Is Recession Coming? Watch These Signs

recession market scare crash downturn stock business men
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There’s no time stamp on when recessions pop up, or how long they last. Our last recession was two months long at the onset of the COVID-19 pandemic in 2020, making it the shortest on record.

The one before that was the Great Recession starting in 2007 and lasting 18 months, the longest downturn since World War II.

If the stock market and economy are keeping you on the edge of your seat, you can look for signs of a recession before it hits. That can help you determine whether you should start preparing for a recession, and the act of getting your finances ready for a possible downturn should give you some peace of mind.

An inexact science

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Before we dive into the possible warning signs of a recession, it’s worth noting that predicting a recession is not an exact science.

So, while the following warning signs historically have served as indicators that a recession might be on the horizon, that doesn’t mean they are foolproof. The economy is dynamic, and there is no list of indicators that have preceded every past recession.

Still, the following indicators tend to be a good place to start looking if you’re worried about whether a recession lies ahead.

Sign No. 1: The yield curve inverts

Positive yield curve
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Typically, long-term bonds pay more than short-term bonds, as illustrated above. This makes sense: If you agree to tie up your money for longer periods, you should be paid more for your trouble. This is why a five-year certificate of deposit (CD) pays more than a one-year CD.

Rarely, however, the reverse is true: Long-term bonds start paying less than short-term bonds. When that happens, a recession often follows. In fact, this situation, known as an inverted or negative yield curve, has proven a highly accurate recession predictor.

Why would long-term bonds ever pay less than short-term bonds? The nation’s central bank, the Federal Reserve — or “the Fed” for short — controls short-term rates, but the market controls the rates on longer-term securities.

The Fed can raise short-term rates, which is exactly what they started doing in March 2022, for the first time since 2018. But if investors start thinking things don’t look so good in the economy, they keep their powder dry by buying long-term bonds. The more they buy and bid up the price, the lower the rates on these securities go.

The yield curve did dip into negative territory in late March 2022. It quickly recovered, but it’s worth noting that it was the first time the yield curve turned negative since 2019 and, before that, 2006.

What to watch: You can find Treasury yields on the U.S. Treasury Department’s website. CNBC also tracks in real time the spread, or difference, between the yields on two-year and 10-year Treasurys.

Sign No. 2: The Leading Economic Index slips

Jenga game at risk of slipping
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The Conference Board’s Leading Economic Index (LEI) is one predictor of global economic health. The Conference Board, a nonprofit research group, describes the index as one of “the key elements in an early warning system to signal peaks and troughs in the global business cycle,” with the LEI specifically anticipating turning points in the business cycle.

Monthly dips in the Leading Economic Index aren’t alarming. However, year-over-year drops in the benchmark have been followed by recessions in the past.

The LEI increased by 0.3% from February to March, and by 1.9% over the six months leading up to March, so there’s no reason for concern based on this indicator right now.

What to watch: Keep an eye on Conference Board press releases or media coverage of the index.

Sign No. 3: Interest rates rise

Federal Reserve
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Government monetary policy can be another economic bellwether. We’ll explain what to watch, but first, a quick refresher on how it works.

The Federal Reserve influences the economy by using a couple of tools. One of those tools is control over short-term interest rates via the target federal funds rate. If the economy is in the doldrums, it can lower the federal funds rate to encourage consumers and businesses to borrow, buy and invest, which stimulates the economy. That’s why this rate was kept near zero for years following the Great Recession that began in December 2007.

On the other hand, if the economy is growing too fast, that can lead to rising prices, otherwise known as inflation. To cool things down, the Fed raises the federal funds rate, which serves to put the brakes on the economy by discouraging both consumers and businesses from borrowing and spending as much.

While interest rates don’t directly affect the stock market, if businesses have to pay more in interest, that hurts their profits, which will ultimately be reflected in a lower stock price.

Also, as rates rise, investors often sell stocks, driving prices lower. Why do they sell? Think about it: If you can earn high interest from insured bank accounts or guaranteed Treasury bonds, why take a chance on stocks?

Again, the Fed resumed raising the federal funds rate in March 2022, marking the first rate hike since 2018. The hike in May — a half-point — was the largest increase since 2000.

What to watch: The Federal Reserve’s Federal Open Market Committee posts statements, which include any votes to change the federal funds rate, after each of its regularly scheduled meetings. The meetings are also widely covered by the financial media.

Sign No. 4: Consumer sentiment falls

Upset shopper at a grocery store
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Another economic indicator published by the Conference Board, the Consumer Confidence Survey, monitors everything from Americans’ buying intentions and vacation plans to their expectations for inflation, stock prices and interest rates.

After an uptick in March, consumer confidence fell slightly in April. The Consumer Confidence Index was at 107.3 for the month, down from 107.6. During the recession at the beginning of the COVID-19 pandemic, the index was less than 90.

Fluctuation is normal, especially as economic conditions shift. The pandemic, the rising costs of products and the war in Ukraine can change how people feel about the economy from month to month. But if consumer confidence continues to drop, that could be a sign of a looming recession.

What to watch: The Consumer Confidence Survey is updated monthly. Track press releases for it on the Conference Board’s website. The survey is also widely covered in the media.

Sign No. 5: Business confidence cools

Upset businessman holding his head at his computer
Rido / Shutterstock.com

Like consumer confidence, business confidence can shed light on the direction of the economy.

The Conference Board’s Measure of CEO Confidence remained in positive territory — 57 — in the first quarter of 2022. (The board considers measures of more than 50 points as positive, and lower readings as negative.) But this measure marked the third consecutive quarter of decline.

CEOs’ assessment of the current general economic conditions, and their expectations for the near future, also declined.

The outlook of small-business owners isn’t any rosier, according to the National Federation of Independent Business’ Small Business Optimism Index.

In March, inflation overtook labor quality as the top problem among small businesses. In fact, the share of owners raising their average selling prices reached its highest level in the survey’s 48-year history.

Moreover, the share of owners who expect better business conditions over the next six months fell to its lowest level in the survey’s history.

What to watch: Business confidence gauges like the Measure of CEO Confidence and CFO Survey are updated quarterly. The Small Business Optimism Index is updated monthly.

Sign No. 6: Vanguard’s risk forecast worsens

Vangaurd
Casimiro PT / Shutterstock.com

Vanguard is one of the biggest asset management firms in the world, so its economic outlooks can help paint a picture of how to monitor fluctuation in the economy.

Before the recession that started in late 2007, Vanguard’s six-month forecast had said the probability of a recession in six months was greater than 40%, according to The New York Times.

The firm’s forecast for 2022 — subtitled “Striking a better balance” — was overall optimistic, if cautiously so:

“While the economic recovery is expected to continue through 2022, the easy gains in growth from rebounding activity are behind us. We expect growth in both the U.S. and the euro area to slow down to 4% in 2022.”

In March, however, Vanguard downgraded its 2022 estimated growth for the U.S. from 4% to 3.5% — which is where it remained going into May.

What to watch: Vanguard posts its monthly market perspectives on its “Our Insights” webpage and issues press releases about its annual outlooks.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Source: moneytalksnews.com

8 Facts You Must Know About Bear Markets

There are few things scarier than a bear market, but steep and sustained drawdowns in stocks are an absolute fact of investing life. Markets go through cycles; always have, always will. 

It’s also true that despite being inevitable and unpleasant, bear markets are not entirely all bad. An irony of bear markets is that they’re one of the exceedingly rare times when long-term retail investors can actually have an advantage over the pros.

Traders and tacticians are under constant pressure to do something, even as a receding tide lowers all boats. Contrast that with retail investors, who are luxuriously free from clients yelling at them all day. Normies can just sit back and dollar-cost average into stocks at increasingly cheaper prices.

