dividend’s well in excess of its peers.

 

Diversification is still the best defensive strategy for any portfolio. Even if you’re a conservative investor, holding only defensive stocks subjects you to risks that more aggressive investors won’t have to worry about. Mixing in various stock types gives a portfolio the best variety to weather any economic storm.

 

 

What to Expect from the Markets in 2018

new year predictions

This late in the year, all eyes are already focused on what 2018 will bring to the markets. While the year isn’t quite over yet, we’ve seen the resurgence of the oil industry following the OPEC-led collapse, the continuation of economic expansion and a steady Fed policy of increasing interest rates. Will 2018 be more of the same, or are there big changes headed our way?

Looking ahead to next year

The market will undoubtedly end with another banner year hitting new highs – or at least near them. The S&P 500 is up around 20 percent year-to-date and isn’t likely to change much before January begins. And as the new year approaches, analysts are hard at work making predictions and listing their reasons for why 2018 will or won’t be a good year for investors.

To begin with, let’s take a look at two opposing viewpoints from two of Wall Streets most respected analytical firms – Credit Suisse and Charles Schwab.

Firmly housed in the bullish camp, Credit Suisse expects 2018 to be another positive year with the S&P 500 ending higher by roughly 13 percent. They cite low economic recessionary risks, along with a positive rate environment and strong business cost-cutting initiatives that should outweigh any losses in slower growth.

Market deregulation should be a boost for financial stocks and the technology sector will continue to expand as IoT begins to become more integrated with other technologies. Positive earnings growth in the 7 percent range should make defensive sectors like utilities and telecommunications the year’s biggest under-performers, as well.

In the other corner, Charles Schwab appears to be more skeptical about what 2018 will look like. Analysts believe that the economy is in the late stages of economic expansion and on the verge of a recessionary cycle with a string of pullbacks throughout the year.

PMI, the main manufacturing index, is at its peak and should come back down next year and other indicators of late stage growth, like an increase in capital spending, have already been observed. The end of central bank stimulus and the slow rise of interest rates should begin to impact growth in 2018 with a marked boost of volatility in the markets.

Both companies cite relevant data as supporting factors for their theses, leaving the decision up to investors as to how to proceed. Final 4th quarter GDP results, scheduled to be released in early 2018 may be the final determinant.

As investors get ready for another year, there are many variables that could make 2018 another bullish year or the end of the second longest bull run in history. The return of rising rates could be an indication that the end is near, but with economic growth showing few signs of slowing and corporate profits still increasing, it seems premature to declare that a bear market is right around the corner. Still, with volatility expected to rise next year, investors should remains cautiously optimistic as we head into the new year.

 

 

What the Holiday Shopping Season Says about the State of the Economy

holiday shopping season

The holiday season is here and businesses across the country are gearing up for their biggest year yet. Retail sales growth is expected to be up 3.8 percent from last year according to the International Council of Shopping Centers (ICSC). And despite the popularity of online shopping, physical brick-and mortar stores are expected to contribute the most with 91 percent of shoppers buying from a physical location.

For the majority of retailers, the biggest earnings of the year happens in the 4th quarter during the holiday season. Considering that the stock market is at all-time highs and the U.S. economy is continuing on an upward trend, investors are anticipating a big year for retailers.

The consumer gauge

One of the biggest components of growth in the economy is consumer spending. And during the holidays, the post-Thanksgiving weekend tells the story of what investors can expect for the year.

Black Friday has traditionally been the single largest shopping day of the year with retailers offering single day sales to entice consumers. But recent years have shown that another similar holiday is even bigger for shoppers – Cyber Monday.

According to research by Adobe Insights, total spending for Cyber Monday this year is expected to hit a record high $6.59 billion with sales topping 16 percent year-over-year. The National Retail Federation recorded 116 million shoppers on Black Friday last year, but more than 122 million on Cyber Monday. The demand for shopping over the weekend is so high that many retailers are expected to carry over sales and offers into Tuesday as well.

