Why does hint of Fed interest rate hike trigger sell-off?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
goshenBogle
Posts: 107
Joined: Thu Oct 06, 2011 6:12 pm

Why does hint of Fed interest rate hike trigger sell-off?

Post by goshenBogle » Mon Sep 12, 2016 6:20 am

I really do not understand why a probable rise in the Fed interest rate should make the market drop. We have known for many, many, many months that the rate will increase. Heck, it has to increase to prevent a potential overheating of the economy. So an increase of 1/2% or even 1% should be no big deal. I'm sure that institutions, which hold so much of the market, know this. We all know this. Yet all it takes is a single news report to start the market tumbling.

So who is doing the selling? And why does a small increase in the Fed rate trigger this selling? And am I naive to even be asking these questions?
Retired and loving it!!!!

User avatar
MossySF
Posts: 2292
Joined: Thu Apr 19, 2007 9:51 pm
Contact:

Re: Why does hint of Fed interest rate hike trigger sell-off?

Post by MossySF » Mon Sep 12, 2016 6:32 am

Day-to-day market movements are controlled by computers nowadays. These firms running these computers are not looking for long-term investments. Instead, many trading algorithms trigger directly off news. They constantly scrape for news sites/twitter/official press releases/sec filings/etc and the moment certain criteria is met, things are either bought or sold because they are looking to get ahead of the general news. Then they have direct fiber connections to the stock exchanges -- usually by being in the same building and paying mega-bucks for a cable run to gain a 20ms advantage over firms not in the building. Those extra milliseconds/seconds from just getting ahead of the news means tons of profits. Now the traders who can't afford a server in the same building as NYSE/NASDAQ/etc can still run their computers and beat the general public but earn less profits. So all this trading back-and-forth by computers is what is driving the market prices. (Prices are set at the margin so the 1% of computers buying/selling will set the price for the 99% of human stock owners doing nothing.)

Long-term, the market is controlled by people investing because if we take our money out, then the computers running the day-to-day show no longer have money to move the market.

jjface
Posts: 2548
Joined: Thu Mar 19, 2015 6:18 pm

Re: Why does hint of Fed interest rate hike trigger sell-off?

Post by jjface » Mon Sep 12, 2016 7:14 am

Just goes to show that us mere investors are pawns in this game.

User avatar
Blueskies123
Posts: 415
Joined: Sat Nov 15, 2014 7:18 pm
Location: South Florida

Re: Why does hint of Fed interest rate hike trigger sell-off?

Post by Blueskies123 » Mon Sep 12, 2016 7:16 am

I also think that there is a lot of borrowed money money in the stock market. How many billions have been borrowed at 1% or 2% and the proceeds put into dividend stocks paying 4%. A single quarter point Fed increase will not change the computer simulations but the spreadsheet geeks are worried about the next 2 or 3 Fed increases.
On Friday some of them took money off the table. If the Fed raises again then the borrowers will run for the hills.

Valuethinker
Posts: 35639
Joined: Fri May 11, 2007 11:07 am

Re: Why does hint of Fed interest rate hike trigger sell-off?

Post by Valuethinker » Mon Sep 12, 2016 7:50 am

goshenBogle wrote:I really do not understand why a probable rise in the Fed interest rate should make the market drop. We have known for many, many, many months that the rate will increase. Heck, it has to increase to prevent a potential overheating of the economy. So an increase of 1/2% or even 1% should be no big deal. I'm sure that institutions, which hold so much of the market, know this. We all know this. Yet all it takes is a single news report to start the market tumbling.

So who is doing the selling? And why does a small increase in the Fed rate trigger this selling? And am I naive to even be asking these questions?
But the rise kept getting postponed.

There's a difference between a vague general handwaving of "the Fed will tighten" and the actuality of it doing so.

A quicker than expected tightening also means future rate rises may be sooner, so the market is adjusting its expectations not just of this interest rate rise, but future ones.

Since US stocks have basically been held in place not by rising earnings (they are falling) but by the absence of good alternatives, anything that makes bonds more attractive is going to suck money out of equities, particularly interest sensitive sectors like utilities, REITs.

Tamalak
Posts: 535
Joined: Fri May 06, 2016 2:29 pm

Re: Why does hint of Fed interest rate hike trigger sell-off?

Post by Tamalak » Mon Sep 12, 2016 7:56 am

I too was surprised by this, thinking it was priced into the market.

