Too often these days we hear the equities market is going to crash once the Federal Reserve starts to raise interest rates. The pundits argued that higher borrowing costs forced leveraged funds a.k.a investments on borrowed money to liquidate holdings, cashing out, to avoid paying more interest on their loans. It’s true that some “smart money” borrowed heavily, like Archegos Capital, to maximize their gains.
The S&P 500 chart above showed the most well known crashes in the US equities markets and below is the interest rates table since 1995. As you can see, rate hike does not pull down the markets that much because leveraged funds only make a small portion of the markets. Indeed, the rate hike in 2004 to 2007 and 2016 to 2019 correspond to rising equities prices!
For that very reason, really smart money, use only cash or very little leverage, 20% and below to survive in the long run and able to scoop bargains when the markets crashed. Looking at the Commitment of Traders on S&P futures, for example, showed that “leveraged” funds only make a small portion of the markets.
There are so many more hedge funds that run on cash accounts or use very little leverage, like GMO, Renaissance Technologies, Bridgewater just to name a few. As we all already knew that leverage is a double edge sword, it maximizes your profits as well as losses, therefore using it only amplifies your success as well as your failures.
As retail traders and investors, we should always do our own research and verify our information sources. Don’t simply believe what others say because in doing so we would undermine our own intellect. Here at MFM, we are committed to deliver you institutional grade tools and world class research so you can make a better decision for your financial future.
Risk Disclaimer:
This article is for general information purpose only. It is not an investment advice or a solicitation to buy or sell any securities/oz. Opinions expressed are of the authors and not necessarily of MFM Securities Limited or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.