The increased retail demand for the holidays tells investors that consumers have a lot of confidence and faith in the economy right now. Despite the slow rise of interest rates, consumers aren’t shy about spending money with savings taking a back seat. Even markets like real estate are showing resurgent signs of growth with high end housing prices jumping on increasing demand.

As consumers spend more this season, the economy should benefit – and investors along with it. More spending also means that wages are going up as well. It’s another positive takeaway that investors have about the current state of the US economy.

Despite the positives in the numbers this holiday season, investors will want to keep a close watch on the GDP data for the 1st quarter of 2018. Some analysts believe that the economy is at its peak and could start to contract next year. Only time will tell which direction the economy will take for 2018, but based on the data right now, there doesn’t seem to be much cause for immediate alarm.

 

 

What the Fall of the Coal Industry Means for Your Portfolio

self-driving car

The energy sector might be a cyclical industry in terms of stock performance, but the need for energy is something that will always exist. But with so many various forms of energy available, traders are left with a hard choice to make about where to invest.

The political climate seems to shifting away from fossil fuels, like coal and oil, and favoring greener alternatives, like solar and wind. But tried-and-true methods still have plenty of pull globally with countries like China and India heavily reliant on coal and oil.

In the United States, the coal industry appears to be in its death throes with technology making solar power more competitive, and in some cases cheaper, than coal. Despite the proclamations of the current political administration, coal isn’t likely to make any real comeback. But as coal starts to be phased out of the modern energy infrastructure, there’s going to be a major vacuum that investors could potentially take advantage of.

The rise of a new industry

Coal’s popularity in the energy industry has always been the low-cost relative to alternatives. But cheaper natural gas and renewable energy sources are ultimately putting the coal industry out of business. It’s not a political attack that’s driving coal down, it’s simple economics.

About a decade ago, coal was responsible for around half of U.S. electricity generation. But that percentage has fallen to less than 30 percent – under the 33 percent that natural gas currently provides for. Meanwhile, renewable energy, including hydroelectric, has jumped from the low single digits to more than 10 percent and keeps trending higher at an exponential rate.

Another threat to coal is the length of time needed for a coal plant to be built and come online compared to the relative quickness of a natural gas plant. Many companies feel that by the time a new coal plant comes online, it will no longer be cost effective, leading to a gradual phasing out of coal-fired power plants.

One of the biggest campaign goals for the Trump administration has been bringing back coal jobs to America. However, the coal industry only represents about 50,000 people – far less than other energy industries like solar. Places that have historically been known as capitals of the coal industry like Pittsburgh have already changed in response to the lack of coal opportunities. Pittsburgh’s largest employers now are University of Pittsburgh Medical Center and Carnegie Mellon University.

One industry some investors believe will replace coal is nuclear. But that’s unlikely to happen as nuclear plants take decades to fully come online. The initial price of a nuclear power plant is extremely cost-prohibitive, as well making nuclear an unlikely successor to coal. It will be renewables, such as solar and cleaner fuels like natural gas, that will replace the coal industry in the coming decades. Investors that want to stay in the energy sector should stay away from coal in favor of these types of industries.

 

 

Is a Strong Dollar Good for the U.S.?

stock market loss

One of the most common rhetoric in American politics is the campaign promise to make the U.S. dollar strong. At face value, it sounds like anything that’s strong should be a good thing, but globalization makes the answer tricky.

The short answer of whether a strong dollar is good for the U.S. or not is – it depends. There are a variety of factors at play that make it a good thing or a bad thing. The issue is a political one, though most Americans wouldn’t be able to explain exactly how or why a strong dollar would be beneficial or detrimental to the economy.

The case for a strong U.S. dollar

A strong dollar translates to one thing – more purchasing power. Because the dollar is used as the primary international currency of choice and the fact that most Americans own their wealth in dollars, a rise in its value would be a good thing. Consumers’ money would go further with imported goods, since they would be relatively cheaper compared to the country or origin’s currency.

