Andrew Marshall Financial, LLC

Category: Investments

  • Why the Recent Stock Market Sell Off? (November 2018)

    Why the Recent Stock Market Sell Off? (November 2018)

    I am writing today to make you aware of some things that are going on behind the scenes that are contributing to the current stock market sell off.

     

    Last week I went to the Fixed Income and Dividend Investing Summit and then yesterday I received a market commentary (from Guggenheim Investments) describing the same scenario I heard about at the Investing Summit.  It’s true that the market can be a bit of a rumor mill and very susceptible to groupthink, but whether the groupthink is correct or just rumors, if enough people believe it might be true, the markets will react.

     

    Here is what I learned.  The current worry for professional investors is the implications of rising interest rates.  More specifically, the ability of corporations to make their loan payments to investors. In the past ten years when interest rates were very low, corporations took on a lot of debt by offering bonds.  Even Apple, with its hundreds of billions of dollars in cash, offered bonds for the first time ever in 2012. From a Marketwatch article about Apple: “The bond debt load has now grown from zero to about $96.6 billion as of July 1, [2017].”  Almost 100 billion owed in five years!

     

    Now there are a lot of companies out there who have done similar things, but are not anywhere near as stable as Apple.  In fact, there are trillions of dollars of bonds with the triple B rating rather than Apple’s AA+ rating.

     

    Market size of BBB Rated bonds (yellow) vs High Yield bonds (orange). [From Bloomberg]
    The ratings are important because “investment grade” bonds must have four ratings:  AAA, AA, A, BBB. Anything below BBB is not investment grade and is therefore a “high-yield” bond.

     

    Here’s why these ratings matter and why the investment universe has become nervous.  If a corporate, investment grade bond fund owns a bond that is no longer investment grade, then the fund MUST sell it.  Investment grade bond funds are only allowed to own investment grade bonds. All the popular bond funds (like the Vanguard Total Bond Market ETF (symbol BND) and the iShares Core US Aggregate Bond ETF (symbol AGG)) are investment grade funds.   Basically everyone owns these types of funds in their 401(k).

     

    The AGG bond fund has been in a steady decline throughout 2018.

    If funds like these are forced to sell there could be huge problems.  The size of the BBB market is $2.5 trillion dollars according to Bloomberg.  But the size of the junk bond market is only $1.2 trillion dollars. It is impossible for the junk bond funds to be able to buy all the bonds that the investment grade funds could be forced to sell.  There is only one outcome. Massive price declines! I haven’t seen any estimates on how much this scenario would affect the price of popular bond funds, but suffice it to say that it would be huge.

     

    With these worries about bonds taking huge hits, and the high valuations from large stock market returns over the past ten years, decision makers have decided to pause their buying of stocks and reduce their risk.  Hence the current stock market sell off.

  • The Folly of Stock Market Predictions

    The Folly of Stock Market Predictions

    Happy New Year, and welcome to market prediction season!  At this time of year, every Wall Street firm and business magazine puts out their predictions for the stock market’s upcoming year.  After much analysis and secret sauce, they come up with a final number for the value of the S&P 500 and the Dow 30 indexes on December 31, 2018.

    Should we believe them?  No.  Is it worth reading the articles about these predictions?  No.

    There is a certain amount of hubris exhibited by these firms, believing they can predict the future.  They like to believe that intellect and analysis gives them a level of control, and with this control, they can foretell what will happen in the future.  What they are really doing is guessing.  No matter how many calculations are done, it is still a guess about the unknowable future.

    At Andrew Marshall Financial, LLC we believe the future of the markets cannot be predicted.  The possibilities of what could happen today, let alone any time in the next year, are just too broad.  It is a waste of time and energy trying to make these predictions.  Do yourself a favor and don’t read these types of articles.

    Furthermore, there is no reason to base an investment decision on someone’s guess about the future.  It is far better to invest using a system that has been proven to work.  A system that rather than predicting, establishes expected returns and is diversified using the best in class fund for each asset.