Most importantly, a patient long-term investor who is diversified in accordance with his or her age, stage in life and risk tolerance can not only wait out a bear market, but profit from it. Remember: The market can be miserable at times, but its long-term trend is always to the up and right.

A familiarity with the basics of bear markets should help investors better cope with the next one. To that end, we’ve compiled the following eight facts you must know about bear markets.

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Why Is It Called a Bear Market?

what is a bear marketwhat is a bear market

It has nothing to do with the way bears sneak up on their prey and attack suddenly, in the same way that bear markets feast on investors. Neither is it because bears are notorious for ransacking campsites and stealing provisions, in the same way bear markets can destroy your financial well-being.

Though both would be fitting.

Believe it or not, the term “bear market” originates with pioneer bearskin traders. The country’s early traders would sell skins they’d not yet received – or paid for. Because the traders hoped to buy the fur from trappers at a lower price than what they’d sold it for, “bears” became synonymous with a declining market.

There is, however, an alternative explanation, according to Wall Street lore: A bear attacks by swiping its claws downward, similar to the downward trend of a declining market.

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What Is a Bear Market, Anyway?

A 3D rendering of S&P 500 stocks heading lowerA 3D rendering of S&P 500 stocks heading lower

First, let’s look at what a bear market is not.

It’s not when stock prices end lower in the majority of trading days within a 90-day period. Neither is it a condition proclaimed by the National Bureau of Economic Research. And it is certainly not when at least two major business publications proclaim a bear market on their magazine covers.

Rather, a bear market is when a broad market index, such as the S&P 500, falls 20% or more from its peak.

There still is some debate among market watchers about whether the downturn that lasted from July 16 to Oct. 11, 1990, was officially a bear. The S&P fell 19.9% during that period. And the 2018 correction that lopped 19.8% off the S&P 500 was within rounding distance of a bear market. Since 1929, S&P 500’s average bear-market decline stands at 33.5%, according to Dow Jones Market Data. The median drawdown comes to 33.2%.

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How Often Do Bear Markets Occur?

bear hiding in tall grassbear hiding in tall grass

Since 1932, bear markets have occurred, on average, every 56 months (about four years and eight months), according to S&P Dow Jones Indices.

The Nasdaq Composite index entered a bear market on March 7, when it closed 20% below its Nov. 19, 2021, high. The S&P 500, for its part, set a high of 4,976.56 on Jan. 3. Thus, any close at 3,837.25 or lower puts the benchmark index into an official bear market.

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What Is Least Likely to Cause a Bear Market?

Tank against Ukraine flagTank against Ukraine flag

A number of events can lead to a bear market: higher interest rates, rising inflation, a sputtering economy, military conflict or geopolitical crisis are among the usual suspects. But which is the rarest?

Fortunately, military or geopolitical shocks to the market have been mostly fleeting. Two of the longest downturns followed the attack on Pearl Harbor in 1941 (308 days) and Iraq’s invasion of Kuwait in 1990 (189 days).

But the average time to the market bottom after such events, which also include the terrorist attacks on the U.S. in 2001 and the North Korean missile crisis of 2017, is 21 days, with a full recovery in 45 days, on average.

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Bear Markets Don’t Automatically Equal Recessions

what is a bear marketwhat is a bear market

There are actually two types of bear markets: recessionary and non-recessionary. 

Bear markets often precede or coincide with economic downturns, which is part of what makes them so scary. Happily, there are almost as many instances of past bear markets in which stocks tanked but the economy did not. 

Since 1928, 14 bear markets heralded or happened during recessions, notes Ben Carlson, director of institutional asset management at Ritholtz Wealth Management. However, another 11 bear markets since 1928 had nothing to do with recession. 

Surprise, surprise: Bear markets that occur outside of recessions tend to be shallower and shorter. 

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What Was the Worst Bear Market of All Time?

what is a bear market in stockswhat is a bear market in stocks

Contrary to popular belief, the worst bear market on record was not the 2007-09 crash when the financial crisis ushered in the Great Recession.

Neither was it the tech wreck of 2000 when dot-com stocks collapsed.

The drawn-out decline from the start of 1973 through the fall of 1974 – during which the Arab oil embargo sent oil prices soaring, the so-called Nifty-Fifty stocks sank, and Richard Nixon resigned the presidency – doesn’t take the cake either.

Rather, the bear market that began just ahead of Black Monday that precipitated the Crash of 1929 was the worst one to date.

The bear market from September 1929 to June 1932 resulted in an 86.2% loss for the S&P. Those other historical examples aren’t even close, with losses of 56.8% in 2007-09, 49.1% in 2000-02 and 48.2% in 1973-74.

Indeed, it took the market more than two decades to recover from the 1929-32 slump. Stocks didn’t regain their prior peak until 1954. 

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How Long Do Bear Markets Last?

Calendar and hourglass on office desk table. With copy space. Shot with ISO64.Calendar and hourglass on office desk table. With copy space. Shot with ISO64.

Ask a random sample of investors and some folks might guess that it’s a year or less. Others will figure it’s a minimum of two years. Regardless of duration, a bear market usually feels like it lasts forever.

And yet the average length of a bear market since 1929 is just 9.6 months, according to Ned Davis Research. True, those months will be agonizing, but consider the bright side: bears don’t live as long as bulls. Indeed, since 1929, the average lifespan of a bull market is 2.7 years.

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Good and Bad Investments for Getting Through a Bear Market

Wall Street sign bear market Wall Street sign bear market

What’s the best investment for a bear market? Is it U.S. Treasury bonds? Or perhaps gold or gold funds? How about classically defensive plays including utilities, consumer staples companies and healthcare companies? Or perhaps the highest-growth stocks with the broadest following?

When stocks are in free fall and worries about the economy abound, there’s nothing more soothing than the full faith and credit of the U.S. government. And a “flight to quality” often leads to gains in U.S. Treasury bonds. In 2008, the Bloomberg Barclays US Aggregate Bond Index – a broad-based, high-quality fixed-income benchmark – gained 5%, making it the only U.S. financial asset in the black that year.

Defensive stocks will lose ground in a bear market, but tend to lose less than average, supported by steady demand for their products and, often, generous dividends. Gold, which Kiplinger recommends as a portfolio diversifier only in small amounts, often zigs upward when stocks zag downward.

As for the worst place to hide out in a bear market, it’s the highest-growth stocks with the broadest following. Indeed, these stocks can be among the worst performers in a bear market if their popularity led them to have outsized gains before everything collapsed. The higher they fly, the harder they fall.

Source: kiplinger.com

How Rising Inflation Affects Mortgage Interest Rates

While the inflation rate doesn’t directly impact mortgage rates, the two tend to move in tandem. Rising inflation can shrink purchasing power as prices of goods and services increase. Higher prices can then influence the Federal Reserve’s interest rate policy, affecting the cost of borrowing for lending products like mortgages.

Homebuyers looking for a home loan and homeowners who want to refinance a mortgage need to know that mortgage rates may rise as inflation increases. Therefore, understanding the difference between the inflation rate, interest rates, and what affects mortgage rates matters for all home finance consumers.

Inflation Rate vs Interest Rates

Inflation is a general increase in the overall price of goods and services over time.

The Federal Reserve, the central bank of the United States, tracks inflation rates and inflation trends using several key metrics, including the Consumer Price Index (CPI), to determine how to direct monetary policy. A target inflation rate of 2% is considered ideal for maintaining a stable economic environment over the long run.

When inflation is on the rise and the economy is in danger of overheating, the Federal Reserve may raise interest rates to cool things down.

Interest rates reflect the cost of using someone else’s money. Lenders charge interest to borrowers who take out loans and lines of credit as a premium for the right to use the lender’s money.