But wait - what if the MARKET thought it was priced into the market, so that when it dropped, it freaked out and dropped more? I certainly had a vague temptation to sell Friday because the market gave the impression it was overpriced from dropping due to Fed talk.

So basically the S&P is like a dog so stupid it's startled by its own barking..

User avatar
VictoriaF
Posts: 18517
Joined: Tue Feb 27, 2007 7:27 am
Location: Black Swan Lake

Re: Why does hint of Fed interest rate hike trigger sell-off?

Post by VictoriaF » Mon Sep 12, 2016 10:01 am

If I(*) have some liquid assets I can invest them in either stocks or bonds. When bond earnings are low, I am motivated to invest in stocks to get better earnings. When fixed income earnings are increased, as an eventual consequence of the Federal Reserve raising their rates, my risk-return balance favors more bonds and less stocks.

As an individual investor, I react to these changes slowly. Actions by professionals beat me to it, and thus make any actions on my part inconsequential and possibly imprudent.

Victoria

(*) I use "I" and "my" as figures of speech. In reality, I have a lot of cash for spending in the upcoming years, and market's fluctuations are quite irrelevant to my planning.
WINNER of the 2015 Boglehead Contest. | Every joke has a bit of a joke. ... The rest is the truth. (Marat F)

Valuethinker
Posts: 35639
Joined: Fri May 11, 2007 11:07 am

Re: Why does hint of Fed interest rate hike trigger sell-off?

Post by Valuethinker » Mon Sep 12, 2016 10:25 am

Tamalak wrote:I too was surprised by this, thinking it was priced into the market.

But wait - what if the MARKET thought it was priced into the market, so that when it dropped, it freaked out and dropped more? I certainly had a vague temptation to sell Friday because the market gave the impression it was overpriced from dropping due to Fed talk.

So basically the S&P is like a dog so stupid it's startled by its own barking..
The MARKET is not uniform in its expectations nor positioning. It is simply a price set by the last buyer and the last seller.

Even if consensus "expects" something to happen, until it *does* happen not everyone will be convinced or positioned for that event.

You will recall we had a mini bear market around the last Fed rise?

User avatar
flashboy
Posts: 62
Joined: Sun Jul 31, 2016 10:05 pm

Re: Why does hint of Fed interest rate hike trigger sell-off?

Post by flashboy » Mon Sep 12, 2016 11:00 am

Valuethinker wrote:
Tamalak wrote:I too was surprised by this, thinking it was priced into the market.

But wait - what if the MARKET thought it was priced into the market, so that when it dropped, it freaked out and dropped more? I certainly had a vague temptation to sell Friday because the market gave the impression it was overpriced from dropping due to Fed talk.

So basically the S&P is like a dog so stupid it's startled by its own barking..
The MARKET is not uniform in its expectations nor positioning. It is simply a price set by the last buyer and the last seller.

Even if consensus "expects" something to happen, until it *does* happen not everyone will be convinced or positioned for that event.

You will recall we had a mini bear market around the last Fed rise?
Even if the market were uniform in its expectations and positioning, you would still see a reaction to news. Market expectations are probabilistic in nature, even if everyone agreed on the probabilities. News "collapses" the wave function, if you will.

User avatar
greg24
Posts: 3215
Joined: Tue Feb 20, 2007 10:34 am

Re: Why does hint of Fed interest rate hike trigger sell-off?

Post by greg24 » Mon Sep 12, 2016 11:03 am

Animal spirits.

User avatar
BolderBoy
Posts: 4019
Joined: Wed Apr 07, 2010 12:16 pm
Location: Colorado

Re: Why does hint of Fed interest rate hike trigger sell-off?

Post by BolderBoy » Mon Sep 12, 2016 11:04 am

goshenBogle wrote:So an increase of 1/2% or even 1% should be no big deal.
A 1% increase is potentially a very big deal on one front: the federal budget. The interest payment on the debt presently is not outrageous. Raise the rate acutely to 1% and could that payment become the budgetary elephant in the room? It is part of the Fed's problem with setting their desired target interest rate.

The market is sensitive to this concern as well as the others posted above.
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect

Tamalak
Posts: 535
Joined: Fri May 06, 2016 2:29 pm

Re: Why does hint of Fed interest rate hike trigger sell-off?

