Week of April 4th, 2022 - Taking Gains Back From Russia
Three things to recap this past week.
1. Taking Gains Back From Russia
Stocks began the week on a high note but then retreated leading to marginal gains and losses on the week for all three major indexes. At the market’s top on Tuesday, the Dow Jones, S&P 500, and NASDAQ had all recovered their losses from Russia’s invasion of bordering Ukraine.
For the first time since COVID wasn’t around and we didn’t have to wear masks, the yield curve inverted. This means the 2-year Treasury bond rose above its 10-year counterpart. This is taken as a strong signal that short-term interest rates could increase and a possible recession could be up ahead.
Unfortunately for investors, the first financial quarter of the year has been a tough one. Even with March being overwhelmingly positive with a growth of 3.6%, the first quarter of 2022 saw the market decline by 5.0%.
Like March Madness’s crazy team narratives, oil has been extremely volatile. After exploding to unseen highs, the price per barrel is now back down below $100 again. However, there is one positive statistic investors will love to see: the economy generated over 400,000 new jobs, seeing unemployment fall by a fifth of a percent.
2. Return of the Value Investing
The “value” in value investing is slowly starting to come back. In the last two decades, the market has put significant value into future success, favoring growth stocks. In particular, the markets have been biased towards technology stocks which were predicted to outpace the market. These growth stocks have been consistently outperforming value stocks in the last few years as technology stocks rule the major indexes.
A “value stock” is one whose true value is less than the one it’s currently trading at. These types of stocks tend to have low P/E ratios, meaning their price-to-earnings ratio is quite low. To maximize this value stock “awakening,” buying an ETF is a wise decision.
Allowing you to diversify your portfolio as well as invest in many different companies’ stocks, these ETFs are option investors ought to consider. However, when choosing an ETF, be wary of the “Value Trap,” which occurs when buying many small-cap value stocks. Instead of the stock’s value increasing to what investors believe it should be, the stocks bottom out and you’ll end up losing money.
3. Preying on Tether
Short sellers are now preying on the downfall of Tether, a cryptocurrency whose price, by definition, shouldn’t move. Tether is a type of stablecoin or a cryptocurrency whose value is tied to an external asset. In this case, Tether is tied to the price of the U.S. dollar and, in theory, should essentially always be worth $1. With around $82 billion worth of Tether circulating the market, it’s the largest and most popular stablecoin. Far from a household name, Tethercoin is still used incredibly often to act as a way to buy cryptocurrency without using a traditional bank.
The company managing Tether stated that the short sellers were using false information and sowing distrust to make a profit from the less informed. Additionally, the representative from Tether’s management stated that its stablecoin was tested countless times and proved extremely stable. The working theory is that the short sellers were charging a management fee and using the stability of Tether to work at virtually zero risk.
The market gained back all its losses from experienced inventors’ reaction to the Russian invasion of Ukraine. With value stocks on the rise, ETFs are a great way to diversify your portfolio and capitalize on the opportunity. Tether, a cryptocurrency whose price doesn’t move, is being shorted by investors.
StreetFins Stock Pitch Competition
The StreetFins Stock Pitch Competition’s first-round submission window is currently open and will close on April 8th! Participants must submit a 5 minute or less stock pitch, with those moving onto the second round presenting live to our audience on Zoom! Interested in winning the $2,000 prize pool from our sponsors? Sign up with the link below!
A Beginner’s Guide to Value Investing: The PB Ratio
One of the most important technical indicators to value investors is the P/B ratio, or the Price to Book ratio. This ratio effectively describes the fundamental value of a company relative to its balance sheet. This strategy has been largely pioneered by the most famous value investors of all, Benjamin Graham and Warren Buffet. The P/B ratio, used in conjunction with other metrics and evaluations, can lead to the discovery of a solid value stock to add to your portfolio.
Valuation: Discounted Cash Flow
One extremely common valuation technique is discounted cash flow (DCF). DCF involves predicting a company’s future cash flows, which refer to the total amount of cash being transferred into and out of the company, and discounting those cash flows to arrive at present values for those cash flows, the sum of which is the present value of the company, or its estimated intrinsic value, or true, real value. Discounting refers to using a discount rate to find the value of a future amount of money today. The discount rate is a rate of return representative of the compensation for bearing the risk of the investment.
In this episode of Finance Simplified, we put together a summary of the best insights from each of our 30 episodes for you to learn for the new year!
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