Higher rates can make borrowing more expensive while also providing more interest to savers. People borrowing less and saving more can have a cooling effect on the economy.

When the economy is slowing down too much, on the other hand, the Fed can lower interest rates to encourage borrowing and spending.

Recommended: Federal Reserve Interest Rates, Explained

What Affects Mortgage Rates?

Inflation rates don’t have a direct impact on mortgage rates. But there can be indirect effects because of how inflation influences the economy and the Federal Reserve’s monetary policy decisions. Again, this relationship between inflation and mortgage rates is related to how the Federal Reserve adjusts interest rates to cool off or jump-start the economy.

The Federal Reserve does not set mortgage rates, however. Instead, the central bank sets the federal funds rate target, the interest rate that banks lend money to one another overnight. As the Fed increases this short-term interest rate, it often pushes up long-term interest rates for U.S. Treasuries. Fixed-rate mortgages are tied to the 10-year U.S. Treasury Note yield, which are government-issued bonds that mature in a decade. When the 10-year Treasury yield increases, the 30-year mortgage rate tends to do the same.

Recommended: Understanding the Different Types of Mortgage Loans

So in terms of what affects mortgage rates, movement in the 10-year Treasury yield is the short answer. Higher yields can mean higher rates, while lower yields can lead to lower rates. But overall, inflation rates, interest rates, and the economic environment can work together to sway mortgage rates at any given time.

A simple way to see the relationship between inflation rates and mortgage rates is to look at how they’ve trended historically . If you track the average 30-year mortgage rate and the annual inflation rate since 1971, you’ll see that they often move in tandem.

They don’t always move perfectly in sync, but it’s typical to see rising mortgage rates paired with rising inflation rates.

Inflation Trends for 2022 and Beyond

In March 2022, the U.S. inflation rate hit 8.5%, as measured by the Consumer Price Index. This increase represents the largest 12-month increase since 1981 and moving well beyond the Federal Reserve’s 2% target inflation rate.

While prices for consumer goods and services were up across the board, the most significant increases were in the energy, shelter, and food categories.

Rising inflation rates in 2022 are thought to be driven by a combination of things, including:

•   Increased demand for goods and services

•   Shortages in the supply of goods and services

•   Higher commodity prices due to geopolitical conflicts

The coronavirus pandemic saw many people cut back on spending in 2020, leading to a surplus of savings. In addition to government stimulus, these savings created a pent-up demand for purchases once the economy got back on track. However, the supply chains have not been able to catch up to demand.

Supply chain disruptions and worker shortages are making it difficult for companies to meet consumer needs. This has resulted in rapidly rising inflation to levels not seen in decades.

In March 2022, the Fed started to raise interest rates to tame inflation and will likely continue to raise interest rates throughout the year. Many analysts believe that inflation is peaking and will steadily decline throughout 2022. However, there is still a lot of uncertainty surrounding the economy that makes forecasting price trends difficult.

Recommended: 7 Factors that Cause Inflation

Is Now a Good Time for a Mortgage or Refi?

There’s a link between inflation rates and mortgage rates. But what does all of this mean for homebuyers or homeowners?

Rising inflation and higher interest rates have caused mortgage rates to spike at the fastest pace in decades, though mortgage rates are still near historic lows. As the Fed continues to pursue interest rate hikes, it could lead to even higher mortgage rates. It simply means that if you’re interested in buying a home, it could make sense to do so sooner rather than later.

Buying a home now could help you lock in a better deal on a loan and get a reasonable mortgage rate, especially as home values increase.

The higher home values go, the more important a low-interest rate becomes, as the rate can directly affect how much home you can afford.

The same is true if you already own a home and are considering refinancing an existing mortgage. However, when refinancing a mortgage, the math gets a bit trickier. You might need to determine your break-even point — when the money you save on interest payments matches what you spend on closing costs for a refinanced mortgage (a refi).

To find the break-even point on a refi, divide the total loan costs by the monthly savings. If refinancing fees total $3,000 and you’ll save $250 a month, that’s 3,000 divided by 250, or 12. That means it’ll take 12 months to recoup the cost of refinancing.

If you refinance to a shorter-term mortgage, your savings can multiply beyond the break-even point.

If your current mortgage rate is above refinancing rates, it could make sense to shop around for refinancing options.

Keep in mind, of course, that the actual rate you pay for a purchase loan or refinance loan can also depend on things like your credit score, income, and debt-to-income ratio.

Recommended: How to Refinance Your Mortgage — Step-By-Step Guide

The Takeaway

Inflation appears to be here to stay, at least for the near term. Buying a home or refinancing when mortgage rates are lower could add up to a substantial cost difference over the life of your loan. From a savings perspective, it’s essential to understand what affects mortgage rates and the relationship between the inflation rate and interest rates.

SoFi offers fixed-rate mortgages and mortgage refinancing. Now might be a good time to find the best loan for your needs and budget.

It’s easy to check your rate with SoFi.


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External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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Source: sofi.com

Student Loan Interest Rates for June 2022

There’s no way around it — college is expensive. This means that for many students, taking out a loan is the only way to realistically cover these expenses. And, like most other loans, student loans accrue interest.

In this article, we’ll explore the current interest rates across the most common student loan products, including federal and private student loans.

When we discuss federal interest rates on student loans in this article, we’re referring to what the rates would be when the freeze is lifted.

Comparing Rates Between Federal, Private and Refinance Loans

Something you may notice is that, at the lowest end, private lenders seem to offer better interest rates than federal. It is important to note that these lowest interest rates are very difficult to get — your credit needs to be outstanding.

It’s also important to remember that, although fixed interest rates appear to have a higher range in the tables below, your interest rate by definition can change. So, while you may qualify for a lower interest rate on a variable-rate loan, it’s entirely possible that this rate will eventually go up and become higher than you would have gotten with the fixed-rate loan. This is simply the tradeoff (and risk) of variable interest rates.

Federal Loan Interest Rates at a Glance

Loan Type Borrower Fixed Interest Rate Loan Fee
Direct Subsidized and Direct Unsubsidized Loans Undergrad students 3.73% 1.057%
Direct Unsubsidized Loans Graduate or professional students 5.28% 1.057%
Direct PLUS Loans Parents and graduate or professional students 6.28% 4.228%

Federal rates increased across the board for the 2021-2022 school year by nearly a whole percentage point. That’s unfortunate, but they are still lower than they have been for years, and generally much lower than an equivalent private student loan.

Federal loans come in two basic types: subsidized and unsubsidized. The primary difference is around when the interest starts accruing:

  • Subsidized student loan: Interest is paid by the Education Department as long as you’re enrolled at least half-time in college.
  • Unsubsidized student loan: Interest begins to accrue as soon as the loan is dispersed.

There are some other differences, but they’re relatively minor compared to this.

The last thing to cover with federal loans is the loan fee (also known as the origination fee). This fee is calculated as a percentage of the total loan amount and then deducted automatically from each disbursement. In practice, this means you’ll receive a smaller loan than the amount you actually borrowed.

Private Loan Interest Rates at a Glance

Loan Type Interest Rates
Fixed rate 3.34% to 14.99%
Variable rate 1.04% to 11.99%

The wide variation in interest rate ranges is due to two factors: different lenders offering different rates, and the fact that the rate you’ll get is impacted by your credit and other factors.

As mentioned above, fixed interest rates tend to have higher rates on paper, but you don’t have to worry about that rate increasing on you, which is a very real possibility with variable-rate loans.