For non-U.S. citizens, a strong dollar would be also be positive thing, since it makes their manufactured goods cheaper for Americans to buy. That means higher demand for products and a boost to the local economy.

In the U.S., imports are far higher than exports. That means Americans buy more goods from overseas than they sell. A strong dollar means goods like televisions and electronics from overseas become cheaper and the standard of living goes up.

The case for a weak U.S. dollar

If the dollar becomes weaker relative to other currencies, U.S. manufacturing would receive a boost, but the purchasing power of consumers when it comes to imported goods would go down. A healthy manufacturing base is generally good for the economy and raises the GDP. Exports would rise and imports would fall as a result.

But because the U.S. export-import industry is so lopsided, a rise in manufacturing wouldn’t be the primary reason a weak dollar would be good. The best result of a weaker dollar comes in the form of a relatively lower foreign debt load. The less the dollar is worth relative to other currencies, the less debt the U.S. has.

Unless America were to borrow money in order to boost domestic investments, higher debt to fund expenses is a bad thing. If the economy can’t expand to meet the higher interest expense, then a devaluation of the dollar might be a way to correct the situation.

There’s a case to be made that the dollar is currently overvalued as it stands. Because it stands as the international currency of choice and a reserve currency, a high dollar value is viewed globally as a positive thing. U.S. debt held by other countries is worth more if the dollar is high, so an atmosphere of artificial inflation is keeping it strong. A future devaluation may be required for the U.S. to keep its status on the global stage.

 

 

Invest Like a Pro with Stop and Limit Orders

financial banker at work

It’s one thing to understand the concept of buying and selling stocks, but successfully putting that concept into actual practice means understanding how trade orders work. Different types of trade orders tell a broker how to execute a trade. There’s more than one strategy that can work and it all depends on what type of trade you want to do.

Instead of relying on market forces entirely when it comes to placing a trade, you can use stop and limit orders to narrow down price points and ensure the best possible deal. There’s no worse feeling than placing an order to buy or sell a stock at a price you want, only to have it come through later at a price you didn’t want.

How to use stop and limit orders in your portfolio

A general stock order is known as a market order. When a market order is placed, you are essentially telling your broker to buy or sell a stock, but you don’t specify a particular price. Thus the actual price you buy or sell at could differ from what you saw when you placed your order – in some cases the difference can be significant. If you want to specify a price, you’ll have to use a stop or limit order.

A stop order tells you broker to execute a trade only when the specified stock reaches a particular price. This type of order is best used to sell a stock. For example, let’s say you owned 100 shares of XYZ stock and it’s currently trading at $20.50. You want to lock in profits at $20 so you place a stop order, also known as a stop-loss order, at $20. Now if the stock drops to $20 or below, you trade order will be triggered and the stock will be sold. If it doesn’t fall, no trade takes place.

A limit order on the other hand sets a minimum or maximum price that has to be reached for an order to go through. Let’s go back to our example with XYZ stock trading at $20.50. If you wanted to buy the stock when it hit $20 a share, you could place a limit order to buy at $20. If that stock drops, the order will be executed; if it doesn’t, then no order is placed. If you already owned the stock, you could place a limit order to sell at $21 per share. If it reaches that level, the stock will be sold.

Successful investing requires a certain time commitment in order to achieve. Putting in the extra time and effort to understand how different stock orders function will help take your portfolio to the next level. By eliminating the possibility of buying or selling a stock at a price you don’t want, or worse yet, not selling at a price you want, you can streamline your gains.

 

 

Demystifying Bonds for the Average Investor

stock market loss

Bonds are considered one of the most essential parts of a well-balanced investment portfolio, but most investors are lost as to how bonds actually work. Even experienced investors only hold bonds as part of a mutual fund and don’t actually own bonds directly.

