patrick.net

S&P 500 is up only about 2% since October 2021 when adjusting for inflation.

https://www.multpl.com/inflation-adjusted-s-p-500

Buckle up?



https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value_month=202409

EBGuy says

https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value_month=202409

10 Year Treasury averages about 1.5% above government-reported annual inflation. And 30 Year Mortgage rate is usually 1.25% above the 10 Year Treasury.

Bond market traders may see less inflationary pressure as the rates such as for 10 Year have steadily decreased since it recently peaked around 5% back in 4th quarter of last year.

That is why I did not do anything with my IRAs which about of 50 percent of my IRA is in an investment grade bond fund with medium duration (about 6.5 years).

The bond fund's price dropped about 25% from its all time high (set in summer 2020) when inflation went from nearly 0% to +8%, and the Fed Funds rate went from 0.25% to 5.5%.

Now it is only down about 16% from its all time high. So hopefully the bond fund fares okay, while my total stock market index fund (the other 50%) drops in the Harris-Biden recession.

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EBGuy says

Buckle up?

From what I understand, 10-2 uninverts as we enter recession.

Al_Sharpton_for_President says

From what I understand, 10-2 uninverts as we enter recession.

Maybe the old rules don't apply to the current conditions.

Obsolete rules and economic models may be in play here.

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‘T-Bill and Chill’ Is a Hard Habit for Investors to Break

(Bloomberg) -- It’s been the ultimate no-brainer for more than a year: Park your money in super-safe Treasury bills, earn yields of more than 5%, rinse and repeat. Or as billionaire bond investor Jeffrey Gundlach put it last October, “T-bill and chill.”

Even now, with Federal Reserve officials poised to ease benchmark interest rates from a two-decade high — a move that would instantly push down yields on bills and other short-term debt — money-market funds are thriving. They raked in $106 billion this month alone and their balances, at $6.24 trillion, have never been higher.

Investors in cash equivalents appear to be perfectly happy to stay where they are for now, despite repeated advice to add exposure to longer-term bonds from the likes of Pimco and BlackRock Inc. — admittedly bond managers themselves. But their point is that while cash returns have nowhere to go but down, debt with longer maturities stands to benefit from capital gains in an environment of deep rate cuts.

“Logically speaking, it doesn’t make a whole lot of sense for $6 trillion-plus to be sitting in money market funds if the yield is going to go down,” Kathy Jones, chief fixed-income strategist at Charles Schwab & Co. “We had a lot of talk about rate cuts and they haven’t happened, so there may be a lot of people who are just actually waiting to see it happen.”

During this year’s bouts of bond volatility, cash has been a good place to be. Money-market rates, which are keyed off of the Fed’s current 5.25%-to-5.5% policy band, have held steady and offered no surprises.

That’s about to change. Fed Chair Jerome Powell signaled last week that rate cuts are coming in September. With inflation ebbing, “the time has come for policy to adjust,” he said, adding that “the direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks.”

Money markets may continue to appeal, it’s the scope of rate cuts matters. Just 1 percentage point of reductions, for instance, would still leave bill rates in the range of 4%, an appealing return — especially after years of near-zero rates before the most recent tightening cycle, and at a time when longer-term US bonds are yielding far less. This may explain why retail investors are in no hurry to shift their holdings.

“For the first time in recent memory, cash is actually offering some yield and I can understand why people are sort of gravitating to that,” said John Queen, a portfolio manager at Capital Group, which oversees $2.5 trillion in assets. However well that’s worked recently, Queen recommends a classic strategy of diversification, investing in a mix of cash, equities and fixed income.

Of the $6.24 trillion of cash parked in money market funds, roughly 60% of that is from corporations that have been stockpiling cash following the pandemic, while the rest is from mom-and-pop investors who are content to continue earning more yield than what they can earn by merely keeping that money in the bank. Those yields are also significantly higher than what investors can get by moving into longer-term Treasury bonds — though nothing like the stock market’s gains.