Loan Refinance Interest Rates at a Glance

Loan Type Interest Rates
Fixed rate 2.59% to 9.15%
Variable rate 1.88% to 8.9%

If your credit is good, it’s possible to refinance your existing student loan to get a lower interest rate. This is not always possible, but it can be an option worth exploring. These refinanced interest rates can themselves be lower than “normal” private rates, so it can be an option worth exploring.

How Student Loan Interest Rates Are Determined

Although federal and private loans are technically different, they often follow similar trends. In other words, when federal student loan interest rates go up, private rates are likely to do the same. Likewise for when they go down. Let’s look at what actually goes into determining federal and private interest rates.

Federal Student Loan Interest Rates

These student loan interest rates are set each year by Congress, based on the high yield of the 10-year Treasury note auction in May. The new rate applies to loans disbursed from July 1 to June 30 of the following year.

Federal student loan rates are always fixed. This means that they won’t change during the life of the loan — whatever interest rate you get when you take out the loan is what you’ll keep until it’s paid off (it changes with student loan refinancing).

Private Student Loan Interest Rates

These loans are funded by banks, credit unions, and other private lenders. As such, interest rates vary between the different lenders, and it’s worth shopping around whenever possible.

Private lenders usually offer both fixed-rate and variable-rate loans. Fixed-rate means that your interest rate remains the same over the life of the loan. It can neither increase nor decrease.

A variable interest rate, on the other hand, means that your interest rate can fluctuate with the market. Sometimes you can get lucky and have it go down for a period of time. However, the risk with variable-rate loans is that the interest rate goes up significantly and you end up paying much more than anticipated.

It’s important to keep this in mind when selecting a loan. It may be worthwhile to take a slightly higher fixed interest rate rather than assume the risks of a variable rate.

The Impact of COVID-19 on Student Loans

The interest rate cuts in 2020 had a major ripple effect on student loan interest rates. Despite the slowly recovering economy, interest rates remain lower than they’ve been in years, for federal student loans and private fixed-rate and variable interest rate loans. This is excellent news for student loan borrowers, and we hope to see these rates remain low in the coming year.

Currently, all federal student loan debt is frozen until Sept. 1, 2022. This means that rates are set to zero and no payments are due until that date. This loan repayment freeze originally began in March 2020  at the outset of the pandemic and has been extended six times at this point.

The Pros and Cons of Federal Student Loans vs. Private Student Loans

Let’s explore the pros and cons of the two major classes of student loans — federal and private. Neither is perfect, as we’ll see. Rather, each is suited to particular situations and types of borrowers.

Federal Student Loans


Pros

  • Flexible repayment plans. Federal loans are eligible for income-based repayment plans and loan forgiveness. These can be a huge help if you find yourself in a tough financial spot.
  • Much lower requirements. It’s almost always much easier to qualify for a federal loan than it is a private student loan, particularly if you want a good interest rate.
  • More affordable overall. Most of the time you’ll end up paying less on federal student loans than on a private student loan.


Cons

  • Origination fees. Federal student loans are subject to small origination fees, which aren’t part of a private student loan. This means your loan disbursements are usually going to be smaller.
  • Borrowing limits for undergraduates. This means some students may actually need to take out a small private loan in addition to the federal loan to cover their full college costs.
  • Can’t choose your loan servicer. Federal student loans are turned over to a loan servicer to handle the payments and administration of that loan. Some of them have sketchy reputations

Private Student Loans


Pros

  • Larger loans. If you know that you’ll need a certain amount of money, and it’s more than federal loans can offer, it might make more sense to simply go private.
  • Potentially lower rates. A private loan may have lower rates, particularly with student loan refinancing. That said, you’ll need an excellent credit score to get these lowest rates.
  • No origination fees. Private student loans don’t have the origination fees that come with federal student loans.


Cons

  • More difficult to qualify for. Private loans have stricter requirements, particularly around credit histories. Federal student loans are almost always easier to qualify for.
  • Generally higher interest rates. Unless your credit is outstanding, you’ll almost always get a better interest rate with a federal student loan.
  • Less flexibility in repayment options. Some private lenders are willing to work with borrowers on this, but there’s no law or regulation forcing them to, and thus, no guarantee.

Frequently Asked Questions (FAQs) About Student Loan Interest Rates

If you still have questions about student loan interest rates, don’t worry — we’ve got answers. Here are some of the most common questions.

What is the Interest Rate on Student Loans Right Now?

Student loan interest rates range from a low of 1.04% to a high of almost 15%. The rates depend on whether you’re looking at federal or private, which type of loan, which private lender you go with, your credit history, and more. 

That said, here’s the quick bullet list:

  • Federal direct for undergraduate students: 3.34%
  • Federal unsubsidized for grad students: 5.28%
  • Federal Direct PLUS for parents and graduate students: 6.28%
  • Private fixed-rate loans: 3.34% to 14.99%
  • Private variable-rate loans: 1.04% to 11.99%

Will Student Loan Interest Rates Go Up in 2022?

This is a hard question to answer. They are expected to remain fairly low for the foreseeable future, but this can always change. For the 2021-2022 school year, federal rates did increase, but they are still a good bit lower than they were prior to the pandemic.

Are Student Loan Rates Dropping?

Rates increased for the 2021-2022 school year, but remain lower than they were prior to the COVID-19 pandemic. So while they didn’t drop this year, they have dropped significantly compared to a few years ago.

What’s the Difference Between a Subsidized and Unsubsidized Federal Student Loan

A subsidized federal student loan is one in which interest is paid by the U.S. Department of Education Department while you’re enrolled at least half-time in college. An unsubsidized loan, on the other hand, begins accruing interest immediately on disbursement, even if you’re still enrolled in school.

Subsidized student loans have a six-month grace period after graduating. During this time, no payments are due, and the Education Department continues to pay the interest on the loan.

An unsubsidized loan, on the other hand, begins accruing interest immediately on disbursement, even if you’re still enrolled in school. The student is responsible for this interest. Unsubsidized loans still have a six-month grace period after graduation, but interest continues to accrue during this time. The interest then capitalizes, which means it gets added to the original loan amount.

When Do Student Loan Interest Rates Start?

Federal student loan rates are set each spring and go into effect July 1, running until June 30 of the following year. At that point, the new interest rate will take effect.

What is Student Loan Refinancing?

Student loan refinancing is a way to decrease the amount of interest paid on your loan. Essentially, when you refinance, the new lender pays off your existing loan and gives you a new one with new terms.  

Not everyone can refinance — there are fairly strict rules to evaluate your credit and income to determine eligibility. Additionally, you generally reset the length of your loan term when you refinance, so it can sometimes end up costing you more money. 

Finally, while you can refinance a federal loan, you lose the extra benefits they come with, including income-based repayment options.

What is Income-based Repayment?

This is a special repayment option available to federal borrowers that lets you tailor your monthly payments to your income. These plans are typically based on a percentage of your monthly disposable income. This can be quite a bit lower than you’d otherwise pay. The tradeoff is that it can take much longer to pay off the loan. 

Additionally, loans on these repayment plans are automatically forgiven after 20-25 years of payments.

Penny Hoarder contributor Dave Schafer has been writing professionally for nearly a decade, covering topics ranging from personal finance to software and consumer tech.

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Source: thepennyhoarder.com

What Is Bond Valuation?

Bond valuation is a way of determining the fair value of a bond. Bond valuation involves calculating the present value of the bond’s future coupon payments, its cash flow, and the bond’s value at maturity (or par value), to determine its current fair value or price. The price of a bond is what investors are willing to pay for it on the secondary market.

When an investor buys a bond from the issuing company or institution, they typically buy it at its face value. But when an investor purchases a bond on the open market, they need to know its current value. Because a bond’s face value and interest payments are fixed, the valuation process helps investors decide what rate of return would make that bond worth the cost.

