Fed taking away the punch bowl

[aja8888]

QE is a double whammy: When they stop buying, rates go up and when they sell everything they bought, rates go up more. That will cause rates to be inflated until they sell everything, just like they were deflated when they bought it. I guess they could hold it all to maturity and let the treasury deal with the fallout.

They have already started tapering by buying less MBS's. With MBS's they can just let those mortgages "roll off" after the mortgages are paid off and that's what they typically do, but they have a huge load of them on the balance sheet so that will take a long while.

They are in a tight spot with inflation running amuck. If things get worse, inflation wise, watch for price controls on certain commodities like were implemented back after WWII and I believe in the early 1970's.

In any event, interest rates will go up on these balance sheet reduction and QE tapering measures unless the stock and bond markets crash so badly that the Pres/Congress goes nuts trying to protect their own personal portfolios! (then we may see the FED PUT!)

Notice that globally, many countries central banks have already tapered and are raising interest rates significantly. Check Japan, Russia, Canada, etc.

 

[OverThinkMuch]

Rate of change in inflation does not impact the returns of value versus growth stocks. Those returns you mentioned are computed in inflation adjusted earnings. IE Discounted Cash Flow (DCF) Formula.

If you're trying to split hairs over inflation vs interest rates, can you name a time when the U.S. ignored inflation and kept interest rates the same? The Fed keeps an eye on inflation so it can raise interest rates (the Fed funds rate) to combat it.

Investopedia captures my thought on this:

"Therefore, when valuing stocks using the discounted cash flow method, in times of rising interest rates, growth stocks are negatively impacted far more than value stocks. Since interest rates are usually increased to combat high inflation, the corollary is that in times of high inflation, growth stocks will be more negatively impacted."
https://www.investopedia.com/articles/investing/052913/inflations-impact-stock-returns.asp

 

[OverThinkMuch]

Not much with the FED is expected until March. But they are tapering QE by slowing down MBS purchases and that should help unload the FED's balance sheet.

Note the markets won't wait until March.

Polling the Fed revealed they have gone from 3 expected rate hikes to 4 this year. They've also gone past tapering - they might start tightening in 2022, which the market was not expected so soon.

10 year treasury rates moved up 0.27% in the past week. I think that signals the bond market finally believes the Fed will impact interest rates, and some of that is being priced in. But 4 rate hikes... I believe are 0.25% each. So that still leaves 0.73% of rate hikes not priced into the bond market.
https://www.treasury.gov/resource-c...interest-rates/Pages/TextView.aspx?data=yield

I have leveraged exposure to Financial Select Sector SPDR Fund (XLF), which went up +4% this week. That approach seems to be doing well so far, and I would assume performs well after each rate hike.

 

[Lsbcal]

The current Covid infections are horrific. I would not be too sure of the near term market direction. NY Times chart of USA:

link: https://www.nytimes.com/interactive/2021/us/covid-cases.html

 

[audreyh1]

Yeah, it’s bad. I’m very curious to see if the US exhibits the sharp spike then drop pattern as was seen in South Africa.

We’ve already exceeded over a million cases reported in one day, and the 7 day average will probably get there. And a lot of people are doing antigen tests at home which are not included in the reporting.

 

[pb4uski]

The current Covid infections are horrific. I would not be too sure of the near term market direction. NY Times chart of USA:

link: https://www.nytimes.com/interactive/2021/us/covid-cases.html

But luckily while most of the cases reported are from Omnicron, the severity of the higher cases caused by Omnicron are much lower.

In the last week I have heard about many friends and family who have contracted covid... much more frequency than a year or 18 months ago... but none of the instances mentioned resulted in hospitalizations... symptoms ranged from none (totally asymptomatic) to sniffles to higher fever and flu-like symptoms.

 

[Lsbcal]

But luckily while most of the cases reported are from Omnicron, the severity of the higher cases caused by Omnicron are much lower.

In the last week I have heard about many friends and family who have contracted covid... much more frequency than a year or 18 months ago... but none of the instances mentioned resulted in hospitalizations... symptoms ranged from none (totally asymptomatic) to sniffles to higher fever and flu-like symptoms.

Yes but will this slow the economy in a prolonged way? Will it slow the punch bowl removal? Will tech have a renewed run because work from home gets a refresh? Lots of uncertainty.

Hospitalizations in the USA are going way up and the CDC has said that this might peak later in the month. Is this a crisis brewing that we are too wherry to recognize?

I am scaring myself just theorizing on this.

 

[SecondCor521]

But 4 rate hikes... I believe are 0.25% each.

They typically have been quarter point changes, but the Fed could do bigger or smaller. They have done half point rate changes in the not-to-distant past.

I think they'd rather be gradual though. It seems to me their preference is to just do quarter point hikes or drops every quarter until whatever they're addressing has responded to their satisfaction. Some would say they start too late, aren't aggressive enough, or go on too long sometimes. While I can understand those comments, I think that the Fed has a very challenging job and more or less gets it right.

 

[audreyh1]

Yes but will this slow the economy in a prolonged way? Will it slow the punch bowl removal? Will tech have a renewed run because work from home gets a refresh? Lots of uncertainty.

