With so many themes circling around the market these days you may be wondering how all of this could affect your portfolio and what you should do. Isn’t that the most important question you have when it comes to all of this financial stuff? We’re breaking down some of the key themes that have been a constant this year and explaining what actions you should consider taking.
- Currency Issues: When the U.S. dollar is stronger than other currencies it may help reduce the cost of the goods that we import but it also reduces the value of corporate sales and profits from overseas operations. Remember, 40% of the revenue of the S&P 500 companies comes from overseas. Make sure you have an equal distribution of global and U.S. stocks in your portfolio to balance out any currency risks.
- Lower Interest Rates: When the interest, or yield, you can get from short term bonds is more than long-term bonds why would you buy long-term bonds? Long-term bonds typically pay more interest because investors are rewarded for having to wait longer to get back their money and interest. But when short-term bonds are paying more than the long-term bonds investors get their investment back faster. This is what is going on in the bond market now. As an investor, you should be thinking about buying short-term or intermediate-term bonds so that you can lock in those higher short-term interest rates.
- The Yield Curve: The stock market does not predict recessions. More often than not, the yield curve does. When the interest, or yield, of short-term bonds is higher than long-term bonds Wall Street nerds say that the yield curve has inverted. The yield curve is actually a line that charts the yields of U.S. Treasuries. Historically, when the yield curve inverts, a recession follows within 12-24 months. We have experienced an inverted yield curve this year. Now, the economy is strong so many Wall Street nerds are wondering if there will be a recession that will significantly impact everyone or more of an “on paper” situation. Either way, its time to make sure that your investment portfolios are diversified. A mix or stocks and bonds will help to soften the blow of a falling stock market.
Keeping up with the headlines is one thing but understanding how fundamentals affect your portfolio and your financial life is quite another. Historically, the state of the economy and the strength of corporations, not headlines, are what matter most for the long-term performance of the stock market.