Unlike stocks, bonds are valued both by their face value as well as their interest payments. Navigating these two benefits can be difficult, which is why they say bond investors are the smartest guys on Wall Street. But bonds can be understood by even beginning investors, all it takes is the right tools to be successful.

Bond basics

Bonds pay a yield semi-annually but are generally displayed on an annual basis to avoid confusion. Other than the interest rate, bonds also have a face value that can rise or fall based on market conditions and interest rates. Finally, the time left until the bond matures, or pays the full face value, is part of how a bond is priced. The further away the maturation date, the more sensitive to interest rates it will be.

One of the most confusing issues for investors is how a bond is priced. Let’s say a bond has a face value of $1,000 and has a yield of 4 percent. To simplify matters, we won’t factor in the semi-annual nature of the bond. That means every year, the bond will pay out $40 in interest to investors. When it matures, the investor will also receive the $1,000 face value of the bond.

If the price of the bond falls though, that affects the yield. Let’s say the same bond falls to $950 – that would make the yield 4.21 percent instead. If the value of the bond rose to $1,050, then the rate would drop to 3.81 percent. Keep in mind that the face value is always $1,000 so regardless of how much you pay for the bond, $1,000 is always the final payout amount.

When interest rates change, bonds are the first asset to be affected. If interest rates rise, bond values will fall to compensate for the increased interest rate. On the other hand, if rates fall, investors will pay more money for the same bond.

 

Bond pricing can be complicated when statistics like duration are considered. Duration is the weighted average of the length of time until the recovery of the bond’s present value considering all future interest payments. While an understanding of the math involved isn’t necessary to be a bond investor, the most important thing to take away is the fact that time until maturity is critical when considering how its value will change with interest rates. Remember, the longer away the settlement date, the more volatility the bond will experience.

 

 

The Political Impact to the Markets

wall street

The economy functions largely as an autonomous entity dependent on things like consumer spending, manufacturing, interest rates and a slew of other factors. Usually, it’s not too difficult to determine the impact a particular market or event has on the markets, but there’s one risk that tends to be enigmatic to investors – political.

One might think that politics plays a big role in how the economy operates. As such, elections are carefully considered by investors with different segments of the economy expected to be impacted by new policies and changes. And while there’s no argument that politicians can enact new tax laws and other reforms that impact businesses and consumers alike, the actual effect is harder to pinpoint.

Politics in a portfolio

Proper portfolio management includes accounting for risk. Some risks, like interest rates, foreign exchange rates and equity prices can be effectively prepared for and hedged against. Political risk though is harder to plan for.

Elections, despite what the pundits might tell you, are hard to predict. Democrats and Republicans trade positions in Congress and the White House on a regular basis, making it virtually impossible to have a long term strategy for hedging against political risk.

The good news is that politics doesn’t actually play much of a role in the stock market. Investors might buy or sell certain sectors in response to a political event, but those changes are almost always temporary and minimal. A short term rally may occur given the election of a new president, but considering there’s no fundamental reason for the rise, it’s all led by speculative buying.

In truth, the president has very minimal power when it comes to affecting the economy. Despite numerous claims otherwise, the president really can’t do anything directly to change employment numbers, inflation, interest rates or the stock market.

Even certain changes, like Trump’s infrastructure spending plan, is a double edged sword that balances out. There is a short term gain for the markets, but over the long term, more government spending could prove somewhat detrimental to the economy.

The Federal Reserve is sometimes thought of as a political entity, but in truth it operates independently. It has allegiance to no political party with its stated goal of maximizing employment and managing inflation being its only mission. Changes in interest rates are done as an economic tool, not a political one.

The best advice for investors is to tune out any political talk and focus on economic fundamentals instead. The media tends to make news out of almost anything and investors tend overreact to any event. There’s a common saying on Wall Street, “Buy the rumor, sell the news.” In other words, take advantage of short term fluctuations and speculation, but don’t hold out hope that they’ll make any real difference in the long term.