Even after the Fed starts lowering borrowing costs, money-market funds should continue to lure at least some cash from retail investors. That’s because they will still offer higher yields than banks and attract institutions that prefer to outsource cash management.

For some investors enjoying high rates on short-term savings, there is a growing recognition that this won’t last forever and they are becoming more attentive to the day when cash returns suddenly drop.

Steven Roge, chief investment officer at R.W. Roge & Co, a private wealth manager with $350 million of assets, says for much of this year the toughest discussions with clients were about teaching them the reinvestment risk of staying too long in a money market fund or high-yield savings account.

“Reinvesting in bond funds over time, that’s been a difficult conversation,” said Roge. “These talks are becoming easier with Fed rate cuts on the horizon.”

The lost opportunity for cash investors is that unlike bills, bonds generate capital gains from price appreciation as interest rates decline.

Bond managers highlight how a 10-year Treasury note yielding less than 4% today has already benefited from capital gains since the benchmark topped 5% less than a year ago. A Bloomberg index of 7 to 10 year Treasuries has gained 13.3% versus a cash return of 4.5% since last October.

Of course, for some the choice isn’t just between bills and longer-term bonds. Warren Buffett’s Berkshire Hathaway Inc. increased its holdings of Treasury bills to $234 billion in the second quarter after cashing in on investments in equities including Apple Inc. For investors like him, holding cash equivalents while rates are still reasonable makes sense until fresh bargains in stocks appear.

But from the perspective of fixed income, the math still works for owning a 10-year Treasury now yielding around 4% versus cash, should the bond market rally towards 3% as the Fed cuts towards a neutral policy setting. Longer-dated Treasuries would enjoy a double-digit return from price appreciation and coupon interest.

“In that scenario, no you’re not better in cash,” said Neil Sutherland, portfolio manager at Schroder Investment Management. “I don’t think it’s unreasonable to think that the 10 year could get down towards 3% and under that environment quite quickly you’re getting up to double-digit returns.”

Digging In

Don’t tell that to Bill Eigen, manager of the $10 billion JPMorgan Strategic Income Opportunities Fund. For him, the idea of moving money into a US 10-year note currently yielding around 3.82% has little appeal. His fund held 54% in cash at the end of July, according to the latest filing.

“You can get mid-5% in cash, get 6% in short-term investment grade floating rate,” Eigen said. “I won’t lend to the government for 10 years and get paid less.”

Eigen has been hoarding cash for a while, a move that has helped the fund return 9% over the past three years, compared with a loss of 6% in the Bloomberg Agg Index. But that was then.

As cash-equivalent rates start moving down — and by all estimates they will — “T-bill and chill” won’t be such a no-brainer anymore.

“Once investors look at what they’re getting, they’ll decide where they are isn’t that attractive anymore,” said Schwab’s Jones.

https://finance.yahoo.com/news/t-bill-chill-hard-habit-110000076.html

Al_Sharpton_for_President says

‘T-Bill and Chill’

Good article and post

Yeah, all about Risk Premium (investment return an asset is expected to yield in excess of the risk-free rate of return.)

That is why I knew Vanguard Total Bond Market Index Fund ETF would rebound after crashing about 25%.

So for those who have at least 40% of their IRAs and 401Ks in investment-grade bonds, it is HODL through a cycle like this.

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AD says

That is why I knew Vanguard Total Bond Market Index Fund ETF would rebound after crashing about 25%.

For every 1% increase in interest rates there is generally a 1% decrease in the price of a bond for every year of remaining duration.

I think the reason why Vanguard's bond fund dropped about 25% because the average duration of its bond portfolio (based on a bond ladder strategy) was around 6 years.

So with interest rates increasing from around 0.5% to 5% (~5% x 5 years), this may explain why Vanguard's bond fund dropped 25%.

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naturally 2021 and 2022 were disastrous for Vanguard Total Bond Market Index Fund ETD (ticker: BND)

just like naturally 2009 - 2011 were very good years for BND

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Over the very long run, the stock market has had an inflation-adjusted annualized return rate of between six and seven percent.

http://www.moneychimp.com/features/market_cagr.htm

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AD says

Over the very long run, the stock market has had an inflation-adjusted annualized return rate of between six and seven percent.