Hospitalizations in the USA are going way up and the CDC has said that this might peak later in the month. Is this a crisis brewing that we are too wherry to recognize?

I am scaring myself just theorizing on this.

Yeah, hospitalizations are going to exceed prior peak simply due to the sheer numbers - much higher total daily number of infections.

And unfortunately the hospitals are in much worse shape this time around due to staffing shortages and burnout/fatigue.

 

[aja8888]

Two friends in my ROMEO group got the virus over a week ago. They have been absent from our daily coffee meetups. Both are in their 70's and did not require hospitalization. They just stayed at home and are past it with minimal issues. both had the Moderna vaccinations and booster which probably helped minimize the effect.

I know the above report has nothing to do with the FED's game plan but it's timely info. Here's a tidbit of info with respect to the FED's QE situation and what is in store for tapering:


From mises.org
Jan 8,2022

https://mises.org/wire/federal-reserve-keeps-buying-mortgages

"The total assets of the Federal Reserve reached $8.7 trillion in November 2021. This is just about double the $4.5 trillion of November 2016, five years before—and we thought it was really big then. Today’s Federal Reserve assets are ten times what they were in November 2006, 15 years ago, when they were $861 billion, and none were mortgages."

“The Federal Reserve now owns on its balance sheet $2.6 trillion in mortgages. That means about 24% of all outstanding residential mortgages in this whole big country reside in the central bank, which has thereby earned the remarkable status of becoming by far the largest savings and loan institution in the world……

This $2.6 trillion in mortgages is 48% more than the Federal Reserve’s $1.76 trillion of five years ago, and of course, infinitely greater than the zero of 2006. Remember that from the founding of the Federal Reserve until then, the number of mortgages it owned had always been zero.”

The rest of the article is a good read and provides additional historical items.

 

[MRG]

Yeah, hospitalizations are going to exceed prior peak simply due to the sheer numbers - much higher total daily number of infections.

And unfortunately the hospitals are in much worse shape this time around due to staffing shortages and burnout/fatigue.

+1
DW'S SIL needs surgery and she can't get it in Florida at this time, looking like Atlanta as long as she can get in there. That doctor is currently out with Covid but did a zoom conference with her. She is dealing with serious problems and at this time they don't know what her real issue is.

 

[FREE866]

This thread went off on a few tangents, but as far as the OP goes if you look at history fed hikes don't necessarily equate to falling stock prices. I think people wish it were that simple. Stocks typically peak at the end of a FED tightening phase when the yield curve inverts. We are far from that as of now.



The reality is that the yield curve is very healthy as of now ( 3 month bill rate of .09 and 10 year bond at 1.75). Thats a decent cushion for the banks and if in fact longer rates rise due to tapering they'll be in even better shape!

 

[OverThinkMuch]

Stocks typically peak at the end of a FED tightening phase when the yield curve inverts. We are far from that as of now.

The reality is that the yield curve is very healthy as of now ( 3 month bill rate of .09 and 10 year bond at 1.75).

According to the Investopedia definition, it's 2 year and 10 year treasuries.
2021 ended with 2y at 0.73% and 10y at 1.52%.
Jan 11th, 2y is 0.90% and 10y at 1.75%.

That's a big rise for less than 2 weeks, and it was triggered by new expectations from the Fed. I think we'll see more in March, when the Fed is expected to act.

https://www.investopedia.com/terms/i/invertedyieldcurve.asp
"One of the most popular methods of measuring the yield curve is to use the spread between the yields of ten-year Treasuries and two-year Treasuries to determine if the yield curve is inverted."

 

[Lsbcal]

According to the Investopedia definition, it's 2 year and 10 year treasuries.
2021 ended with 2y at 0.73% and 10y at 1.52%.
Jan 11th, 2y is 0.90% and 10y at 1.75%.

That's a big rise for less than 2 weeks, and it was triggered by new expectations from the Fed. I think we'll see more in March, when the Fed is expected to act.

https://www.investopedia.com/terms/i/invertedyieldcurve.asp
"One of the most popular methods of measuring the yield curve is to use the spread between the yields of ten-year Treasuries and two-year Treasuries to determine if the yield curve is inverted."

I personally use the 3month, 10 year values. The last times this inverted was May-19 and still SP500 was up 11% until Jan-20. But then it inverted again in Jan-20 and then we had a 2 month crash due to the pandemic news.

I don't think one can easily hang ones hat on the indicator alone. But inversion would be a go slow indicator I think.

 

[FREE866]

According to the Investopedia definition, it's 2 year and 10 year treasuries.
2021 ended with 2y at 0.73% and 10y at 1.52%.
Jan 11th, 2y is 0.90% and 10y at 1.75%.

That's a big rise for less than 2 weeks, and it was triggered by new expectations from the Fed. I think we'll see more in March, when the Fed is expected to act.

https://www.investopedia.com/terms/i/invertedyieldcurve.asp
"One of the most popular methods of measuring the yield curve is to use the spread between the yields of ten-year Treasuries and two-year Treasuries to determine if the yield curve is inverted."