Post by Tamalak » Mon Sep 12, 2016 11:54 am

flashboy wrote:
Valuethinker wrote:
Tamalak wrote:I too was surprised by this, thinking it was priced into the market.

But wait - what if the MARKET thought it was priced into the market, so that when it dropped, it freaked out and dropped more? I certainly had a vague temptation to sell Friday because the market gave the impression it was overpriced from dropping due to Fed talk.

So basically the S&P is like a dog so stupid it's startled by its own barking..
The MARKET is not uniform in its expectations nor positioning. It is simply a price set by the last buyer and the last seller.

Even if consensus "expects" something to happen, until it *does* happen not everyone will be convinced or positioned for that event.

You will recall we had a mini bear market around the last Fed rise?
Even if the market were uniform in its expectations and positioning, you would still see a reaction to news. Market expectations are probabilistic in nature, even if everyone agreed on the probabilities. News "collapses" the wave function, if you will.
True but my impression is that the probability of a rake hike soon was considered to be near 100%. So there's not much to collapse if you get verification of this.

User avatar
Toons
Posts: 12926
Joined: Fri Nov 21, 2008 10:20 am
Location: Hills of Tennessee

Re: Why does hint of Fed interest rate hike trigger sell-off?

Post by Toons » Mon Sep 12, 2016 11:55 am

Noise
:happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

User avatar
flashboy
Posts: 62
Joined: Sun Jul 31, 2016 10:05 pm

Re: Why does hint of Fed interest rate hike trigger sell-off?

Post by flashboy » Mon Sep 12, 2016 11:59 am

Tamalak wrote:
flashboy wrote:
Valuethinker wrote:
Tamalak wrote:I too was surprised by this, thinking it was priced into the market.

But wait - what if the MARKET thought it was priced into the market, so that when it dropped, it freaked out and dropped more? I certainly had a vague temptation to sell Friday because the market gave the impression it was overpriced from dropping due to Fed talk.

So basically the S&P is like a dog so stupid it's startled by its own barking..
The MARKET is not uniform in its expectations nor positioning. It is simply a price set by the last buyer and the last seller.

Even if consensus "expects" something to happen, until it *does* happen not everyone will be convinced or positioned for that event.

You will recall we had a mini bear market around the last Fed rise?
Even if the market were uniform in its expectations and positioning, you would still see a reaction to news. Market expectations are probabilistic in nature, even if everyone agreed on the probabilities. News "collapses" the wave function, if you will.
True but my impression is that the probability of a rake hike soon was considered to be near 100%. So there's not much to collapse if you get verification of this.
"Soon" is not defined. "Near 100%" is not 100%. And probabilities of subsequent rate hikes are important, too.

User avatar
nedsaid
Posts: 10204
Joined: Fri Nov 23, 2012 12:33 pm

Re: Why does hint of Fed interest rate hike trigger sell-off?

Post by nedsaid » Mon Sep 12, 2016 2:33 pm

goshenBogle wrote:I really do not understand why a probable rise in the Fed interest rate should make the market drop. We have known for many, many, many months that the rate will increase. Heck, it has to increase to prevent a potential overheating of the economy. So an increase of 1/2% or even 1% should be no big deal. I'm sure that institutions, which hold so much of the market, know this. We all know this. Yet all it takes is a single news report to start the market tumbling.

So who is doing the selling? And why does a small increase in the Fed rate trigger this selling? And am I naive to even be asking these questions?
Quite frankly, this mystifies me too. I have had stock market investments for 32 years and weird things like Friday happen that I can't explain.

Yes, there are investors who use leverage. Yes, many market participants are not really long term investors but are short term traders. And yes, the robots go crazy sometimes.

This panic seems to come from the large institutions, who quite frankly, ought to know better. Individuals get trashed all the time in the financial press for being too short term in their thinking, too emotional, and prone to performance chasing. The big institutions are not immune to this behavior.

When events like Friday come along, I just shake my head in wonderment.
A fool and his money are good for business.

User avatar
saltycaper
Posts: 2650
Joined: Thu Apr 24, 2014 8:47 pm
Location: The Tower

Re: Why does hint of Fed interest rate hike trigger sell-off?

Post by saltycaper » Mon Sep 12, 2016 4:03 pm

Neither a hint of an interest rate hike nor an actual interest rate hike necessarily triggers a sell-off. Either could trigger a sell-off if the market was expecting more accommodative policy than was suggested or implemented. Notice dovish comments today by Lael Brainard caused a reversal. The market was not expecting a hike in September, and not even necessarily in 2016. Expectations changed on Friday, and they reverted somewhat today.

