News And The Stock Market
What is the "Federal Reserve"?
The Federal Reserve also known as the Fed is the government organization that really deals with banks. The Federal Reserve manages banks, manages interest rates the banks charge and also controls the money supply as it relates to the United States.
How do Federal Reserve "announcements" impact the markets?
Usually the type of announcements that the Federal Reserve will make that will have the biggest impact on the market, has to do with interest rates. The Fed makes announcements that control the interest rates that affect banks lending to their best clients. As a result of that, the Fed is going to raise its rate and interest rates are going to go up, and vice versa when they're lowing their rate you'd expect interest rates to go down. This has the biggest baring on the market. But the Fed does have other meetings, conversations and announcements. They are also forward-looking. They talk about their view of the economy and inflation and what the market is doing. One tries to read those signals from the Fed and make a prediction on whether the Fed is going to raise or lower interest rates at their next meeting. The prime rate is the rate that banks charge their best clients for shot term lending.
Should Federal Reserve announcements impact my investment decisions?
When I'm thinking about investments, I'm thinking about long-term investment strategies. The announcements by the Federal Reserve are really short-term factors. I don't think we should be making investment decisions - long-term investment decisions - based on the short-term market gyrations that are going to happen relative to announcements by the Federal Reserve Bank.
How do interest rates impact the stock market?
The way that interest rates affect the stock market is really to do with the cost of capital. If interest rates start to go up, what that means is that a company is going to have to pay more money in order to get capital, so it's more expensive for them to do business. That's one way in which interest rates can directly affect the stock market and what might be happening with the company. There's some indirect effects that might be going on that increase interest rates, or a sign that we're going into an inflationary period that could also have a negative impact on the short term prices of stocks.
What is "inflation" and how does it impact my investments?
Inflation is really a long-term risk as it relates to our investments. All that inflation is, is it's the cost of the goods and services that we buy. Over time, the cost of goods and services go up. If we were just to take our money and shove it under the mattress, our money would actually lose value every year because the goods and services that we can buy with that money are becoming more expensive. So as investors, one of the minimum things we need to do is stay ahead of the rate of inflation and the taxes we pay for the growth of that money.
Do elections impact the markets?
When it comes to presidential elections and how those are going to affect the market, it's definitely going to have a short term impact on the market, not necessarily the day of the election, but as people predict who might be winning, the market's going to be having gyrations. Those are all short term factors as it relates to the market. It shouldn't affect us as investors, but traditionally, the Republicans tend to be business friendly, so the markets like Republicans because they feel there's going to be less regulation on business, and businesses are going to be able to go out and grow at a faster pace. Conversely, Democrats tend to want to regulate the markets more. They might be trying to put more restrictions on businesses in general, whether it's environmental or whatever it might be, that the market is fearful that it is going to affect the way that companies are going to be able to grow. It's a short term prediction on what's going to really happen with a next term. If we're long term investors, we are going to have our money invested through Democrats and Republicans, and through multiple multiple elections. So we shouldn't let an election impact our long term decision process on the design of a portfolio.
Are there factors that make it more likely for the market to go up or down?
When it comes to factors that are going to affect the market, it really goes all the way back to the economy. What you have to think about is that stocks make up our economy. So, we're looking at the broad basket of companies in our economy, we're owning stocks that are really tied together. So, it's more fundamental economic factors that are going to affect the long-term returns of our portfolio. Now, there are a lot of short-term up and down movements in the stock market. Really what those are, is the market trying to predict with the more longer, steadier factors that kind of drive our economy.
How does the strength of the dollar impact the markets?
The strength of the dollar, or conversely the weakness of the dollar will affect our portfolios in the markets in a few different ways. One of them is that it's going to affect the value of our international investments. When we invest internationally not only are we taking the risk associated with those international companies, but we're also taking the risk associated with the U.S. dollar, the currency. So, if we own international investments and the dollar is stronger, it starts to grow, that means that our international investments are worth less money when we trade those back to dollars. Conversely, if the dollar is going down, then those international investments are going to have a greater value relative to the U.S. dollar. That's one of the main factors when it relates to our investment strategy on a weak dollar vs. a strong dollar.
