Wow! What another crazy week! Volatility is back in full swing, with the VIX jumping up a ton this week. As you can see below, just look at the huge swings each day! Buy! Sell! Buy! Sell! Where are we going? Sideways the hard way!
Here is what drove the market to wild swings:
1. The S&P Downgrade: Everyone knows at this point that S&P downgraded US debt’s credit rating to AA+. Basically, it shattered a perfect track record. This sent the market down huge on Monday, the first trading day after the announcement. But what does it really mean? Not a whole lot. As you may have read in my Mutual Fund Problem, people still rush to buy US Treasuries in times of turmoil. While this may seem counter-intuitive, the fact is that US Debt is still the safest thing out there, even if the US defaults. If it does default, it is because of political pressure, not fiscal issues. As a result, bond holders will still eventually get paid, just once the politicians figure it out.
2. European Banking Crisis: There is now speculation about a brewing European banking crisis similar to our 2008 crisis. This sent stocks lower mid-week, with financial companies taking a huge hit.
3. FMOC Meeting: The Fed also announced earlier in the week that it is planning to hold interest rates at historic lows until possibly 2013. That is actually a combination of relief and fear. It is relieving because it shows the Fed is paying close attention to the economy. It is scary because it shows the Fed is thinking the economy will be soft through 2012 – another 5-6 quarters at least. That is a long time with stagnant economic growth.
What does this all mean?
- Possible Buying Opportunities: With these recent downturns, there may be some opportunities to invest in great companies at good prices. If there is a company that you like, keep an eye on the price. I have been putting in low limit orders lately to see if something triggers in a volatile swing and large bid/ask spreads. I have got some great companies during the worst drops on Monday and Wednesday.
- Low Interest Rates = REITs: With interest rates staying low throughout 2012, it will continue to be a great time to take advantage of Agency Mortgage REITs. These companies take advantage of low rates and invest in government backed mortgages. They play that spread, leverage themselves, and pay a huge dividend to shareholders. Get in now before prices are driven up by speculative buying.
Readers, what are you thoughts about this crazy market week?
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This post was written by...
Robert – who has written 317 posts on The College Investor.
Robert is the founder and editor of The College Investor, a personal finance site dedicated to young adult and college student finances. You can learn more about him here and connect with him on Twitter or Facebook.
{ 8 comments… read them below or add one }
Sideways the hard way. Perfect sentiment and no other way to describe it.
Thanks! I like that line too!
Overall, my assessment is that there are some serious issues with our financial situation here in the US.
That being said, I’m a long-term investor. That hasn’t changed, as we’ve all known about our debt issues. The downgrade itself basically calls out what we already recognize.
I do agree with you that there could be some value buying opportunities on the downswings. And make no mistake, with the volatility in the market, there have been big ups and downs. The value opportunites can emerge when otherwise solid companies with very good prospects are dragged down with the market. Despite being more of an index fund type of guy, sometimes you have to consider when there are true opportunities.
If you’re an index fund guy anyway, you can add into your funds at lower prices, which is always a win.
Nice recap. I’m more of an index guy, too, but can’t deny some great companies will go on sale just because everything else is tanking. In the long run, can’t go wrong if you bargain shop the cream of the crop!
In a market like this, no one makes money. The traders will be clobbered by the volatility swings, and both the long and shorts (especially shorts) won’t make money because the market is non-trending.
Hey Tony, if no one makes money during times like this, what should one do?
I think crazy week about sums it up. I’m sticking to my strategy of investing a set amount monthly and just figure that time will tell though.