As for what hikes indicate, there are numerous factors at play, from increased borrowing costs for businesses and consumers--for the latter particularly mortgage and auto rates--to late stages of the business cycle and the presage of economic contraction, and more specifically today, what happens when you move off of near zero-rate policy and whither "asset bubbles" that have been bloating even after Brexit. And by potentially indicating these things, that says nothing yet about whether the Fed is actually wrong to hike, which could have a much worse outcome.

There is uncertainty over what the Fed will do, but all the talk of what the Fed will do sometimes obscures the larger question of what the Fed ought to do, which is exposed when it comes time for the Fed to make a decision, along with all the uncertainties that are always with us.
Quod vitae sectabor iter?

User avatar
Phineas J. Whoopee
Posts: 7370
Joined: Sun Dec 18, 2011 6:18 pm

Re: Why does hint of Fed interest rate hike trigger sell-off?

Post by Phineas J. Whoopee » Mon Sep 12, 2016 9:52 pm

goshenBogle wrote:I really do not understand why a probable rise in the Fed interest rate should make the market drop. We have known for many, many, many months that the rate will increase. ...
I'm probably going to respond to several individual posts in this thread.

Over the short term, an increase in interest rates will make it more expensive for businesses to operate, not just to expand. Many borrow their working capital, that is, the money they have to pay now to produce widgets, like paying for the raw materials, paying employees, and taking care of utility bills, whereas they only get paid for widgets after they're produced and delivered. Operating on borrowed working capital is common, and is one of the reasons behind the recent money market fund regulatory changes.

Over the short term an increase will make it more expensive for customers to borrow to buy widgets. Over the short term rising rates are bad for business and consumer spending, therefore bad for earnings.

Over the long term the conditions which result in an increase, like greater productivity, consumer spending, and international trade, are good for earnings.

I don't think it should be surprising that short term movements in market prices reflect short term concerns.
goshenBogle wrote:So who is doing the selling? And why does a small increase in the Fed rate trigger this selling? And am I naive to even be asking these questions?
Anybody who owns stocks can buy or sell at will, during market hours. The confusing part is potential buyers and sellers mostly disagree with each other about prices. The most recent transaction, by accounting convention, is assumed to be the correct price. One could argue against that procedure, but at least everybody can agree on what the last price was. Other accounting conventions, unless somebody has a novel idea, have proven to be worse, for stocks.

I wrote about the mechanics behind the disagreement and the accounting convention in the middle part of this post.

PJW

User avatar
Phineas J. Whoopee
Posts: 7370
Joined: Sun Dec 18, 2011 6:18 pm

Re: Why does hint of Fed interest rate hike trigger sell-off?

Post by Phineas J. Whoopee » Mon Sep 12, 2016 9:54 pm

jjface wrote:Just goes to show that us mere investors are pawns in this game.
As is anybody, which is mostly but not entirely everybody, whose own trades are too small to move markets.
PJW

User avatar
Phineas J. Whoopee
Posts: 7370
Joined: Sun Dec 18, 2011 6:18 pm

Re: Why does hint of Fed interest rate hike trigger sell-off?

Post by Phineas J. Whoopee » Mon Sep 12, 2016 9:57 pm

Blueskies123 wrote:I also think that there is a lot of borrowed money money in the stock market. How many billions have been borrowed at 1% or 2% and the proceeds put into dividend stocks paying 4%. A single quarter point Fed increase will not change the computer simulations but the spreadsheet geeks are worried about the next 2 or 3 Fed increases.
...
The Fed does not directly control brokers' margin rates. They make their own business decisions for their own profitability reasons.
PJW

User avatar
Phineas J. Whoopee
Posts: 7370
Joined: Sun Dec 18, 2011 6:18 pm

Re: Why does hint of Fed interest rate hike trigger sell-off?

Post by Phineas J. Whoopee » Mon Sep 12, 2016 10:02 pm

Tamalak wrote:...
But wait - what if the MARKET thought it was priced into the market, so that when it dropped, it freaked out and dropped more? I certainly had a vague temptation to sell Friday because the market gave the impression it was overpriced from dropping due to Fed talk.

