The Fed ⬆️ rates, this ⬆️ borrowing costs for banks and pretty much everyone else.
The story then unfolds:
Interest rates ⬆️, mortgage and credit card rates ⬆️, disposable income 🔽
S&P500 is down 6.5% since the start of January.
Nasdaq is down over 10%, the Dow 6%.
Why do stocks go down when Treasury yields (i.e. interest rates) go up?
Especially tech stocks!
Thread 👇 🧵
The Fed ⬆️ rates, this ⬆️ borrowing costs for banks and pretty much everyone else.
The story then unfolds:
Interest rates ⬆️, mortgage and credit card rates ⬆️, disposable income 🔽
When you spend less, firms sell less stuff.
This in turn affects company earnings, and by extension their stock prices.
It’s just a way how investors value stocks.
Anticipating what the future cash flow of tech firms is worth today.
And the discount factor reflects interest rates in the economy.
As interest rates go ⬆️ the present value of future earnings goes 🔽
Remember that most tech stocks have very high expected future earnings.
And as a consequence extremely high valuations.
And it hasn't even raised them yet!
Why does that warrant such a big correction?
Sure, the Fed didn’t raise rates yet, but the bond market is adapting to *expectations* of 3 to 4 interest rate hikes this year.
Because as the economy overheats - higher exp. growth & higher inflation - the Fed raises it’s federal funds rate
(short-term interest rates basically)
This sends short-term T-yields ⬆️
(the 1-mo, 2-mo, 3-mo, 6-mo rates)
They expect short-term rates to fall in the future.
So they buy long-term bonds, thus pushing their price down.
(see this thread for an explanation of how this works)
https://t.co/Cd45dlta8K
6/ If there is greater demand for a bond, and its price goes\U0001f53cto, say, $1050, the current yield is 20/1050 = 1.9%
— Vuk Vukovic (@wolf_vukovic) November 15, 2021
If the price of a bond goes\U0001f53bdue to less demand, say to $920, the current yield jumps to 20/920 = 2.17%
Hence the inverted relationship btw bond yields & prices.
So we get an *inverted* yield curve - a self-perpetuating mechanism that sends signals to investors and at the same time drives reactions of market actors.
It becomes a self-fulfilling prophecy.
That's why keep an eye on the spread between the 2 year (& 3-month) yield to the 10 year yield.
Nothing, really.
It depends on the period you look at.
Stocks went down 40% of the time, up 60% of the time.
Coin-toss, really.
In this case, a 50bps rise in rates moved equities by 1 p.p.
Their logic is that higher rates are necessary due to a strong economy, and a strong economy implies better earnings.
Expect sector rotations during corrections: moving from tech to energy or industrials or banks.
Tech? Don’t exit, take some profits and keep holding
(if you have any profits left, that is!)
And also watch out for that yield curve inversion!
Follow me @wolf_vukovic for more similar stuff on finance, markets and investing.
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1/“What would need to be true for you to….X”
Why is this the most powerful question you can ask when attempting to reach an agreement with another human being or organization?
A thread, co-written by @deanmbrody:
2/ First, “X” could be lots of things. Examples: What would need to be true for you to
- “Feel it's in our best interest for me to be CMO"
- “Feel that we’re in a good place as a company”
- “Feel that we’re on the same page”
- “Feel that we both got what we wanted from this deal
3/ Normally, we aren’t that direct. Example from startup/VC land:
Founders leave VC meetings thinking that every VC will invest, but they rarely do.
Worse over, the founders don’t know what they need to do in order to be fundable.
4/ So why should you ask the magic Q?
To get clarity.
You want to know where you stand, and what it takes to get what you want in a way that also gets them what they want.
It also holds them (mentally) accountable once the thing they need becomes true.
5/ Staying in the context of soliciting investors, the question is “what would need to be true for you to want to invest (or partner with us on this journey, etc)?”
Multiple responses to this question are likely to deliver a positive result.
Why is this the most powerful question you can ask when attempting to reach an agreement with another human being or organization?
A thread, co-written by @deanmbrody:
Next level tactic when closing a sale, candidate, or investment:
— Erik Torenberg (@eriktorenberg) February 27, 2018
Ask: \u201cWhat needs to be true for you to be all in?\u201d
You'll usually get an explicit answer that you might not get otherwise. It also holds them accountable once the thing they need becomes true.
2/ First, “X” could be lots of things. Examples: What would need to be true for you to
- “Feel it's in our best interest for me to be CMO"
- “Feel that we’re in a good place as a company”
- “Feel that we’re on the same page”
- “Feel that we both got what we wanted from this deal
3/ Normally, we aren’t that direct. Example from startup/VC land:
Founders leave VC meetings thinking that every VC will invest, but they rarely do.
Worse over, the founders don’t know what they need to do in order to be fundable.
4/ So why should you ask the magic Q?
To get clarity.
You want to know where you stand, and what it takes to get what you want in a way that also gets them what they want.
It also holds them (mentally) accountable once the thing they need becomes true.
5/ Staying in the context of soliciting investors, the question is “what would need to be true for you to want to invest (or partner with us on this journey, etc)?”
Multiple responses to this question are likely to deliver a positive result.