The fed funds rate is much more applicable than the 2 year and here is why:
Banks borrow at the shorter rate not the 2 year rate. Fed funds are still at .25 and with the 10 year rising the yield curve is actually steepening, which helps banks tremendously. So even a few rate hikes by the FED has them in a good position.

 

[NW-Bound]

Yes, bank stocks have been rallying. I noticed because I have a few.

The effect does not help their customers. I have more stocks outside the financial sector, and this is of more concern to me.

 

[OverThinkMuch]

I personally use the 3month, 10 year values.

The fed funds rate is much more applicable than the 2 year and here is why:
Banks borrow at the shorter rate not the 2 year rate. Fed funds are still at .25 and with the 10 year rising the yield curve is actually steepening, which helps banks tremendously. So even a few rate hikes by the FED has them in a good position.

I think I'm missing a source of information? I've heard the 2 year and 10 year used to determine if the yield curve will invert. For yield inversions, I've never heard of using a 3 mo or 6 mo rate.

Some banks get the Fed funds rate, other relatively smaller banks have to pay a bit more. But when that effect reaches bonds, it's not always linear.

Right now the 10 year is increasing faster than the 2 year (and other shorter terms?), so no immediate concern over a yield inversion. The next two events of interest would be the March meeting of the Fed (FOMC), where they are expected to raise interest rates. And the Fed predicts inflation will subside in the first 6 months of 2022, so it will be interesting to see how CPI inflation (Fed's primary measure) changes over 2022.

 

[FREE866]

I think I'm missing a source of information? I've heard the 2 year and 10 year used to determine if the yield curve will invert. For yield inversions, I've never heard of using a 3 mo or 6 mo rate.

Some banks get the Fed funds rate, other relatively smaller banks have to pay a bit more. But when that effect reaches bonds, it's not always linear.

Right now the 10 year is increasing faster than the 2 year (and other shorter terms?), so no immediate concern over a yield inversion. The next two events of interest would be the March meeting of the Fed (FOMC), where they are expected to raise interest rates. And the Fed predicts inflation will subside in the first 6 months of 2022, so it will be interesting to see how CPI inflation (Fed's primary measure) changes over 2022.

The notion that banks borrow at the 2 year rate is a false narrative. Don't know what else to say. The 2 year rate does not correspond to banks business models or propensity to lend. That is why the yield curve is important. They borrow at fed funds.

As previously stated we can handle a few fed hikes before we have risk of inversion. And even after inversion historically stocks do well for a year or so after.

 

[Lsbcal]

I think I'm missing a source of information? I've heard the 2 year and 10 year used to determine if the yield curve will invert. For yield inversions, I've never heard of using a 3 mo or 6 mo rate.

Some banks get the Fed funds rate, other relatively smaller banks have to pay a bit more. But when that effect reaches bonds, it's not always linear.

Right now the 10 year is increasing faster than the 2 year (and other shorter terms?), so no immediate concern over a yield inversion. The next two events of interest would be the March meeting of the Fed (FOMC), where they are expected to raise interest rates. And the Fed predicts inflation will subside in the first 6 months of 2022, so it will be interesting to see how CPI inflation (Fed's primary measure) changes over 2022.

There is a paper or two from the Fed on the yield curve as a leading indicator of recessions and uses the 3mo 10year data

Link: https://www.newyorkfed.org/research/capital_markets/ycfaq.html#/overview

 

[JAB1950]

One of the first things I learned about the stock market was the phrase "It's better to be out of the market wishing you were in than being in the market wishing you were out". Currently things are orderly, folks rebalancing, etc. Things will get dicey when panic sets in and margin calls commence. Thats when you are more focused on seeing the return OF your money as opposed to the return ON your money.

 

[foxfirev5]

The notion that banks borrow at the 2 year rate is a false narrative.

Where did the poster OverThinkMuch state this?

 

[FREE866]

The notion that banks borrow at the 2 year rate is a false narrative.

Where did the poster OverThinkMuch state this?

In post above he said " I've heard the 2 year and 10 year used to determine if the yield curve will invert."


I've heard it from others too...again, it's a false narrative that people tend to repeat. If banks did most of their borrowing at the 2 year rate it would have validity, but they don't

 

[Lsbcal]

Yield curve inversion is a negative signal for stocks but it is not enough in itself as other factors enter into a recession scenario unfolding and stocks selling off. Some of those factors are unemployment rates going up, having stocks trending downward, stocks having hit high PE's etc. The time between inversion and big equity declines is quite variable.

Timing equity selling to avoid a recession decline is very hard because of the irregular nature of all those factors.

 

[FLJim]

Normal

Stocks go up; stocks go down. Has been happening since Day One. At 30 years old I bought when there was blood in the streets, because I thought "long-term". Now 45 years later I don't buy green bananas, and don't buy stocks that don't pay dividends or raise them each year. I really don't care about the price, just keep paying me. And they do. I only spend income, never capital.

 

[mickeyd]

Z-Z-Z-Z-Z wake me when the big explosion is just about to happen. In the meantime my 45/45/10 AA will continue to roll along...