How to Make Smarter Decisions About Money 10.12.18

The overall market was held up by the performance of a relatively small number of stocks in high-growth sectors, so if they stumble the rest of the market follows. The highest flying growth stocks are down significantly this week, with Amazon down almost 15% from its late-summer high to Thursday’s low, and the other stock leading the market, Netflix, losing even more.

The so-called “FAANG” stocks (Facebook, Amazon, Apple, Netflix, and Google) have often led the market amid the momentum-driven rally this year. Some of these leading stocks have lofty valuations based on expectations of high growth into the foreseeable future. They have been propelled higher by strong fundamentals and helped by low interest rates, making profits far in the future look attractive.

Rising interest rates can have an outsized effect on the high valuation growth stocks because by discounting future profits back to today at higher interest rates they are worth less, and that has led to the sharp sell-off we have seen this week.

Consumers are starting to see the effects of rising interest rates in car loans and mortgages.

Zero-Percent Financing Deals Fade From the New-Car Lot as Interest Rates Rise

Sears is expected to file for bankruptcy and close at least 150 locations.

A generation ago Sears was the place to go to get everything that a household needed. Shoppers could pick up housewares, yard maintenance equipment, have their autos repaired, have their portraits taken, and for a while even take out an insurance policy through Allstate or get financial advice from Dean Witter.

On Wednesday reports surfaced that the 125 year old retailer is preparing to file bankruptcy. The failure of Sears holds important lessons for investors. Although a company can dominate an industry for decades, the cycle of innovation and constant competition is always eroding the advantage of the major companies in any industry. Over the last decade we’ve seen the emergence of what appear to be a winner take all companies such as Amazon, Netflix, Apple, and Google. In the future, they too will be subject to the same forces of competition and innovation and new leaders will emerge. The Rise and Fall of Sears

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