The stock market is in some ways much like a chess game – prices of stocks usually are priced based on future expectations. In other words the folks at multi-billion dollar hedge funds have done the math, and have tried to play a long ways into the future. This can be said about the price of stocks, and the price of stock derivatives. The biggest reason why the stock market has been falling in recent weeks is due to the expectation that the Federal Reserve is going to raise interest rates – a low jobless claim rate cause stocks to sink faster because it increases the chances that the Federal Reserve will in fact raise rates to stave off inflation. By doing so, stocks are no longer as good of an investment relatively speaking compared to cash – stocks have risk and cash has little risk, so to increase interest rates means you can get more return for a no risk investment.
However, since the stock market looks to the future there is a very real possibility that stocks will have taken into account a Federal Reserve interest rate increase before the increase happens – and if the increase is lower than expected you should see the stock market start to jump back up due to its factoring error.
That being said, investors should still reassess the forward price earnings ratios of their stocks to make sure they aren’t holding on to something that is too expensive. Speculators will still hold onto company stocks which they see as having lots of potential even though they are priced very high. You can see that in companies like Tesla, where a company that doesn’t have a P/E ratio because it isn’t profitable yet still boasts a good stock price. On the other hand, a company like AFLAC has a very low P/E ratio of 10 because I suppose investors don’t see AFLAC coming up with the new invention of the century. Apple is priced at a moderately cheap price of around 15, as investors are weary that Apple may have had its day in the sun and won’t come out with any new revolutionary products since legend Steve Jobs has left.
My suggestion then is to sell off your expensive stocks and as the market drops incrementally buy back in as prices because attractive. As an insurance policy against the Federal Reserve deciding not to raise interest rates I suggest buying some precious metal company stock, and companies that will do well under higher interest rates include banks such as Bank of America. I want you to be the one who yells Checkmate before your portfolio yells it to you!
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