Wednesday, January 30, 2013

Some notes about the market and the economy


Hello users of EzBacktest, I know you don't refer to this blog for financial news and analysis and I promise you I'm not providing any. This blog is about the software EzBacktest, its features, releases, plans, recommendations etc.

Take this one as an exception. I'm not an expert to provide a professional opinion stating the market will or should go this way or that way based on such and such micro/macro. My financial credentials are simply building EzBacktest and Free-Stocks-Ticker, based on publicly available knowledge and users feedback. (I do have credential in my field of work, which is software engineering)

Here goes, succinctly:

* The market is making new multi-year highs: U.S. Stocks Rise on Earnings; DJIA at Five-Year High
* Earnings are reported to be great: The Odd Season: Good Earnings, Nervous CEOs
* Yet the economy seems to be in the tanks: US economy shrinks 0.1 pct., 1st time in 3 ½ years
* Unemployment is high:U.S. economy adds 155K jobs, unemployment rate stays at 7.8 percent
* Federal debt out of control:Why is the national debt $16 trillion?

I can actually find tens of recent bad news regarding the economic conditions. Is the market up only because banks are given "free money" by Quantitative Easing? How is this mechanism working? Sounds very suspicious, doesn't it? I don't get it, do you?

4 comments:

  1. Interest rates are so low that investors have to buy stocks instead of bonds for returns. Many stocks have higher dividends than what bonds are currently yielding. Also, interest rates are likely to go up instead of down once the Fed stops the quantitative easing. This will make bonds riskier than stocks unless you hold the bonds until maturity.

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    1. Thanks Jim, your comment suggests the markets are up not as a reflection of the economy's health or the individuality companies success, rather influx of money due to low returns in the bonds market. Would that not qualify as a risky bubble then? Wouldn't a collapsing bond market due to rising rates trigger a collapsing stock market?

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  2. Yes, we are seeing that now in fact. The 20yr bond is spiking causing interest rate sensitive stocks to get hammered to the tune of 10% or more since May 9. The broad market indices are also under pressure and have declined over 2% from their peak. I expect this to continue for another month or more.

    By the way, I did a 2yr backtest of HYG against the s&p500. The chart shows HYG appreciated 15% during that time. But when I charted HYG in finance.yahoo.com, it shows only about a 2% appreciation in the stock price. Are you including dividends in your backtest charts?

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    1. Correct, as shown in the FAQ page, by default dividends are included in the backtest as the results are taken from Yahoo!Finance's downloadable historical data, specifically from the "adjusted close" column which includes re-invested dividends. You can turn that option off in the settings window.

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