In this week’s issue of Market Slice, we discuss what’s moving the markets & affecting your investments this week with the latest look at market movement, government spending, and more!
Troubling Winds are Blowing
Bob Dylan may have helped spark a revolution with our Subject line back in the 60’s, but it applies to the markets today. And, to reference another Dylan song, the answer may be blowing in the wind. In this week’s issue, we will look at three harbingers of market troubles ahead.
Treasury Rates Rising
The week got off to another stumbling start, with a disastrous auction of 2 Year Treasury Notes reinforcing the growing uncertainty about the prospects for economic recovery.
Of course, markets have been “pricing in” the possibility of an eventual Fad decision to reduce its intervention in the bond market. This “tapering,” as they call it, would mean reduced demand for interest rate instruments across the board, which equates to rising yields and lower bond prices. However, those expectations are now being “recalibrated.”
Here’s how MarketWatch explains it:
Short-term Treasury yields began jumping last Wednesday, after Fed officials indicated that the tapering of $120 billion in monthly bond purchases “may soon be warranted” and penciled in one rate hike for 2022 — the first increase since 2018. A day after the Fed’s update, the 10-year and 30-year rates also spiked and have each climbed by roughly 15 basis points or more since policy makers clarified their plans.
The MarketWatch article goes on to state that “We’re seeing a short-term recalibration of the Fed’s policy outlook now that there’s clarity on tapering.”
Liquidity Contraction Ahead?
Just because the Fed is talking about tapering, doesn’t mean it’s going to happen. We’ve made the case here that the minute the market gets jittery about rate increases, Fed chair Powell is likely to cave on any rate increases.
However, Richard Duncan of Macro Watch feels differently. Here’s what he writes in his latest blog:
Since March 6th, the S&P 500 index has risen by 16% and existing home prices by 15%. Only Gold has disappointed. It has risen just 3%.
Now, however, it appears that the Liquidity Tsunami that has been pushing asset prices higher is about to come to a very abrupt end.
The Fed gave notice this week that it is likely to begin Tapering soon and aggressively.
That, combined with the Treasury Department’s plan to build up its cash in the Treasury General Account, suggests that the firehose of Liquidity that has driven asset prices sharply higher since March 2020 is about to be turned off.
If so, the steady appreciation of asset prices that investors have grown used to is likely to slow down and then stop.
The risk of a significant correction in asset prices during the months ahead is probably much greater than most investors imagine.
Do your own research and decide for yourself what these developments might mean for your investments, and your trading business.
Government Spending Impasse
In July of 2019, the government suspended the debt ceiling for two years. Here’s how the market responded to this kicking the can down the road” response to a political stalemate:
That first red bar down shows the S&P 500’s reaction to the decision to delay action on the debt crisis in 2019. Not a huge correction, but significant. It took 3 months for the market to recover and resume its upward climb. This is only the most recent example of ‘political football’ hurting market performance.
“In 2011, a debt limit standoff in Congress brought the country very close to a default before lawmakers finally struck a deal, but not without a downgrade of the country’s credit rating and significant market volatility.
Between July and October of that year the S&P 500 sank more than 18%.” – What the federal debt ceiling showdown could mean for you, CNBC, 9/20/21. This time, CNBC points out, lenders may start tightening up even before any decision is reached, reducing their exposure to any adverse consequences of the looming impasse.
Need help figuring out what’s going on in the markets? That’s what we are here for! FFR Trading’s Strategy Team will review your present portfolio and trading strategy and make impartial recommendations on how to navigate these stormy financial times. Call (800) 883-0524 to speak with one of our Strategists today!
Trading Plan Tip: Three Stages of Portfolio Growth
The best way to relate your shorter and longer time horizon goals to your actual trading activity is with a three-stage growth plan. Even though you have a deadline for each goal, you also need an “account growth target” to make everything fit together.
Whether you are starting small, with $10,000 or even less, or have a bigger account right now, you are only at Stage One of your winning trading plan. This is your first step toward the things you want to achieve in life… and the aim for Stage One is to rapidly increase your account balance, to position you for long-term gains.
Once you grow your $10,000 account to $50,000, or your $50,000 to $150,000 (or whatever target you set), you can start thinking about spending trading profits on goal fulfillment. But if you start spending your gains as soon as you have them, you are killing your chance to grow your account.
Stage Two is where you take your balance to the next level. If Stage Two means you are just reaching the mid-five figures range, it’s time to start thinking about diversifying your strategies into non-correlated markets and time frames. And if you are now moving into six figures with your trading capital, you can begin looking toward the fulfillment of all your most cherished goals.
This is Stage Three, where you are creating the life of your dreams, and building generational wealth.
Income or Growth?
There is always a trade-off between trading for income and focusing on growth. Obviously, any money you take out of your account to pay for the things you want, won’t be available for growing your wealth.
Albert Einstein is reported to have called compound gains “the most powerful force in the universe.”
For this reason, the aim of Stage One is to multiply your account balance by 300-500%. While it’s okay to reward yourself with a modest material goal while you’re at this stage, the primary objective is to get to Stage Two!
So, ironically, the payoff for whatever goal-setting work you’ve done is that you are going to be more motivated to defer many of your goals, as you build your wealth.
To make your goals meaningful in the context of your trading plan, you want to be clear on where you will be with your account growth, as well as having a “due date” for each goal. When you do this, you will have a powerful vision for your trading business. You will be instantly way ahead of the vast majority of retail traders.
FFR’s Strategy Team specializes in developing trading plans and strategies that match your important life goals. Call (800) 883-0524 , or click the Calendly link, to schedule a free consultation call!
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