Interest rates aren’t expected to go down soon. Here’s what you need to do to protect your portfolio!
Every Wednesday, we bring you insights about the world of investing because we believe that this activity can help you attain financial freedom through wealth creation. Today, we’ll talk about why it’s important for you to understand credit in spotting buying opportunities in the stock market. Excited to know more? Continue reading below!
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Interest rates aren’t expected to go down soon. Here’s what you need to do to protect your portfolio! During the first half of 2023, the S&P 500’s returns were at 16% while the Nasdaq composite and small-cap Russell 2000 were up by 32% and 7%, respectively. Fast forward to today, these indexes are shedding their gains. The S&P 500 and Nasdaq are both down by more than 6% since the start of August. Meanwhile the Russell 2000 has sold off 10%. All this is happening since the market is starting to listen to the U.S. Federal Reserve, a.k.a. the Fed. For the past year, the Fed has committed itself to bringing down inflation to its long-term target of 2%. While the agency chose not to raise interest rates during its September 2023 meeting, another hike is expected to happen before the year ends. Additionally, the Fed’s officials have said that interest rates will likely remain above 5% until the end of 2024. Due to this, it’s highly unlikely that interest rates will come back down to manageable levels until the Fed is absolutely certain that inflation has vanished. Given this economic outlook, strategists and analysts at big financial institutions are no longer counting on a “soft landing,” for the U.S. economy. Instead, these folks are now bracing themselves for a looming recession. Due to this grim economic outlook, finding a suitable investment strategy seems like a challenging task… and while that may be the case, it’s not entirely impossible. Understanding Credit According to Professor Joel Litman, Chairman and CEO of Valens Research and Chief Investment Strategist of Altimetry Financial Research, investors are doing themselves a disservice if they don’t try to understand a company’s credit situation. Monitoring a publicly traded company’s credit health enables an investor to know whether a firm could finance its debt and avoid the risk of bankruptcy. More importantly, knowing about a firm’s credit health enables savvy investors to find cheap, undervalued, or mispriced stocks in the market, netting them sizable gains in the long run. In fact, that’s exactly what happened in 2009 when Professor Litman advised his clients to hold on to airline stocks. Within a few years, the shares of airline carriers like Jetblue Airways and Delta Air Lines went up by 296% and 345%, respectively. At the time, the bond market treated many of these firms like they were at risk of going bankrupt. On the other hand, Professor Litman and his team saw that these companies had plenty of cash reserves that enabled them to finance their debt with no issues. They realized that once the market caught on to that, the stock prices of these firms would go up. — As we’ve discussed above, the secform4.com website is a very powerful tool in helping investors make well-informed investment decisions. As we’ve discussed above, knowing about a company’s credit situation is very useful in identifying opportunities in the stock market regardless of the economic situation. Now, we’re not saying that you need to know everything there is about credit to do a little digging of your own. You just need to take a quick look at the past few years of a company’s income and compare it total to the firm’s debt burden. This way, you’ll know whether a company can pay off its debts in the long run. Once you know about a firm’s credit situation, you’ll be able to assess whether to buy its stock or not! Hope you’ve found this week’s insights interesting and helpful. What picture comes to your mind when you hear the word, “fraud”? Learn more about how you can avoid getting eaten by “corporate wolves” in next week’s article! |