So basically the S&P is like a dog so stupid it's startled by its own barking..
Market prices aren't controlled by what you think. They're controlled by what everybody else thinks. Everybody else knows that too, therefore in order to beat the market you have to know what everybody else thinks everybody else thinks. :wink:
PJW

jalbert
Posts: 3584
Joined: Fri Apr 10, 2015 12:29 am

Re: Why does hint of Fed interest rate hike trigger sell-off?

Post by jalbert » Mon Sep 12, 2016 10:04 pm

I really do not understand why a probable rise in the Fed interest rate should make the market drop.
How do you know that was the cause? Maybe some other event was a fundamental cause, and stock and bond selloffs as well as a rise in probability of rate hikes are all symptoms of the fundamental cause?

User avatar
Phineas J. Whoopee
Posts: 7370
Joined: Sun Dec 18, 2011 6:18 pm

Re: Why does hint of Fed interest rate hike trigger sell-off?

Post by Phineas J. Whoopee » Mon Sep 12, 2016 10:08 pm

VictoriaF wrote:If I(*) have some liquid assets I can invest them in either stocks or bonds. When bond earnings are low, I am motivated to invest in stocks to get better earnings. ...
Stocks have earnings. Bonds have yields. They are very much different, which is good because that way we can efficiently diversify our portfolios using near zero correlation assets.
PJW

User avatar
Phineas J. Whoopee
Posts: 7370
Joined: Sun Dec 18, 2011 6:18 pm

Re: Why does hint of Fed interest rate hike trigger sell-off?

Post by Phineas J. Whoopee » Mon Sep 12, 2016 10:15 pm

BolderBoy wrote:
goshenBogle wrote:So an increase of 1/2% or even 1% should be no big deal.
A 1% increase is potentially a very big deal on one front: the federal budget. The interest payment on the debt presently is not outrageous. Raise the rate acutely to 1% and could that payment become the budgetary elephant in the room? It is part of the Fed's problem with setting their desired target interest rate.
...
You express a political opinion, that the Fed's monetary policy is beholden to fiscal policy. I have no problem with people holding political opinions, but I do have a problem with stating said opinions as fact.

The federal government, via the Treasury Department, borrows to finance the current deficit as well as to refund the debt. That's a fact, not an opinion. The Treasury decides how to structure the debt, including by borrowing at present low nominal rates, and low real rates, for up to thirty years. No successful competitive bidder at a primary Treasury auction, which confusingly are conducted by the Fed although they don't issue the securities, they just conduct auctions as one of the banking services they provide for the federal government, receives less yield than they asked for to begin with.

Then the secondary market takes over.

PJW

User avatar
Phineas J. Whoopee
Posts: 7370
Joined: Sun Dec 18, 2011 6:18 pm

Re: Why does hint of Fed interest rate hike trigger sell-off?

Post by Phineas J. Whoopee » Mon Sep 12, 2016 10:31 pm

nedsaid wrote:...
Quite frankly, this mystifies me too. I have had stock market investments for 32 years and weird things like Friday happen that I can't explain.
...
Events like Friday's very mild 2.5% one-day decline are difficult to understand iff there is a correct price that can be determined outside of the market. There isn't. I wrote about it toward the beginning of this post.
nedsaid wrote:This panic seems to come from the large institutions, who quite frankly, ought to know better. Individuals get trashed all the time in the financial press for being too short term in their thinking, too emotional, and prone to performance chasing. The big institutions are not immune to this behavior.
...
The institutions are not necessarily panicking. Some are adjusting their portfolios, sometimes in complex trading strategies for short-term gain. That the market price changed doesn't imply everybody, or even everybody you personally disagree with, gets it wrong. It only means the most recent transaction took place at a lower price than the transaction just before, which is strictly an accounting convention. Most actual and potential market participants disagree about prices most of the time. As I already linked in this post, I wrote about it here.

PJW

User avatar
whodidntante
Posts: 3909
Joined: Thu Jan 21, 2016 11:11 pm

Re: Why does hint of Fed interest rate hike trigger sell-off?

Post by whodidntante » Mon Sep 12, 2016 11:13 pm

It's not useful to think in terms of a selloff. That's not what is occurring. There is someone else taking the other side of the trade to buy the asset.

If the buyer thinks he can get an asset cheap, he won't be willing to pay more. You wouldn't buy a car today if you believe you can get it next week for 10% off, unless you are desperate for a car. This is one reason why nations go to great lengths to avoid deflation. It can slow economic activity dramatically.