There is no such investment as "the stock market." At best, you can buy some index funds. In reality, a stock investor must choose from a small subset of stocks over his own lifetime with "your results may vary." Plus, in the "very long run" we are all dead.

AD says

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Over the very long run, the stock market has had an inflation-adjusted annualized return rate of between six and seven percent.

http://www.moneychimp.com/features/market_cagr.htm

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Passive income!

Today I was chatting with a guy who lives nearby, and he said he was a "financial adviser".

He was also a CPA, MBA, and had an M.S. in something with computers.

He started asking me questions and I almost laughed at his bullshit.

He offered me "advice". No thank you.

"Are you diversified into private equity, real estate, commodities, etc. blah blah blah?"

"I think my Fidelity Contrafund may own some "private equity" but I'm not sure and it's a small amount of my money."

I made a fucking ton of money with Vanguard Primecap and Vanguard Capital Opportunity; both funds are managed by Primecap in Pasadena, CA.
I also rolled the dice on shares of Apple and that's become huuuuuuuuge.

It doesn't matter anyway; you will do well with Vanguard Total Stock Market Index Fund or similar at Fideilty.

The trick is have it in there for 30 years of so. Too bad nobody has a time machine to start investing in 1990.

HeadSet says

There is no such investment as "the stock market." At best, you can buy some index funds. In reality, a stock investor must choose from a small subset of stocks over his own lifetime with "your results may vary." Plus, in the "very long run" we are all dead.

I copied that statement about "the stock market" from the S&P 500 CAGR calculator. The website for the calculator meant that "the stock market" is the S&P 500, as far as context.

But I agree as far as investing in "the stock market".

Seems like the best you could do is invest in a Wilshire 5000 fund to try to get as much broad range of stocks.

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There's only 3403 stocks in the Wilshire 5000 nowadays. There is simply not the investment choice that there used to be. This is from a variety of factors from companies cannibalizing each other, to private owners seeing the crap Wall Street does, and new IPOs designed to bilk investors instead of raising capital to expand their business. There is a ton of VC money and crazy pension fund managers, as well, making private equity valuations greater than they could get in the public markets. There is also much greater regulatory hurdles to meet nowadays.

Really, who wants to go through all that ???

So, we've still got millions upon millions of people continuously pouring ever more money into the stock market. Nobody even looks at valuations anymore.

The stock market capitalization is about $55.2 trillion. Our GDP is about $25.4 trillion...so an increase in stock values of 6% would be about 13% of our economy. This doesn't even include the dividends that are paid.

Apple trades at 8.75 times sales. Not income but sales. Sales and income are forecasted to be decreasing. Hewlett Packard trades at about .63 times sales.

However, Apple commands the #1 position in terms of capitalization. It therefore attracts the most of any company from index investors.

You've got about 100 million people that are working, that are putting their money blindly into the stock market through their retirement programs where they work.

You've only got about 2.3 million first time home buyers a year.

Good luck trying to convince either group that what they are spending is waaaaaaay outta line.

Misc says

There's only 3403 stocks in the Wilshire 5000 nowadays.

Yes, but that is the closest to getting enough broad market exposure or diversification as far as investing in the "entire stock market".

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Misc says

You've got about 100 million people that are working, that are putting their money blindly into the stock market through their retirement programs where they work.

You've only got about 2.3 million first time home buyers a year.

I read that contributions to the S&P 500 index fund through 401K and IRA contributions such as the federal government employees contributing every 2 weeks to their Thrift Savings Plan adds volume to the S&P 500 and contributes to demand every 2 weeks.

I'm not sure how many workers out of 100 million contribute regularly such as at least monthly to their 401Ks (and IRAs) and adding that much demand for the S&P 500 stocks.

I know of 1099 contractors who max out their retirement contributions such as Solo 401Ks and Traditional IRAs.

