Let’s discuss exactly why your favorite stocks have sold off, what’s going on behind the scenes, and how the stock market rotation may very well have begun to happen as interest rates start going up…Enjoy! Add me on Instagram: GPStephan
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Last week, investors began to worry because the INTEREST RATES on the treasury yield began going up…and, they see that as a BIG WARNING SIGN that inflation might start to increase, interest rates are getting more expensive, and borrowing is NOT going to be as easy as it was throughout all of last year.
Throughout the last few decades, INFLATION has actually been going down…and the FED has consistently been unable to reach their 2% annual inflation target, despite actively trying to CREATE inflation.
WELL…as more people are getting back to work…investors are spooked that…wait a second…there might be inflation…and here’s what The Federal Reserve said:
The first point was that, because inflation is measured in year-over-year periods, in March…it’s going to show HIGHER inflation than normal. Like, just took at this 10-year chart here:
Long term overall…inflation is going down…and, on a year by year basis, it’s looking okay. But, if we start the year over year beginning at the BOTTOM of the market…exactly one year later, it’s going to show a substantial amount of inflation, ONLY BECAUSE we’re measuring from the lowest point, and that’s deceiving.
He also said: we might see a SURGE of TEMPORARY inflation as people finally leave their house and go on all of those trips that they’ve been putting off, or go out to all the dinners they’ve missed out on over the last year…but, that’s just TEMPORARY and it’s nothing to worry about.
Right now is CERTAINLY a really strange time, where good news for the ECONOMY is bad news for the MARKET…but, you know what they say…the stock market is not the economy…and that’s been REALLY evident here. But, in terms of where we go after this…we need to talk about “The Great Rotation.”
This is the term used when investors ROTATE their money from GROWTH STOCKS, which benefit from low interest rates…and into RECOVERY AND VALUE STOCKS, which benefit from CURRENT cashflow and the economy re-opening.
The reason for this is the the stock market is FORWARD THINKING – meaning, we don’t value a company based on what it’s doing TODAY – but, instead, what we THINK it’s going to be doing in the future. But, as interest rates go up, those bonds compete with stocks – driving down the price, because higher interest rates eat away at future profits.
So, overall…here’s what you just need to know: The stock market is reacting to positive economic data, which just means that interest rates might go up SOONER than expected. That will lower stock values, and that will slow growth because borrowing gets more expensive.
HOWEVER…the stock market, as we all know, it’s entirely rational. GENERALLY, people over-react to good news, and over-react to bad news, with the reality being somewhere in the middle. During a sell off, it’s probably going to drop more than it really should – and that’s probably a good time to buy.
Just remember – last year, the BEST time to buy was when EVERYONE thought the market was doomed forever and it wasn’t coming back…you have to ask yourself NOW: are people over-reacting? Did anything fundamentally change about the companies you’re investing in? If not – why panic? If you were gambling, on the other hand – take a close look at what you’re able to tolerate, and then make adjustments accordingly – but, if you’re investing in long term, sound companies – don’t worry, keep buying, and keep smashing the like button for the YouTube algorithm.
For business or one-on-one real estate investing/real estate agent consulting inquiries, you can reach me at GrahamStephanBusiness@gmail.com
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