Financial Planning: Tariff Time
The International Trade Administration defines a tariff as “a tariff or duty is a tax levied by governments on the value including freight.”
It is worth revisiting some of the basics about the stock market, and debunk some common myths. It is often said that there are 3 Pillars that support stock prices: Earnings, Interest Rates and Valuation. The stock market is said to be a voting mechanism in the short run as some popular stocks get bid up and others lag; but a weighing mechanism in the long run. What the market weighs, is earnings. Those companies that can generate consistently high earnings will outperform other stocks regardless of whether or not they pay a dividend (more on this later).
Interest rates are important as an alternative to equity investments. As bond yields rise, they become more attractive as an investment relative to equities. In fact, many equity valuation models, like the Dividend Discount Model, discount future earnings at a specified discount rate. As interest rates rise, the present value of those cash flows decreases.
The last Pillar, valuation, relates to what John Maynard Keynes called “animal spirits” or what is more commonly called “bullishness” or optimism about the future. The Equity Risk Premium attempts to measure that expected return that investors require to invest in equities instead of less risky bonds.
Fidelity Strategist Jurrien Timmer estimates that the current Equity Risk Premium is 3.5%, well below its long-term average of 5%. This low Equity Risk Premium is evidence of relative optimism about the long-term outlook for stocks, but also means that the market is more vulnerable to shocks.
The International Trade Administration defines a tariff as “a tariff or duty is a tax levied by governments on the value including freight.”
When we experience bouts of market volatility, it can be disconcerting to watch our account balance decline in value.
In times of uncertainty and/or adversity, refocusing on the fundamentals is a time-tested solution.
When markets feel as shaky as they do now in the United States, it is normal to ask: Is this time different?