At a very basic level, an interest rate is a fee the lender charges the borrowers for lending money. In U.S. the Federal Reserve dictates the interest rate charged between the banks – or the federal fund rates. By controlling the interest rates, the central bank can control inflation in times of economic growth, and inject stimulus to the economy in economic slowdown.
When the federal reserves increase the interest rates during period of economic growth, it automatically discourages borrowing – high cost to borrow. This way, companies and individual think more before spending. In contrast, during an economic slowdown, lowering the interest rate causes lending costs to go down, therefore more spending.
Do you feel wealthier today compared to last year? According to the Federal Reserve, you should, as the household net worth of Americans rose 2.5% between the second and third quarters of 2013 for a total of $77.3 trillion. (Source: “Financial Accounts of the United States,” Federal Reserve, December 9, 2013.) The Federal Reserve calculates household net worth by looking at the value of stocks, homes, and other assets, minus mortgages and debts. In fact, the nominal total wealth is at a record high. Adjusted for inflation, the current level of net worth is approximately one percent below the peak prior to the Great Recession. On paper, it appears as though econom ... Read More
As many of you already know, the gross domestic product (GDP) estimate for the third quarter came in above estimates at 3.6%, with most of the increase coming from higher inventory levels. But I would like to look at something slightly different than the inventory buildup. I think we are all aware of what happens when inventory builds and consumers don’t buy—corporate profits get hit. However, looking at the data a bit closer, there are more worrisome signs aside from excess inventory that are also pointing to tough times ahead for corporate profits. The S&P 500 has had a stellar run since its bottom in 2009. Part of the reason for this is that corporate profits have expanded t ... Read More
This past weekend, a friend of mine made a statement that there must be a large amount of economic growth coming shortly because of the booming stock market, driven by investor sentiment. As I told him, the two are not necessarily tied together. Over the past few months, we have heard about how economic growth is about to accelerate here in America, and this has helped drive investor sentiment in the stock market higher. However, I think there are many questions that need to be answered before we can assume economic growth will reach escape velocity, and investor sentiment is heavily contaminated with a large addictio ... Read More
What does it take to develop a successful, long-term investment strategy? This is the correct question to ask, rather than asking simply which stock(s) to buy. To be successful over the long term, you need to have a comprehensive investment strategy that takes into account your goals and risk parameters. Having said all of that, at the end of the day, I’m looking for a company that has both an attractive valuation and the ability to increase corporate earnings at a rate above market expectations. One way to develop an investment strategy is to look at the factors driving corporate earnings for a specific industry and individual company. A great example is the automoti ... Read More
The winds are changing, my friends. For most of the past year, each time the S&P 500 sold off, it was a buying opportunity. I think we are at an inflection point this year, as we all know nothing lasts forever. I believe it all began to emerge last week with the Federal Reserve meeting. As long-time readers know, over the past couple of months, I’ve been warning that once the Federal Reserve begins to adjust monetary policy, this will have a negative impact on the S&P 500. With the Federal Reserve continuing to reduce its asset purchase program, investors are now calculating the le ... Read More
When it comes to building a balanced portfolio, investors like to find stocks that provide both value and growth. If you’re a value investor, you’re always on the lookout for companies that are cheap relative to their earnings, assets, or price-to-book value; in other words, they look for what’s undervalued. A growth investor, on the other hand, likes to look at publicly traded companies that are in a position to rapidly increase their revenues and profits; they want stocks with excellent long-term growth potential. This could include those stocks that have provided revenue and earnings guidance that is expected to outperform the market or industry. While sticki ... Read More
The S&P 500 and Dow Jones Industrial Average may be trading at record highs, but not everyone is enjoying the so-called signs of economic growth. In fact, there isn’t too much for the average American to cheer about when it comes to the U.S. economy. Fortunately, investors looking to benefit from real economic growth may consider diversifying their investing boundaries and looking at exchange-traded funds (ETFs) with exposure to one of the most mature economies in the world: the United Kingdom. As Wall Street and the Federal Reserve cel ... Read More
In light of the events that occurred in Cyprus over the last couple weeks, many investors may be wondering if it’s safer to hide your retirement savings under a mattress. After all, what’s to say it couldn’t happen here? In June 2012, Cyprus, like many members of the European Union (EU), sought a bailout after suffering heavy losses. The company’s banking sector was hit by the economic crisis that crippled Greece. Cypriot banks had made loans to Greek borrowers that were worth 160% of the country’s gross domestic product (GDP). In mid-March, the EU and the International Monetary Fund (IMF) agreed on a bailout for Cyprus, which included Cyprus raising billions of euros of its own money by ... Read More