Downward movements tend to inspire further downward movement as other buyers decide to wait and see, or maybe just do a little buying and leave cash on the sidelines. People are not typically desperate to buy stocks, especially in a market that is moving down. So downward movements in the stock market can be impressively rapid, and cannot be explained by the economic impact of any news that sparked it.

Valuethinker
Posts: 35639
Joined: Fri May 11, 2007 11:07 am

Re: Why does hint of Fed interest rate hike trigger sell-off?

Post by Valuethinker » Tue Sep 13, 2016 4:55 am

nedsaid wrote:
goshenBogle wrote:I really do not understand why a probable rise in the Fed interest rate should make the market drop. We have known for many, many, many months that the rate will increase. Heck, it has to increase to prevent a potential overheating of the economy. So an increase of 1/2% or even 1% should be no big deal. I'm sure that institutions, which hold so much of the market, know this. We all know this. Yet all it takes is a single news report to start the market tumbling.

So who is doing the selling? And why does a small increase in the Fed rate trigger this selling? And am I naive to even be asking these questions?
Quite frankly, this mystifies me too. I have had stock market investments for 32 years and weird things like Friday happen that I can't explain.

Yes, there are investors who use leverage. Yes, many market participants are not really long term investors but are short term traders. And yes, the robots go crazy sometimes.

This panic seems to come from the large institutions, who quite frankly, ought to know better. Individuals get trashed all the time in the financial press for being too short term in their thinking, too emotional, and prone to performance chasing. The big institutions are not immune to this behavior.

When events like Friday come along, I just shake my head in wonderment.
You saw the largest flow of funds out of the largest Emerging Markets ETF in its history.

Was that institutional investors? Or individuals?

User avatar
telemark
Posts: 2299
Joined: Sat Aug 11, 2012 6:35 am

Re: Why does hint of Fed interest rate hike trigger sell-off?

Post by telemark » Tue Sep 13, 2016 10:38 am

jalbert wrote:
I really do not understand why a probable rise in the Fed interest rate should make the market drop.
How do you know that was the cause? Maybe some other event was a fundamental cause, and stock and bond selloffs as well as a rise in probability of rate hikes are all symptoms of the fundamental cause?
Hmm. You mean like maybe a large Korean shipping company going bankrupt, leaving loaded ships all around the world with nowhere to dock?

http://www.bloomberg.com/news/articles/ ... n-ceo-says

User avatar
VictoriaF
Posts: 18517
Joined: Tue Feb 27, 2007 7:27 am
Location: Black Swan Lake

Re: Why does hint of Fed interest rate hike trigger sell-off?

Post by VictoriaF » Tue Sep 13, 2016 11:18 am

Phineas J. Whoopee wrote:
VictoriaF wrote:If I(*) have some liquid assets I can invest them in either stocks or bonds. When bond earnings are low, I am motivated to invest in stocks to get better earnings. ...
Stocks have earnings. Bonds have yields. They are very much different, which is good because that way we can efficiently diversify our portfolios using near zero correlation assets.
PJW
Does it mean that investing is passive-aggressive: bonds yield to stocks' earnings?

Victoria
WINNER of the 2015 Boglehead Contest. | Every joke has a bit of a joke. ... The rest is the truth. (Marat F)

Call_Me_Op
Posts: 6995
Joined: Mon Sep 07, 2009 2:57 pm
Location: Milky Way

Re: Why does hint of Fed interest rate hike trigger sell-off?

Post by Call_Me_Op » Tue Sep 13, 2016 11:36 am

Anyone concerned about rising rates must have a short-term view, because in the long term the rising rates will benefit both stocks and bonds.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

rgs92
Posts: 2139
Joined: Mon Mar 02, 2009 8:00 pm

Re: Why does hint of Fed interest rate hike trigger sell-off?

Post by rgs92 » Tue Sep 13, 2016 11:45 am

Thanks MossySF, that was a great post yesterday (it's the 2nd post in this thread). (Everyone should read it to calm themselves about volatility.)
But in a way, this robo-trading is good, since eventually, those machines are programmed to detect when things have gone too far and bring things back in line with their "true" rational economic value.

User avatar
Yesterdaysnews
Posts: 426
Joined: Sun Sep 14, 2014 1:25 pm

Re: Why does hint of Fed interest rate hike trigger sell-off?

