Singapore-based financial blog that aims to educate people on personal finance, investments, retirement and their Central Provident Fund (CPF) matters.

Tuesday, 19 August 2014

First post

20:05 Posted by szcszc No comments

Hi, readers. This will be the first post of the blog. Some drum rolls please!

While this is not the latest news, it should have far-reaching effects in terms of how the market will react. As some of you might have caught it, it is the raising of interest rates by the Federal Reserve (Fed). I have also conveniently attached the Wikipedia page of the Fed, which I think is sufficient as a light read on its background and functions.

From the minutes of the FOMC (Federal Open Market Committee meeting), "officials growing more aware that labor markets are returning to health.". Flexibility was also emphasized, whereby if the economic progress is faster than expected, a raise of rates will come sooner. However, if the results are lackluster, the policy will be more accommodating. 

Generally, a raise of interest rates will cause a subsequent drop in the stock market. This is because the cost of funds is higher and now investors have lesser ammunition to load up their firepower in their investments. Furthermore, corporations will also incur higher interest expenses, resulting in lower profits for investors. As it applies to corporations, domestic homeowners will also start to feel the pressuring of the mounting costs of their loans.




As you can see in the charts above, when there is a inverse relationship between interest rates and the stock market's performance. However, there should be something more important in the data that we should note. In every crisis, interest rates have been raised to more than twice its initial level. This is somewhat logically, in a way that corporations and individuals no longer have the ability to pay the high interest expenses and hence, defaulted. This caused a ripple effect in the market, resulting in a recession, where people are now poorer and cut back on spending.

In this all-time low interest rate environment, credit is extremely easy to obtain and finance. This has somewhat supported the global economy and manufactured a man-made economic expansion. This sent stock market levels to all-time. However, this is not the time to greed but to fear as a slight increase of 0.25% will result in twice the interest expense. Should it increase to thrice its existing level, it will be unsustainable. While experts predict this to happen sometime next year, it will be good to prepare for the effects.

I hope you find this informative and if you have any feedback, do leave a comment below. Stay turned as we roll out more features!

Sources:
http://www.philly.com/philly/business/20140823_Yellen_says_she_s_not_satisfied_yet_with_recover.html#1W62bvtYg6eqeHoS.99
http://www.macrotrends.net/1319/dow-jones-100-year-historical-chart
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