Here’s a step-by-step explanation of how bond valuation works, and why it’s important for investors to understand.

How Bond Valuation Works

First, it’s important to remember that bonds are generally long-term investments, where the par value or face value is fixed and so are the coupon payments (the bond’s rate of return over time) — but interest rates are not, and that impacts the present or fair value of a bond at any given moment.

To determine the present or fair value of a bond, the investor must calculate the current value of the bond’s future payments using a discount rate, as well as the bond’s value at maturity to make sure the bond you’re buying is worth it.

Some terms to know when calculating bond valuation:

•   Coupon rate/Cash flow: The coupon rate refers to the interest payments the investor receives; usually it’s a fixed percentage of the bond’s face value and typically investors get annual or semi-annual payments. For example, a $1,000 bond with a 10-year term and a 3% annual coupon would pay the investor $30 per year for 10 years ($1,000 x 0.03 = $30 per year).

•   Maturity: This is when the bond’s principal is scheduled to be repaid to the bondholder (i.e. in one year, five years, 10 years, and so on). When a bond reaches maturity, the corporation or government that issued the bond must repay the full amount of the face value (in this example, $1,000).

•   Current price: The current price is different from the bond’s face value or par value, which is fixed: i.e. a $1,000 bond is a $1,000 bond. The current price is what people mean when they talk about bond valuation: What is the bond currently worth, today?

The face value is not necessarily the amount you pay to purchase the bond, since you might buy a bond at a price above or below par value. A bond that trades at a price below its face value is called a discount bond. A bond price above par value is called a premium bond.

How to Calculate Bond Valuation

Bond valuation can seem like a daunting task to new investors, but it is not that onerous once you break it down into steps. This process helps investors know how to calculate bond valuation.

Bond Valuation Formula

The bond valuation formula uses a discounting process for all future cash flows to determine the present fair value of the bond, sometimes called the theoretical fair value of the bond (since it’s calculated using certain assumptions).

The following steps explain each part of the formula and how to calculate a bond’s price.

Step 1: Determine the cash flow and remaining payments.

A bond’s cash flow is determined by calculating the coupon rate multiplied by the face value. A $1,000 corporate bond with a 3.0% coupon has an annual cash flow of $30. If it’s a 10-year bond that has five years left until maturity, there would be five coupon payments remaining.

Payment 1 = $30; Payment 2 = $30; and so on.

The final payment would include the face value: $1,000 + $30 = $1,030.

This is important because the closer the bond is to maturity, the higher its value may be.

Step 2: Determine a realistic discount rate.

The coupon payments are based on future values and thus the bond’s cash flow must be discounted back to the present (thanks to the time value of money theory, a future dollar is worth less than a dollar in the present).

To determine a discount rate, you can check the current rates for 10-year corporate bonds. For this example, let’s go with 2.5% (or 0.025 as a decimal).

Step 3: Calculate the present value of the remaining payments.

Calculate the present value of future cash flows including the principal repayment at maturity. In other words, divide the yearly coupon payment by (1 + r)t, where r equals the discount rate and t is the remaining payment number.

$30 / (1 + .025)1 = $29.26

$30 / (1 + .025)2 = 28.55

$30 / (1 + .025)3 = 27.85

$30 / (1 + .025)4 = 27.17

$1030 / (1 + .025)5 = 1,004.87

Step 4: Sum all future cash flows.

Sum all future cash flows to arrive at the present market value of the bond : $1,117.70

Understanding Bond Pricing

In this example, the price of the bond is $1,117.70, or $117.70 above par. A bond’s face or par value will often differ from its market value — and in this case its current fair value (market value) is higher. There are a number of factors that come into play, including the company’s credit rating, the time to maturity (the closer the bond is to maturity the closer the price comes to its face value), and of course changes to interest rates.

Remember that a bond’s price tends to move in the opposite direction of interest rates. If prevailing interest rates are higher than when the bond was issued, its price will generally fall. That’s because, as interest rates rise, new bonds are likely to be issued with higher coupon rates, making the new bonds more attractive. So bonds with lower coupon payments would be less attractive, and likely sell for a lower price. So, higher rates generally mean lower prices for existing bonds.

The same logic applies when interest rates are lower; the price of existing bonds tends to increase, because their higher coupons are now more attractive and investors may be willing to pay a premium for bonds with those higher interest payments.

Is Investing in Bonds Right for You?

Investing in bonds can help diversify a stock portfolio since stocks and bonds trade differently. In general, bonds are seen as less risky than equities since they often provide a predictable stream of income. All investors should at least consider bonds as an investment, and those with a lower risk tolerance might be better served with a portfolio weighted highly in bonds.

Performing proper bond valuation can be part of a solid research and due diligence process when attempting to find securities for your portfolio. Moreover, different bonds have different risk and return profiles. Some bonds — such as junk bonds and fixed-income securities offered in emerging markets — feature higher potential rates of return with greater risk. “Junk” is a term used to describe high-yield bonds. You can take on higher risk with long-duration bonds and convertible bonds. Some of the safest bonds are short-term Treasury securities.

You can also purchase bond exchange-traded funds (ETFs) and bond mutual funds that own a diversified basket of fixed-income securities.

The Takeaway

Bond valuation is the process of determining the fair value of a bond after it’s been issued. In order to price a bond, you must calculate the present value of a bond’s future interest payments using a reasonable discount rate. By adding the discounted coupon payments, and the bond’s face value, you can arrive at the theoretical fair value of the bond. A bond can be priced at a discount to its par value or at a premium depending on market conditions and how traders view the issuing company’s prospects.

Owning bonds can help add diversification to your portfolio. Many investors also find bonds appealing because of their steady payments (one reason that bonds are considered fixed-income assets). When you open an online brokerage account with SoFi Invest, you can build a diversified portfolio of individual stocks as well as exchange-traded bond funds (bond ETFs). You can also invest in a range of other securities, including fractional shares, IPOs, crypto, and more. Also, SoFi members have access to complimentary professional advice. Get started today!


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Stock Market Today: Stocks Try to Find Their Legs Ahead of CPI Report

Wall Street searched for stability Tuesday, with a couple of the major indexes able to muster some gains ahead of a vital inflation reading tomorrow.

The 10-year Treasury note, after touching 3.2% yesterday, pulled back below the 3% threshold to as low as 2.94%. This retreat in interest rates removed some pressure from growthier stocks (which had been pummeled Monday), with technology (+1.5%) firms leading the session’s relief rally. Semiconductor stocks such as Nvidia (NVDA, +3.8%), Broadcom (AVGO, +3.3%) and NXP Semiconductor (NXPI, +3.2%) were among the day’s notable risers.

It wasn’t all roses, though. Investors continued to punish once-hot companies showing any signs of weakness.

For instance, artificial-intelligence lending-platform maker Upstart Holdings (UPST) plunged 56.4% to trade around all-time lows. While it beat Street estimates for first-quarter earnings, the company reduced full-year revenue forecasts to $1.25 billion from $1.4 billion previously.

Work-from-home darling Peloton Interactive (PTON, -8.7%) continued its fall from grace after reporting a 15% year-over-year decline in sales, a $757 million net loss and a dwindling cash pile that CEO Barry McCarthy said left the company “thinly capitalized.”

Even AMC Entertainment (AMC, -5.4%) was knocked lower despite a pretty encouraging report in which Batman and Spider-Man films helped the theater company to report a narrower-than-expected quarterly loss.

Still, the major indexes showed some strength. The Nasdaq Composite rebounded 1.0% to 11,737, while the S&P 500 improved 0.3% to 4,001. The Dow Jones Industrial Average brought up the rear, declining 0.3% to 32,160.

