Understanding the key fundamentals that are impacting our investments
Earlier this week, I gave a detailed overview of what is going on in the markets, to the students in my financial group coaching program, RULE YOUR FINANCES™ ACADEMY. It focused on the current forces affecting the stock market & other financial asset classes and I wanted to share a few highlights.
I have to tell you, it’s been a WILD ride for investors so far this year (check out my comments further below on a few individual stocks)!
However, in order to grasp what is really going on, we need to understand some key fundamentals that impact our investments (in all asset classes), so that we can take strategic steps in creating and protecting our wealth.
Because I am all about teaching how to build long-term sustainable wealth. Remember, there is a HUGE difference between being Rich vs being Wealthy (and I’ll make sure to talk more about this in my next blog post).
Currently, investors around the world have been focused on the Federal Reserve’s Monetary Policy. If you are wondering, “Hey, Anna! What are you talking about?”
Don’t worry. I got you.
Monetary policy is the policy adopted by what is called a monetary authority, such as the central bank of a nation, through one of its committees.
You see, every nation has a central body who oversees their economic and monetary policies. Their actions influence the cost and availability of money, hence they make decisions that help promote stability and help the nation reach certain economic goals.
The central bank or monetary authority in the United States is The Federal Reserve – also known as The Fed- and the committee that decides where Fed Fund rates are (more on this below) is called the FOMC (Federal Open Market Committee).
In the UK, the Bank of England is the central bank and the MPC (Monetary Policy Committee) is the committee that decides the direction of rates, amongst other things.
THE ROLE OF CENTRAL BANKS
Monetary Authorities (or central banks) control two main things: Interest rates & Money supply. Their main goal is to make sure that INFLATION is in line, in order to ensure price stability.
If inflation, which is the general rise in prices, spirals, it can lead to economic instability in a country.
When central banks raise interest rates, they decrease the money supply in the system. Because when rates rise, it becomes more attractive to deposit funds and reduce borrowing from the central bank. On the other hand, when they lower rates, well you guessed it, the reverse happens. As lower rates make it more attractive to borrow and spend money (basically what we have seen the decade pretty much).
🇺🇸 The FOMC consists of 7 Governors of the Federal Reserve Board and 5 Federal Reserve Bank Presidents. They meet 8x a year to review economic & financial conditions, debate Fed Fund Rates, and vote on policies that help maintain sustainable growth for the country.
This bit is important: Fed Fund rates is the rate at which banks borrow from and lend to each other overnight.
Why does this matter?
When the Fed Funds rate changes, it triggers a ripple effect on short-term and long-term interest rates, foreign exchange rates, and many other variables, across the ENTIRE USA ECONOMY (it even influences other economies).
This includes the Stock Market!
Keep in mind, the USA stock market is one of the most important markets in the world. As such, what happens there affects investors EVERYWHERE.
Now, this is the thing…
In general, it takes around 12 months for a change in interest rates to feed through to the real economy.However, that’s NOT the case with STOCKS. The stock market’s response to such changes is pretty much IMMEDIATE.
I also want to explain that when Fed Funds Rates go up, so does the Discount Rate (the rate at which banks can borrow from The Fed directly).
This means that short-term borrowing costs for financial institutions RISE and when their costs go up, those financial institutions will charge their customers more to borrow.
This includes businesses, corporates, and people like you and I!
Let’s break this down even further…
As borrowing gets more expensive (rates rise) – whether it be a mortgage loan, personal loan, or credit cards – what happens is that consumers have less disposable income (or discretionary money) to spend. This in turn negatively impacts the bottom line of company’s revenues and profits.
Additionally, when looking purely at STOCKS – rising rates tend to reduce the multiples that investors are willing to pay for a share of a company’s profits.
That said, keep in mind that some stock market sectors actually benefit from a raise in rates (such as banks, mortgage companies, and insurance companies). Always remember to do your research and understand these kind of relationships, before investing.
🇬🇧 As we mentioned previously, the Bank of England oversees monetary policy in the UK. The MPC consists of 9 members (the Governor, 3 Deputy Governors for Monetary Policy, Financial Stability and Markets & Banking, their Chief Economist, and 4 external members appointed by the Chancellor). They too meet 8X a year to debate Base Rates and vote on policies.
In fact, just last week the Bank of England increased BASE RATES from 0.25% to 0.50%. This was expected, as inflation in the UK has been high (albeit lower than in the USA)…in December inflation was 5.4% which was the highest level since 1992 vs a typical target inflation rate of 2%.
This had immediate impact on UK consumers…me included!
In fact, just a few minutes after the rate rise announcement, I got a text from my mortgage lender advising me that my monthly mortgage was going up, since it is a variable rate mortgage (very common in the UK).
Yup, thanks MPC!
