Working from home. Missing my free coffee!
- Jan 3, 2003
- Reaction score
- Laveen, AZ
I get all that. I am just thinking like the little guys. When I was a kid and interest rates were double digits, every retiree I knew was putting money into CDs, etc. Eventually inflation stopped because money got sucked off the street into savings. So I am just remembering my experience and thinking, 4% isn't going to make me move off buying discounted stocks that have historically averaged 8%. You get to that sure thing around 8% THEN I am trying to buy interest based investments for as long as I can lock them in.The federal funds rate is the rate at which banks can lend to each other. It heavily influences market rates, but it does not set them. The closest market equivalent of the fed funds rate is the 2 year treasury which is just over 4%. The fed funds rate was just increased to 3.25% today. This tells us bond investors are expecting the fed fund rate to hit 4% in the short term. I believe the fed eluded to the vicinity of 4.5% being their target.
4% isn't blowing anybody over, but it does cause investors to pause especially when considering long duration equities (companies or assets that won't be profitable until years down the road or ever). If I'm getting zero interest on my cash, I'm not missing out if I invest it into a fast growing business that may be years away from profitability. See 2021 and Cathie Wood as well as the huge asset bubble. We are already seeing what an increase of a few percentage points in mortgage rates is doing to home purchases.
That easy money is now gone and the yield curve is hinting if not screaming that a recession is coming and with that a likely decline in earnings. Do you want to invest in the face of a potential recession and falling earnings or take the sure 4%?
It's important to remember you are not buying a stock, but a business that has a valuation based on future earnings and market sentiment that can be disconnected from the fundamentals. If you buy a business, you should be expecting to at minimum make your money back by it generating income/dividends and/or selling it at a later date for a higher price.
Those fast growing, but unprofitable companies were able fuel their growth by borrowing at ultra low rates and further fuel growth by issuing shares at extreme valuations. This would dilute shareholders, but investors kept lining up and the price kept going higher. That worked great until it didn't. Now it's too expensive to borrow and their share price has collapsed with the euphoria gone.
So if you want to buy stocks, stick with high quality, profitable companies that are growing revenue and profits with strong balance sheets. Which is pretty good advice all the time. That or stick with index funds and just dollar cost average as that strategy will likely outperform all of us.