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“Markets are clearly confused about what the Fed will do this year and just how aggressive it will get. That can be seen in the volatility in expectations for where the Fed funds rate will be at the end of 2022, as seen in Fed funds futures,” says Invesco Chief Global Market Strategist Kristina Hooper. “And it is reflected in stock market volatility, with the VIX above 30.”

The big story to watch tomorrow is the Bureau of Labor Statistics’ consumer price index (CPI) report for April. BlackRock, for one, expects 8.1% headline CPI growth and 6.0% core growth following 8.5% and 6.5% increases in March.

“A weaker-than-expected CPI report later this week could help turn the tide and see investors embrace risk assets once again,” says Brian Price, head of investment management for independent broker-dealer Commonwealth Financial Network.

stock chart for 051022stock chart for 051022

Other news in the stock market today:

  • The small-cap Russell 2000 slipped marginally to 1,761.
  • U.S. crude futures slipped below the $100 per-barrel mark, ending the day down 3.2% at $99.76 per barrel. 
  • Gold futures fell 0.9% to settle at $1,841 an ounce.
  • Bitcoin clawed out a 0.5% gain to $31,315.54. (Bitcoin trades 24 hours a day; prices reported here are as of 4 p.m.)
  • Groupon (GRPN) slid 12.5% after the e-commerce marketplace swung to an adjusted loss of 80 cents per share in its first quarter, compared to a per-share profit of 25 cents in Q1 2021. GRPN also said revenue slid 41% year-over-year to $153.3 million, while global units sold slumped 29% to 12.7 million. The company gave soft current-quarter and full-year revenue guidance, as well. “The underperformance was driven by a weaker rebound in local following omicron impacts in January and February,” says Credit Suisse analyst Stephen Ju, who maintained a Neutral (Hold) rating on GRPN. “As merchants found themselves in a high demand/low capacity environment, they were not incentivized to leverage discounting. Furthermore, April local billings continue to trend at Q1 2022 (as a percentage of 2019) levels and latest trends suggest an elongated recovery path.”
  • Vroom’s (VRM) narrower-than-expected first-quarter loss sent shares up 32.4% today. In its first quarter, the online used auto dealer reported a per-share loss of 71 cents per share vs. a consensus estimate for a loss of $1.07 per share. Revenue of $923.8 million also came in higher than analysts had expected. VRM also announced a new business realignment plan for long-term growth that it anticipates will result in up to $165 million in cost savings through the rest of 2022. “Vroom is shifting to survival mode, understandably, swapping out more aggressive growth plans for a leaner, and potentially more profitable business model,” says Baird Equity Research analyst Colin Sebastian (Outperform). “Given the current market environment, and challenges in scaling up an ‘asset light’ online sales platform, we think this pivot makes sense.”

Stick to (Most Of) Your Guns

“More than anything, volatility is a test of investor mettle.” So says Ross Mayfield, investment strategy analyst at research firm Baird, who notes that while we’re often told volatility is the price to pay in the stock market’s long-term gains, this glosses over the fact that volatility can take many forms.

“March 2020 featured a gut-wrenching drop, but also a relatively quick rebound. On the other end of the spectrum, markets are occasionally plagued by periods of high volatility that churn sideways relentlessly,” he says. “Each is challenging in its own way; holding through a big drop requires a steel stomach, but longer periods of frustrating volatility require real fortitude.”

While staying the course isn’t easy, you can at least make it less difficult on yourself by homing in on higher-quality investments with a longer-term focus. Stock investors might look to the Dow Jones’ top-rated components; fund investors should stick to well-managed products, such as these Vanguard funds commonly found in 401(k) plans.

But remember: Keeping a calm head doesn’t mean you shouldn’t ever sell in a downturn – on the contrary, the only thing worse than suffering losses in the first place is holding on to weak positions that will slather you in more red ink down the road. 

With that in mind, we’ve taken a look at some of Wall Street’s least favorite names at the moment. Remember: Sell calls are typically rare among the analyst community, so the fact that the pros are calling for more downside in these names, rather than saying to buy the dips, is noteworthy.

Check out Wall Street analysts’ list of stocks to sell right now.

Kyle Woodley was long NVDA as of this writing.

Source: kiplinger.com

Stock Market Today: Stocks, Bonds, Crypto and More Take a Dive

The S&P 500 fell to its lowest point in more than a year Monday as last week’s selloff retained all of its momentum and bled into just about anything that trades.

Interest-rate fears continued be the selloff’s primary driver. The 10-year Treasury briefly touched 3.2% today and, even after pulling back to 3.06%, sits around levels last seen in 2018.

“Interest rates are a hammer, not a scalpel – they are blunt tools designed to move slowly and with great force, rather than precisely,” says Andy Kapyrin, co-chief investment officer at registered investment advisory firm RegentAtlantic. “The Fed is swinging the interest rate hammer, and the financial markets are responding to the aftershocks.”

Technology (-3.9%) and consumer discretionary (-4.3%) were among the usual suspects in a trading day that saw each of the 11 S&P 500 stock sectors finish in the red. But this was a wide selloff that went well beyond just stocks and bonds.

U.S. crude oil futures, for instance, cratered by 6.1% to $103.09 per barrel, amid ongoing worries that China’s strict COVID-19 lockdowns will cramp oil prices. Indeed, energy (-8.3%) was Monday’s worst-performing sector, with even blue chips such as Exxon Mobil (XOM, -7.9%) and Chevron (CVX, -6.7%) taking it on the chin.

Gold futures? A bad day, too, off 1.3% to $1,858.60 per ounce as investors piled into the U.S. dollar. 

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Cryptocurrencies haven’t provided safety, either. Bitcoin, which fell as low as $30,375 and finished off 13.4% to $31,153, has now fallen by more than 50% from its November 2021 peak. (Bitcoin trades 24 hours a day; prices reported here are as of 4 p.m.)

Edward Moya, senior market strategist at currency data provider OANDA, notes that institutional buyers are starting to pay close attention to Bitcoin, given that many who got in during 2021 are now losing money on their investment. “If the $30,000 level breaks, that could trigger a flash crash environment if several whales unload,” he says.

The Nasdaq Composite (-4.3% to 11,623) has re-entered bear-market territory, off nearly 28% from its January highs. The S&P 500 (-3.2% to 3,991 – its lowest close since March 31, 2021) needs to lose another 4% or so before entering a bear market, while the Dow Jones Industrial Average (-2.0% to 32,245) would have to retreat another 9%.

stock chart for 050922stock chart for 050922

Other news in the stock market today:

  • The small-cap Russell 2000 sank by 4.2% to 1,762.
  • Palantir Technologies (PLTR) stock surrendered 21.3% after the data analytics company reported lower-than-expected first-quarter earnings per share (2 cents actual vs. 4 cents estimated). The company also gave current-quarter guidance below Wall Street’s estimates, adding that there is “a wide range of potential upside to our guidance, including those driven by our role in responding to developing geopolitical events.” One high note of PLTR’s financial results was its Q1 revenue of $446.4  million, up 31% year-over-year and above the average estimate.
  • Rivian Automotive (RIVN) plummeted 20.9% after sources told CNBC that Ford Motor (F, -5.9%) will sell 8 million RIVN shares after the electric vehicle maker’s insider lockup period expired on Sunday. The news also dragged on Amazon.com (AMZN, -5.2%), which owns roughly 158.4 million RIVN shares, according to S&P Global Market Intelligence. “The news is not surprising to us, especially after the two companies terminated a partnership to jointly develop an EV last November and as Ford begins deliveries of the F-150 Lightning, a direct competitor to Rivian’s R1T pickup truck,” says CFRA Research analyst Garrett Nelson, who maintained a Hold rating on the EV stock.