Last week was a pretty busy week for the TECH (technology stocks) sector as various companies presented their Quarterly financial results (Q4 2021).
Mamma Mia! That’s a lot of dough.
As a consequence, Facebook’s stock was down 26% at one point and shed around $230ish Billion in market value. According to reports, this was the LARGEST one-day loss ever for a USA company. And since this stock is one of the largest weightings in various indices, well more than ever we need to understand what is going on as it impacts investors on various levels.
Now, it’s important to highlight that NOT all of the TECH financial results that came out recently were bad.
For instance, Amazon’s quarter four results (announced last week) were solid and translated to a full year 2021 increase in net sales, operating income, and net income. Not only that, but Amazon broke the record for the greatest one-day increase in value EVER after it saw its shares rise around 13.5% last Friday, which expanded their market capitalization by around USD 190BN.
There was also good news this month from Google’s parent Alphabet who reported better-than-expected fourth-quarter earnings and revenue strong growth (up 32%) and plans for a stock split (20-for-1).
Remember a STOCK SPILT is when a company divides up its shares to lower the price and increase the overall number of shares available. So, if Google are doing a 20-for-2 stock split it means that that ALL existing shareholders will get 19 additional shares for every share they already own.
Google decided to split because at $3k per share, it is one of the more expensive stocks out there and by lowering their share price, it allows more people to invest in them. There were also some market reports that mentioned a lower stock price, could potentially translate in them being admitted into the DOW JONES index as well.
ECONOMIC DATA & STOCKS
In addition to the roller coaster ride from company quarterly earnings last week, the stock markets were also affected by economic data, such as the USA Payrolls that came out on Friday.
These monthly job reports are KEY, as they reveal the condition of the labor market and the overall state of the US economy.
As I mentioned previously…what happens in the USA impacts investors globally. The monthly payroll data was quite shocking, as the market expected a rise of 150,000 jobs versus the 467,000 figure revealed. That massive number impacted the stock market immediately (and it was no bueno).
Because it gives further ammunition to The Fed to lift interest rates faster and more aggressively.
However friends, don’t take everything at face value.
According to some reports the seasonal adjustments and revisions apparently skewed this number massively. Apparently, if those revisions hadn’t occurred the number would have been a lot more in line with market expectations.That’s why stocks bounced back a bit afterwards.
I do NOT give financial advice, so what I am about to share are my thoughts as a financial educator, money coach, and a long-term investor with experience in global financial markets.
I believe that we are facing some extraordinary circumstances, which can influence (both positively and/or negatively) our ability to build wealth.
For investors, these challenges come in the form of monetary & fiscal policy (just check out how much debt the Federal government undertook as a response to the pandemic), political gridlocks, government’s responses to coronavirus variances, technological disruptions, shortage in labor markets, supply-chain issues, and much more!
However, one of the biggest risks is INFLATION.
Truth be told, I don’t believe the inflation numbers we have been given from “official sources” are even accurate.
INFLATION IS MUCH HIGHER THAN THE CPI FIGURES THEY ARE TELLING US.
And I reemphasize this even today – 10th of February 2022 – when we’ve just had the U.S. consumer price index report telling us that inflation rose +7.5% from a year earlier. This is the LARGEST 12-month increase since February 1982.
Inflation is not only a gruesome reality in our life, but it has a deep impact on our cash flow management & investment returns, which impacts our ability to build sustainable long-term wealth.
Why do I say this?
Because when I look at the rising costs of my monthly supermarket bills, utilities, travel expenses, and household goods, I am DEEPLY CONCERNED.
Just have a look at Amazon’s announcement last week – they are increasing annual U.S. Prime subscription prices by 17%. That’s nothing. There are many items that we purchase in our home on a monthly basis, which I deem as NEEDS & not WANTS, which have risen north of 20-30%.
And it’s not only the price of goods that has gone up dramatically!
In fact, just yesterday my cousin in New York was describing how the vet bill for a procedure that her new dog needed was 50% HIGHER than what she had paid in December. Yup, the SAME exact procedure, just another pet. The bottom line? She had to pony out an extra $300.
However, as a Financial Educator & Money Coach, I want to remind you:
IN ORDER TO BUILD SUSTAINABLE WEALTH, WE MUST THINK LIKE INVESTORS.
This requires increasing our FINANCIAL KNOWLEDGE and working skillfully to balance the financial symphony in our personal finances. Included in this are elements such as money mindset, cash flow management, and of course learning to investing strategically.
This is exactly what I do in my one-to-one work & in Rule Your Finances™ Academy.
So friends, if you wish to chat about your financial situation and/or building your financial knowledge so that you can build wealth strategically, reach out and let’s get chatting. You can book a free 20min Discovery Call here: https://wearyourmoneycrown.com/book-a-call .
Wishing you Health and Wealth friends.
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