Post by Yesterdaysnews » Tue Sep 13, 2016 11:53 am

The market imo is a fundamentally different animal today with super-fast computers, fiber connections, HFT and algorithmic trading than it was 10 or 15 years ago.

I always buy on large sell-off days and so far that has worked well for me (ie Brexit).

Keep some dry powder, buy index ETFs on large down days, and hold forever... that's my strategy.

kolea
Posts: 1234
Joined: Fri Jul 11, 2014 5:30 pm
Location: Maui and Columbia River Gorge

Re: Why does hint of Fed interest rate hike trigger sell-off?

Post by kolea » Tue Sep 13, 2016 12:50 pm

BolderBoy wrote:
goshenBogle wrote:So an increase of 1/2% or even 1% should be no big deal.
A 1% increase is potentially a very big deal on one front: the federal budget. The interest payment on the debt presently is not outrageous. Raise the rate acutely to 1% and could that payment become the budgetary elephant in the room? It is part of the Fed's problem with setting their desired target interest rate.

The market is sensitive to this concern as well as the others posted above.
You have to remember that the Fed only sets the rate on overnight interest rates. Bonds and Notes interest is set by market forces. The overnight rate will affect bond interest eventually but it will take time for that to happen. The biggest effect of the Fed raising rates is on mortgages (which are often keyed to the LIBOR, which is short-term rates), short term debt like CDs and bank deposits. The economy will feel the effect more than anything since ready supply of money is necessary. The fear of the Fed is not so much that the bond market will be hurt but that the economy will falter. At least that is my understanding.
Kolea (pron. ko-lay-uh). Golden plover.

User avatar
Oicuryy
Posts: 1236
Joined: Thu Feb 22, 2007 10:29 pm

Re: Why does hint of Fed interest rate hike trigger sell-off?

Post by Oicuryy » Tue Sep 13, 2016 1:22 pm

goshenBogle wrote:We have known for many, many, many months that the rate will increase. Heck, it has to increase to prevent a potential overheating of the economy. So an increase of 1/2% or even 1% should be no big deal.
Not everyone is so sure the economy is in immediate danger of overheating. Maybe it is barely above freezing. A 2% GDP growth rate is tepid at best. A premature doubling or tripling of the federal funds target could push the economy below zero.

One of the factors in Friday's decline was the announcement that Fed governor Brainard would make a speech on Monday. There was concern she would change her view on the timing of a rate hike. She didn't. In fact, she argued for erring on the side of overheating.
Lael Brainard wrote:Conventional changes in the federal funds rate, our most tested and best understood tool, cannot be used as readily to respond to downside shocks to aggregate demand as it can to upside shocks. While there are, of course, other policy options, these alternatives have constraints and uncertainties that are not present with conventional policy. From a risk-management perspective, therefore, the asymmetry in the conventional policy toolkit would lead me to expect policy to be tilted somewhat in favor of guarding against downside risks relative to preemptively raising rates to guard against upside risks.
Ron
Money is fungible | Abbreviations and Acronyms

User avatar
LadyGeek
Site Admin
Posts: 47401
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Why does hint of Fed interest rate hike trigger sell-off?

Post by LadyGeek » Tue Sep 13, 2016 4:00 pm

I removed a comment which stated a perspective on deficit spending. As a reminder, see: Unacceptable Topics
Non-actionable (Trolling) Topics

If readers can't do anything with the content of a topic other than argue about it, it does not belong here. Examples include:
  • US or world economic, political, tax, health care and climate policies
  • conspiracy theories of any type
  • discussions of the crimes, shortcomings or stupidity of other people, whether they be political figures, celebrities, CEOs, Fed chairmen, subprime mortgage borrowers, lottery winners, federal "bailout" recipients, poor people, rich people, etc. Of course, you are welcome to talk about the stupid financial things you have done.
Here's why we have this policy: Re: Yellen: "We're taking a look at negative interest rates."

Please stay focused on actionable investing discussions.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

Waba
Posts: 375
Joined: Wed Feb 26, 2014 9:19 pm

Re: Why does hint of Fed interest rate hike trigger sell-off?

Post by Waba » Wed Sep 14, 2016 12:31 am

ES futures started trending down on friday about 3 hours before the Fed person spoke.
Just because the financial media turns correlation into causation doesn't make it so.

Post Reply