But I see where there is concern the stock market is a ponzi scheme or at risk of wiping people out such as the +53% drop in the S&P 500 around 2001 and 2009. Hopefully those close to retirement only had no more than 30% in stocks.

Where else can you put your 401K money ? Or don't put the money in a 401K ?

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There's about 330 million people in the US with a work participation rate of about 63%. About half have an employee contribution plan at work that they are taking advantage of. That's where I get the ballpark number of 100 million blindly contributing.

Given the market cap of the US stock market and estimated returns, the math just don't pencil out.

If you get selective, there are some stocks worthy of investment, but none that are widely known. Any stock known by the masses is hugely overvalued, especially if it is has a large market cap, as those are driven by inflows into index funds.

What 100 million lemmings cannot be wrong.

Just put in enough to get the match, and do it pre-tax, no Roth 401-k where you don't get the tax benefit. Best you can do with a 401-k type program and stay away from Index funds.

While it is possible for an individual to "save" money, it is impossible for a society to do so.

At the society level, all investment/savings programs Ponzi.

Misc says

Just put in enough to get the match, and do it pre-tax, no Roth 401-k where you don't get the tax benefit. Best you can do with a 401-k type program and stay away from Index funds.

I agree about contributing to traditional 401K (pre-tax). When you retire and withdraw from it, you'll be in a lower tax bracket.

What do you mean stay away from index funds like Wilshire 5000 or S&P 500 ? ? ? ?

Where do you put the money ? If you work for the federal guvmint, the Thrift Savings Plan (i.e., 401K) only has index funds and government bond fund.

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Misc says

While it is possible for an individual to "save" money, it is impossible for a society to do so.

At the society level, all investment/savings programs Ponzi.

Well I understand as us investors such as through government bond funds, depend on future society to be functional enough.

If not, then those bonds will never be paid back, but I guess we will have a lot bigger concerns such as society becoming like a Mad Max movie.

So when you invest like this, its an investment in hope for a better (or tolerable) future.

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AD says

Misc says

Just put in enough to get the match, and do it pre-tax, no Roth 401-k where you don't get the tax benefit. Best you can do with a 401-k type program and stay away from Index funds.

I agree about contributing to traditional 401K (pre-tax). When you retire and withdraw from it, you'll be in a lower tax bracket.

What do you mean stay away from index funds like Wilshire 5000 or S&P 500 ? ? ? ?

Where do you put the money ? If you work for the federal guvmint, the Thrift Savings Plan (i.e., 401K) only has index funds and government bond fund.

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Lots of private companies have been sold on the Index fund route a, as well. By at least getting the match and going pre-tax, you lose less value over the long term. Mathematically, the vast majority of people must lose value on their investments. The idea is to lose as little as possible.

Anyone here buying Tbills through Treasury Direct?

HeadSet says

Anyone here buying Tbills through Treasury Direct?

I used to but now the return pretty meh.

Misc says

Lots of private companies have been sold on the Index fund route a, as well. By at least getting the match and going pre-tax, you lose less value over the long term. Mathematically, the vast majority of people must lose value on their investments. The idea is to lose as little as possible.

I never lost money on my S&P 500 Fund as I've sold shares that I owned for at least 7 years

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Today's market can best be described as Insurance companies dash for cash. The property/casualty folks are about to be hit with what is probably a record dollar amount of claims. They gotta sell everything to meet that cash demand.

I wonder how many of these will make it.

https://www.alliance321.com/top-homeowners-insurance-companies-in-florida/

Misc says

Today's market can best be described as Insurance companies dash for cash. The property/casualty folks are about to be hit with what is probably a record dollar amount of claims. They gotta sell everything to meet that cash demand.

I wonder how many of these will make it.

https://www.alliance321.com/top-homeowners-insurance-companies-in-florida/

It's not only property, but the profits of life insurance companies suffering under the procrustean duress of a 6-sigma surge in excess mortality (and payouts) and rising interest rates.

(how did y'all like that $10 word?)

HeadSet says

Anyone here buying Tbills through Treasury Direct?

No. I use my brokerage account.