The Strongest Parts of a Weak Market

Green ink was in shockingly short supply Monday – but relative success was found among the usual suspects. 

“This collapse should continue the rotation into defensive dividend stocks,” says Jay Hatfield, chief investment officer of ETF manager Infrastructure Capital Management. 

Consumer staples, which was only marginally lower Monday, and utilities, second-best at a 0.8% decline, are among such beneficiaries, Hatfield says.

Among their greatest qualities right now is what’s sure to be a common refrain in near-term investment advice: pricing power. In short, as inflation continues to march unimpeded, those companies that are best able to push most of those prices on to consumers should fare best – and while your average American might go a few extra months without taking a vacation or buying a new pair of Nikes, they’re unable to pull back much on basic necessities such as food and electricity. 

Read on as we examine a number of stocks with exceptional pricing power – as well as highlight several names that, while good companies in their own right, will have an uphill battle as long as inflation remains white-hot.

Source: kiplinger.com

What Is a Stock Market Benchmark? – How to Measure Index Performance

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When researching investment opportunities or financial markets, you often hear something compared to something called a benchmark. You might see statements like “outperforming benchmark returns” or “lagging the benchmark.” 

Based on context, we can surmise that these terms mean an investment is performing better or worse than something, but what exactly is that something? What does a stock market benchmark mean for the average investor? 

Find out what benchmarks are and how you can use them to your advantage when investing.


What Is a Stock Market Benchmark (Index)?

A stock market benchmark, sometimes called a market index or benchmark index, is a carefully selected group of stocks meant to measure the overall performance of a group of equities or the market as a whole. Benchmarks are used as a standard or baseline against which specific investments or a portfolio’s performance can be measured.


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History of the Stock Market Benchmark

The first market index was created by Charles Dow and Edward Jones in 1884. The index was called the Dow Jones Transportation index and tracked the performance of the large railroad companies that were seen as a reflection of the United States economy at the time. 

That index evolved to become one of the best-known benchmarks, the Dow Jones Industrial Average, which today includes 30 of the largest industrial companies that represent the U.S. economy.  

Another classic market index was created by the Standard Statistics Company in 1923. Within a few years, the company developed 90 indexes that would be computed on a daily basis. 

The Standard Statistics Company evolved to become one of the biggest names on Wall Street: Standard & Poor’s, or S&P. Through a merger, the company’s name recently changed once again to S&P Dow Jones Indices. The company’s flagship index, the S&P 500 composite, is the most widely used benchmark in the U.S. today. 


Types of Benchmarks

Over the past century or so, benchmarks have become a crucial part of the complex machine that is the stock market. However, it’s important that you use the appropriate benchmark for what you plan to measure and compare — more on this later. 

There are several types of benchmarks investors use, each measuring different market segments. The most common types of benchmarks are:

Market Capitalization-Focused

The central theme to some indexes is market cap, or size of the constituents listed within it. There are four primary types of market-cap-focused indexes:

1. Blue Chips

A blue-chip benchmark is designed to track the results of the largest, most successful companies on the market. These companies are known for producing relatively predictable gains and revenue growth. 

The flagship blue-chip index in the United States is the Dow Jones Industrial Average. The Dow tracks 30 of the largest and most successful publicly traded companies in the U.S. 

2. Large-Cap

Large-cap stocks represent companies worth $10 billion or more. These are some of the largest companies in the world and tend to be leaders within their respective industries. Large-cap indexes list a diverse group of stocks in this category, tracking and measuring the performance of very large companies. 

The most popular large-cap index is the S&P 500, which tracks the 500 largest publicly traded companies in the U.S. It represents around 85% of the country’s total market cap.  

3. Mid-Cap

Mid-cap stocks represent companies worth between $2 billion and $10 billion. These companies tend to be just finding their footing in their respective industries. They’re not quite as predictable as large-cap stocks, but offer the potential for meaningful growth as these companies continue to grow and evolve. 

Mid-cap indexes are made up of a diversified list of these companies, giving investors the ability to track the performance of mid-sized companies. 

One of the most popular benchmarks in this category is the Russell Midcap Index, which is made up of the 800 smallest companies on the Russell 1000. 

4. Small-Cap

Small-cap indexes include stocks representing companies worth between $500 million and $2 billion. 

These companies are often in the beginning to intermediate stages of business, or may be experienced players in relatively small markets. A small-cap benchmark shows investors how smaller publicly traded companies are faring.

One of the most popular small-cap indexes is the S&P 600, the small-cap index also maintained by Standard & Poor’s that includes 600 smaller U.S. companies.. 

Sector-Focused

There are several sectors across the stock market. Some of the most popular include technology, biotechnology, energy, and consumer goods. Each sector is represented by a long list of benchmarks. 

One of the best examples of a sector-focused index is the Nasdaq. Known as a tech-heavy index, a large percentage of its constituents are within the technology and biotechnology sectors. 

Strategy-Focused

Some indexes have a central focus on an investment strategy. These usually fall into one of the following categories:

  • Growth Stocks. Growth-focused indexes track a diversified group of stocks known for producing compelling revenue, earnings, and price growth. One of the most popular in this category is the Russell 3000 Growth Index. 
  • Value Stocks. Value-focused indexes track a diversified group of stocks that are believed to be undervalued when compared to their peers. Investors believe that by investing in these stocks, they’ll outperform the market as the stocks recover from recent lows. One of the most popular in this category is the S&P 500 Value Index. 
  • Income Stocks. Income-focused indexes track stocks known for paying the highest dividends. One of the most popular benchmarks in this category is the S&P 500 Dividend Aristocrats. 

Asset Class Focused

Stocks aren’t the only asset class on the market, nor are they the only class of assets with a benchmark index to track them. Indexes exist to track bonds, commodities, futures, and more. If it’s an asset class, there’s likely an index that covers it.

A great example of indexes in this category is the S&P U.S. Treasury Bond Index, which tracks the performance of a highly diversified group of bonds issued by the U.S. Treasury.  

Risk-Focused

Risk-focused indexes are largely used to determine the level of volatility and variability in the market, helping investors understand what they’re up against in the battle between the bears and bulls. 

One of the most popular risk-focused indexes is the CBOE Volatility Index (VIX). 


How to Use a Benchmark

Benchmarks have become incredibly valuable tools for investors. Here are the different ways to use them:

Index Investing

With so many people tracking benchmark indexes, it was only a matter of time before they were used as investments themselves. These days, there’s a long list of index funds, which are mutual funds or exchange-traded funds (ETFs) that make investments that track the movement of an underlying index. These funds are based on an underlying index instead of the investment decisions of a fund manager. 

The index investment strategy (indexing) is centered around investing in these funds. Individuals investing in a benchmark index’s performance benefit greatly from heavy diversification. Indexing removes much of the research and decision-making from the process of managing investment portfolios. Index investors know the fund’s performance is likely to be very similar to that of the underlying index. 

Measure Portfolio Performance

Another common use for benchmarks is to measure the performance of your investment portfolio. All you need to do is compare your portfolio’s performance to the appropriate benchmark to see how well you’re stacking up. 

For example, if your portfolio is tech-heavy, consider comparing your performance to that of the Nasdaq. If your portfolio is outpacing the index, you’re in good shape. If it’s underperforming a comparable benchmark, it’s time to adjust your holdings because there’s more money to be made elsewhere. 

Gauge Economic Performance

Stock market indexes aren’t just a tool for understanding the performance of different segments of the market. Widespread benchmarks that focus on the market as a whole also tell you quite a bit about the state of the economy. 

After all, the economy and equities market are closely correlated. 

When economic conditions are good, stocks tend to be up. Conversely, when economic conditions look grim, stocks tend to be down. Paying attention to the movement in the largest flagship benchmarks for any economy will paint a picture of that economy’s health. 

