The animals we have on Wall Street:
If you have some space at your house, you will propably have a cute animal, a pet running around. Some animal that you can tame, a cat or a dog, allow me to presume. In Wall Street though we got the wild ones, we have a bull & we have a bear in our backyard… As cats and dogs can’t get along, the bulls and the bears in our lovely Wall Street family also can’t get along. At your house you and your wife, are the owners of the house; in Wall Street everyone who can buy a room (a share of some stock) that we have in our enormous house (the markets) is an owner. Some owners buy rooms for the long term and some just rent them for a short period of time, and then dump them (I don’t like those owners).
Most of the time, the many owners that we have agree that the bull have the permission to enter the house and play with us. So we pamper him, we feed him and as we do that we become wealthier. Until…we the owners realize that we were acting like pigs and we were feeding this bull for no good reason. And suddenly we all decide that this bull has no place among us and as we are getting him out to the backyard the bear comes in.
I’ll explain; in short. A bull is a market participant which is betting that the stock market will go higher, so he is buying shares, when the owners are bullish they drive the prices higher; hence we call it, a Bull market (the same bull that was in our backyard and we let it in and fed it).
On the other side of the equation there are the bears, a bear is a market participant that is betting against the stock market and believe that it will go lower, so he sells his shares or short others, when the owners become bearish they sell what they have and drive the prices lower, hence; we call it a bear market.
The start of a Bull Market:
After the financial crisis hit the U.S and the whole world in 2007 and the housing bubble exploded, March of 2009 was the month that the bear market had ended; the market hit its bottom. By that time prices of the stocks went down and became cheap. Everyone became bullish and many investors started snapping up stocks that they like in a very low prices. Interest rates were slammed to the ground, which allowed the markets to gain their steam again and jump higher. Interest rates are the gravity force for the markets if they go higher stocks goes lower.
Jerome Powell The “Matador”.
Today the stock market swinged, the major indexes turned from positive, to negative.
Today; Jerome Powell, the new chair of the Federal Reserve headed to Capitol Hill to testify before congress. As he started answering the questions, everyone was listening closely, the most important thing for the markets was his comments about how many times the Fed is willing to raise the interest rates. He signaled that the Fed might raise interest rates more than anticipated; If the Fed decides to start raising the interest rates faster than expected and more than three times in 2018 (also as estimated by the markets), stocks might get into some trouble. and if that happens he might be the Matador to kill and end this bull market.
One reason out of many:
Higher rates can give businesses hard time; those who suffer from low margins can get slaughtered. Higher rates mean that those businesses that have low income and leveraged will be forced to pay more interest on their loans which will reduce their cash flow and hit their financial results.