Fed tapering: The math investors need to know

Imagine a share of stock that will pay you $100 in dividends every year for the next, say, 100 years. How much is that worth in today’s money? How much would you pay for that stock? To know the value, you have to apply a relevant “discount rate” — in layman’s terms, and with some oversimplification, you have to know what interest rate you could get on the money if you didn’t buy the stock.

In May, you knew you could earn 1.6% a year, at least for the next 10 years, if you left your money in ten-year Treasury notes. Applying a 1.6% discount rate to our stream of $100 dividends produces a value of $4,972. In other words, that’s how much that theoretical stock would be worth, in today’s money, if we use a discount rate of 1.6%.

Hike that discount rate to 2.7% — the interest rate on the Treasury note today — and that value collapses by nearly a third, to $3,445. Hike the discount rate to 4.5% — a normal rate on the Treasury — and the value halves to $2,240.

To put this in very simple logic: The Federal Reserve has been suppressing interest-rates to boost the economy. That suppression artificially hiked the value of the stock market, by a simple mathematical equation. Now that suppression is coming to an end, interest rates can be expected to rise. That rise ought — again, by a simple mathematical equation — to reduce the value of the stock market. Dramatically.

Fed tapering: The math investors need to know – Brett Arendss ROI – MarketWatch.

Absolut real, si absolut scary. Shortarea si VIX-ul vor fi armele noastre de-acum inainte.

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