Week of May 2nd, 2022 - Down We Go
Three things to recap this past week.
1. Down We Go
The market was rough yet again for investors, as this week marked the fourth straight decline of the major U.S. indexes. With the Dow Jones down 2% and S&P 500 down around 2.9%, the NASDAQ trailed for another consecutive week with a loss of around 4%. The tech-heavy index is now down over 23% since November.
In this year’s first quarter, the GDP and economy of the US regressed, surprising economists and worrying investors. After posting a full-year growth of 5.4% last year, the drop of 1.4% in the first quarter is something economists believe is a temporary setback. The unfortunate news for investors is piling on this week like APs and finals for students.
Yield rates have surged to 2.9% as bond prices increase and people pull money out of the market. Though the forecasted interest rate hike harms investors’ wallets, it’ll be slightly set off by the strengthening of the US Dollar. The policy tightening of the Fed Reserve has bolstered the status of the dollar in the world economy.
2. Poison Pill
Elon Musk — a visionary, leader, and genius that doesn’t need an introduction — just bought Twitter for $54.20 a share, or $44 billion. Around 10 days ago, Elon Musk made a bold announcement that he planned on purchasing the social media company on which he frequently posts.
In response to this surprising request, Twitter implemented a poison pill plan. Essentially, this defense mechanism meant that if Musk bought the stock, his shares would immediately go down in value by a significant amount, losing him a serious amount of money. However, after a week of negotiations between Musk and the Twitter Board, Twitter ran out of options.
With no other options on the table, Twitter was forced to accept his offer. Musk is supposedly a champion of free speech and preventing bots from clouding Twitter. Normally a deal like this wouldn’t happen so rapidly, but Twitter’s lack of offers and Musk’s impressive net worth expedited the deal and helped it close so quickly.
It’s no secret the Federal Reserve wants to slow down inflation, and they pulled a new trick out of their sleeves: the I-Bond. The I-Bond is a type of Treasury security that was made to “protect America’s money from rising inflation.” The government will now issue them at a historically high 9.62%, an interest rate that will surely attract new investors. Parking your money in these types of bonds is very attractive to some investors with higher inflation, leading to more money being taken out of the market.
This will slow economic growth but also stunt inflation, the goal of the Fed Reserve at the moment. The risk of defaulting on these bonds is practically zero, leading many investors to place their money in these bonds in such a time of uncertainty. The NASDAQ is down 23% from its record highs, in clear correction territory, and these bonds have never looked better.
The market fell for another straight week with the NASDAQ now firmly in correction territory from its highs. All over the news was Elon Musk buying Twitter. However, a poison pill was in his way as Twitter refused the sale. The Federal Reserve raised the interest rates on its I-Bonds to further stop the growth of inflation.
Investment Grade and High Yield Bonds
Bonds are an important component of many investors’ portfolios. In the past, they offered a stable return compared to other investments such as stocks, which are more volatile. There are many types of bonds, but most of them typically fall into one of two categories: investment grade or high yield. In this article, we’ll be looking at investment grade and high yield bonds and how they offer returns on bonds.
The main difference between the two bond categories lies in their credit rating and how investors view each category’s risk in each.
Introduction to Dollar Cost Averaging
I’m sure we have all heard that putting away money regularly is key to building a successful portfolio and that trying to time the market is simply a loser’s game. The dollar-cost averaging strategy helps an investor mitigate that risk by putting a fixed amount of money in a stock or fund over time, regardless of fluctuations. It is likely that you are employing this strategy right now if you own a 401K or Roth IRA account to which you contribute at regular intervals.
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!
“Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value.” — Warren Buffet