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| *Ostroff, Fair and Company>>>Investing |
What has been going on this past week causing the market to drop the way it is? |
What has been going on this past week causing the market to drop the way it is? Interest rates. Europe raised theirs .25% while in America, they have remained unchanged, but are not expected to be lowered anytime soon. There have even been rumors that the Fed might even raise them. This has caused the sell-off we've seen this past week. I've lost a couple percentage points, but I'm still well within my tolerance limits. A good thing to know about a stock is how much it is really worth. That way, even if the stock has a bad day, you know what it is trully worth, so bad days won't faze you. interest rates. It had run up a bit and it was probably time for a pullback. The catalyst, however, was probably interest rates going up. When interest rates go up some people take advantage of the higher rates by pulling their money out of the market and buying bonds and cd's (with the new higher rates). Seems like the selling is already done though as today (friday morning) things are up a bit, so we'll just have to see where it goes from here. When interest rates go up, stocks (and outstanding bonds) tend to fall in value. Higher interest rates do 2 things to stocks: 1) Newly issued bonds will now be issued with higher coupon (or interest) payments. This makes them more attractive to investors. Some investors will sell stocks to seek out higher-paying, but relatively safe, bonds. The stock selloff causes stock prices to fall. 2) Higher interest makes it more difficult for companies to borrow money. This hurts their ability to grow. Also, if companies do borrow, they pay more of their revenue towards interest. These two actions tend to damper profits. Anything that hurts profits can potentially hurt future dividend payments. Since a stock's value is (theoretically) based on the future discounted dividends, this lowers the stock's value. Less people demand it, which then lowers its price. Download a free copy of my book and read chapter 16. It will explain all of this in better detail. Click on my profile and read the info to get the website. Its all about expectations of rates from the US. Not too long ago everybody is expecting a rate cut. Now everybody is talking maybe there will be no cut and some is even speculating a rate hike within this year. Just wait for all these news to be priced in first, then we'll see. If market sentiment remains good, there will be a recovery. If not, well this will be the beginning of a down turn. |
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