Investing in the Uncertainty of the Financial Markets
The world is currently experiencing a time of widespread economic uncertainty. With anaemic global growth rates, excessive government debt, and an aggressive policy of monetary expansion the scene is set for an interesting period of investment in the stock markets. It comes as no surprise that technology analysts and fund managers are more vocal in their opinion that a tech bubble is about to pop. This would leave a massive sector of the global economy vulnerable, with Apple, Google, Facebook, Amazon, Alibaba, Twitter, Yahoo and other major stocks subject to a 10% – 20% correction or more. Top binary option broker, Banc De Binary expects that the tech bubble will lead declines in general stock sentiment, but that better value will be attained when the correction takes place. When the inevitable bubble bursts, or slowly deflates, investors will be out bargain hunting for stocks.
The Current Challenge: Investing in Volatility
The current investment climate is an interesting one. The existence of high levels of government debt, quantitative easing and lacklustre economic growth cannot be denied. Many factors were involved in the 2008 global financial crisis that led to the housing bubble bursting. By 2006, the ratio of home prices (median prices) to income (median incomes) rose to 5:1. This was significant since it showed that the rate of income growth was slowing. To counter the problem, the Fed began expanding the money supply with a series of quantitative easing programs. These began with T.A.R.P., QE II, Operation Twist, and QE III. Government debt has soared to $17.5 trillion, but in the absence of the monetary stimulus program, the U.S. economy would have gone into freefall and a major economic depression would have ensued.
Currency traders are cautiously eyeing the global landscape too. Q1 results from the U.S. economy in 2015 have come in below expectations and the eurozone has been outstripping the U.S. over the short term. This has placed the dollar under pressure, as QE policies in Europe boost euro demand and short-term strength. Top binary option brokers have seen an increasing number of put options on dollars and high volumes of call options on euros. General sentiment seems to support the notion that the long-term prospects for the dollar are sound while that for the euro are less optimistic.
How has Fed Policy Impacted on the Economy?
Oren Laurent, the CEO of a leading binary option broker sees the issue as such: the Fed is pursuing the joint objectives of stable prices and full employment. Since as much as 70% of the U.S. economy is driven by consumers, there are only two ways to influence consumer behaviour. One is saving and the other is spending. The current policy has been encouraging consumers to spend money – since saving is automatically discouraged by low interest rates. However, the Fed is likely to increase interest rates later in 2015 and this will then make it more lucrative to save money, stabilize prices and reduce the money supply. The changing economic times were evident in the way that the 10-year U.S. Treasury rose by over 1% during 2013. As the price of bonds fell, more bonds were sold and investors were left wondering if interest rates might continue rising.
The Fed has effectively been driving investors towards stocks. And when the stock market rises, consumer expenditure increases too. The sheer growth of stocks has been substantial and even hedge fund managers have been taken by surprise. Since Fed policy has driven the increase in stocks, it will also be Fed policy that is responsible for stocks dropping when interest rates rise. The fact is that higher interest rates are a discouragement to investing in the stock market. With more to be gained from investing your funds elsewhere the attractiveness of the NYSE, NASDAQ and LSE to name a few would diminish. Now that tech industry bigwigs from Snapchat and Buzzfeed are suggesting that a tech bubble is a reality, investors are a little cautious about going gung-ho under present conditions.
Since nobody has a crystal ball as to the merits of investing in the stock market now, it is safe to say that investors who shied away from stocks did not benefit during the past year. Over the long term, there is no doubt that the stock market outperforms other investment options. The Vanguard Group generated 90% returns in lump sum investments between 1926 and 2011 in rolling 10-year investments periods. Waiting for a correction before going all in is also foolhardy since corrections tend to occur when prices have already factored in the ‘correction’ making stocks overpriced. Sage advice is to engage in dollar-cost averaging – investing regular amounts over time to build up a substantial financial portfolio – be it via binary options or traditional stocks.