Gauge Market Performance

The stock market is known for moving through a series of peaks and valleys. Benchmarks can be used to give you a clear picture of the market and market sentiment. 

In the U.S., the best benchmark for this is the S&P 500 index. That’s because the index lists 500 of the largest publicly traded companies in the U.S., representing 85% of the country’s market cap. 

With such a large representation of the domestic market, when the S&P is up, you can safely assume that stocks are generally trending in the upward direction, and vice versa. 

Measure Historical Performance

History tends to repeat itself. Although past performance isn’t always indicative of future results, the world’s most successful investors often use historical performance as a way to predict the returns they may generate. 

Tracking benchmarks throughout history gives you an idea of how the index has performed over time, the levels of volatility generally experienced, and the risk and reward associated with investing in the section of the market measured by the index.  

Determine Market Timing

Warren Buffett famously told investors to buy when fear is high and sell when greed sets in. Benchmarks can tell you when those emotions are taking hold in the market. 

CNNMoney created the Fear & Greed Index to help investors measure market sentiment when determining the best time to buy and sell stocks. Many other benchmarks can also be used to determine market sentiment to help you decide when to make your moves. 


Final Word

Stock market benchmarks have been around for more than a century and have proven to be valuable tools for investors and economists alike. Whether you compare your portfolio to a benchmark during rebalancing or invest directly in index funds, these tools are integral in the search of stock market success. 

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GME is so 2021. Fine art is forever. And its 5-year returns are a heck of a lot better than this week’s meme stock. Invest in something real. Invest with Masterworks.

Joshua Rodriguez has worked in the finance and investing industry for more than a decade. In 2012, he decided he was ready to break free from the 9 to 5 rat race. By 2013, he became his own boss and hasn’t looked back since. Today, Joshua enjoys sharing his experience and expertise with up and comers to help enrich the financial lives of the masses rather than fuel the ongoing economic divide. When he’s not writing, helping up and comers in the freelance industry, and making his own investments and wise financial decisions, Joshua enjoys spending time with his wife, son, daughter, and eight large breed dogs. See what Joshua is up to by following his Twitter or contact him through his website, CNA Finance.

Source: moneycrashers.com

Warren Buffett’s Inflation Plan: Buy, Buy, Buy

Rapidly rising prices are on the radar for virtually everyone in America – even the billionaire class. Indeed, Warren Buffett himself has his eyes on inflation.

Buffett finally whipped out Berkshire Hathaway’s (BRK.B, $318.99) checkbook in a big way earlier this year, spending tens of billions of dollars in a matter of weeks. 

All it took was a historically bad start to the year for stocks – or at least, that’s how things would appear at first glance.

But stumbling share prices, while certainly critical, aren’t the whole story here. Warren Buffett clearly has been monitoring America’s rampant inflation, which appears to be a key factor driving his renewed appetite for equities. 

And make no mistake: Berkshire’s chairman and CEO is hungry.

Berkshire Buys Like There’s No Tomorrow

Buffett has embarked on a shopping spree the likes of which we haven’t seen since the Great Financial Crisis. During the first quarter …

True, the market’s terrible start to 2022 no doubt played a starring role in Buffett’s largesse. The S&P 500 tumbled as much as 13% from its all-time high at one point in Q1. Buffett, as patient as any investor when it comes to waiting for bargains, at long last pounced – and did so with surgical precision.

Buffett put nearly 30% of Berkshire’s massive cash pile to work in equities last quarter. And according to Bespoke Investment Group, almost 80% of his purchases came during the weakest part of the quarter.

That’s remarkable timing.

Contrast that with 2021, when the S&P 500 generated a total return (price appreciation plus dividends) of nearly 29%, or its third best run since 1997. Berkshire, however, used the market’s outstanding performance as a chance to lighten up on stocks. Indeed, the holding company was a net seller of equities in all four quarters of 2021. 

Suffice to say that Warren Buffett is pretty adept at the whole “buy low, sell high” thing. When investors are fearful, he more often than not gets greedy. 

Warren Buffett Makes the Most of Inflation

But there’s a second (and perhaps more urgent) factor driving Buffett’s lavish spending on stocks right now: Inflation. 

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Remember, Warren Buffett rather famously didn’t go shopping when the market lost a third of its value in the pandemic crash of 2020. So while he hasn’t been this active buying stocks in ages – it’s not just because stocks are in a slump.

It’s because of inflation.

When prices are rising at the fastest pace in four decades, cash is trash. That helps explain Buffett’s biggest Q1 binge, says David Kass, a professor of finance at the University of Maryland’s Robert H. Smith School of Business and noted Buffett expert.

Berkshire raised its stake in Chevron (CVX, $162.49) to $26 billion, up from a modest $4.5 billion at the beginning of the year. That’s a big deal. The integrated energy major and Dow Jones Industrial Average stock is now Berkshire’s fourth-largest holding.

And it’s not like Buffett scooped up those CVX shares when they were on sale. The stock traded at all-time highs in Q1.

In addition to a number of other attractive attributes, Warren Buffett also sees an inflation hedge in Chevron, Kass says. And even if oil prices level off or reverse trend, a stake in CVX is better than sitting in cash and equivalents.

“Chevron has a large stock buyback program and pays a cash dividend of 3.5%,” Kass says. “That makes it a relatively safe cash alternative. Instead of earning essentially zero on Treasury bills, why not earn a dividend yield and a buyback yield that combined probably come in somewhere in the high single digits?”

The same calculus of falling stock prices plus rising inflation can be seen in a number of Buffett’s recent buys. 

Earlier this year, Berkshire disclosed a series of purchases in Occidental Petroleum (OXY, $59.24). Buffett’s conglomerate is now the integrated oil and gas firm’s largest investor, with 14.6% of its shares outstanding. 

“Chevron and Occidental, to me, they make a whole lot of sense,” Kass says. “Oil, I believe, is a good hedge against inflation.”

This stocks-down-inflation-up dynamic helps explain the sudden and stark reversal in Berkshire’s balance sheet. 

When inflation is all but dormant, as it was for more than a decade until last year, Warren Buffett was content to accumulate cash. From 2016 to 2021 – a period in which Buffett bemoaned the fact that relentlessly rising asset prices made it nigh impossible to find whale-sized acquisitions – Berkshire’s cash hoard essentially doubled, from $75 billion to about $147 billion.

Watching the cash pile up, however, was preferable to destroying capital by overpaying for assets in an aging bull market.

But now, with share prices falling and consumer prices rising, putting cash to work in more attractively priced companies that pay dividends and buy back their own stock is almost irresistible. 

For example, Buffett bought $600 million additional shares in Apple (AAPL, $159.48) following a three-session decline in the stock in Q1. The iPhone maker recently authorized a $90 billion share repurchase program and disburses more than $14 billion in dividends annually. 

Or take the case of HP (HPQ, $37.9). Hefty buybacks and dividends – not to mention a cheap valuation – no doubt factored into Buffett’s purchase of a major stake in the computer and printer maker in April, Kass notes.

Topping off Buffett’s buying was an $11.6 billion outlay to outright acquire insurer Alleghany. This Warren Buffett move wasn’t tied to inflation – it just seemed a fruitful way to put more of that cash to work. Kunal Sawhney, CEO of independent equity research firm Kalkine, says Alleghany makes a perfect strategic fit with Berkshire’s extant insurance businesses. 

Even after Buffett’s Q1 buying extravaganza, Berkshire retains $106 billion in its arsenal of financial firepower. If stocks keep struggling amid intense inflationary pressures, expect Buffett to make even more bold bets and splashy buys. 

Source: kiplinger.com