Worried About a Stock-Market Correction? Here’s How to Lock in Recent Gains
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    HOUSE MEDIAN ASKING PRICES AND WEEKLY CHANGE     Sydney $1,655,505 (-0.06%)       Melbourne $994,898 (+0.02%)       Brisbane $991,841 (+1.33%)       Adelaide $889,373 (+1.26%)       Perth $861,566 (+0.49%)       Hobart $729,893 (-1.65%)       Darwin $669,344 (+0.35%)       Canberra $999,769 (+1.27%)       National $1,055,910 (+0.34%)                UNIT MEDIAN ASKING PRICES AND WEEKLY CHANGE     Sydney $749,436 (-0.10%)       Melbourne $494,327 (+0.46%)       Brisbane $554,094 (+2.77%)       Adelaide $439,361 (-1.14%)       Perth $456,655 (-0.27%)       Hobart $524,871 (-0.43%)       Darwin $349,455 (+1.52%)       Canberra $494,554 (-1.96%)       National $530,871 (+0.07%)                HOUSES FOR SALE AND WEEKLY CHANGE     Sydney 10,048 (-72)       Melbourne 14,823 (-272)       Brisbane 7,999 (+9)       Adelaide 2,372 (-66)       Perth 6,238 (-89)       Hobart 1,265 (-29)       Darwin 232 (-6)       Canberra 1,020 (0)       National 43,997 (-525)                UNITS FOR SALE AND WEEKLY CHANGE     Sydney 8,719 (-61)       Melbourne 8,033 (-189)       Brisbane 1,615 (-4)       Adelaide 391 (-5)       Perth 1,570 (-29)       Hobart 203 (-10)       Darwin 394 (-6)       Canberra 1,010 (+7)       National 21,935 (-297)                HOUSE MEDIAN ASKING RENTS AND WEEKLY CHANGE     Sydney $820 ($0)       Melbourne $600 (-$10)       Brisbane $640 ($0)       Adelaide $610 ($0)       Perth $670 ($0)       Hobart $550 ($0)       Darwin $700 ($0)       Canberra $680 ($0)       National $668 (-$1)                UNIT MEDIAN ASKING RENTS AND WEEKLY CHANGE     Sydney $750 (-$25)       Melbourne $550 ($0)       Brisbane $630 ($0)       Adelaide $500 ($0)       Perth $640 (+$13)       Hobart $450 ($0)       Darwin $513 (+$13)       Canberra $570 ($0)       National $589 (-$2)                HOUSES FOR RENT AND WEEKLY CHANGE     Sydney 5,497 (+71)       Melbourne 5,818 (+35)       Brisbane 4,141 (+99)       Adelaide 1,399 (0)       Perth 2,377 (+32)       Hobart 400 (+17)       Darwin 111 (+17)       Canberra 604 (+9)       National 20,347 (+280)                UNITS FOR RENT AND WEEKLY CHANGE     Sydney 9,083 (+248)       Melbourne 4,637 (+100)       Brisbane 2,182 (-27)       Adelaide 393 (+2)       Perth 731 (-10)       Hobart 130 (-7)       Darwin 144 (-8)       Canberra 684 (+72)       National 17,984 (+370)                HOUSE ANNUAL GROSS YIELDS AND TREND       Sydney 2.58% (↑)        Melbourne 3.14% (↓)       Brisbane 3.36% (↓)       Adelaide 3.57% (↓)       Perth 4.04% (↓)     Hobart 3.92% (↑)        Darwin 5.44% (↓)       Canberra 3.54% (↓)       National 3.29% (↓)            UNIT ANNUAL GROSS YIELDS AND TREND         Sydney 5.20% (↓)       Melbourne 5.79% (↓)       Brisbane 5.91% (↓)     Adelaide 5.92% (↑)      Perth 7.29% (↑)      Hobart 4.46% (↑)      Darwin 7.63% (↑)      Canberra 5.99% (↑)        National 5.77% (↓)            HOUSE RENTAL VACANCY RATES AND TREND       Sydney 0.8% (↑)      Melbourne 0.7% (↑)      Brisbane 0.7% (↑)      Adelaide 0.4% (↑)      Perth 0.4% (↑)      Hobart 0.9% (↑)      Darwin 0.8% (↑)      Canberra 1.0% (↑)      National 0.7% (↑)             UNIT RENTAL VACANCY RATES AND TREND       Sydney 0.9% (↑)      Melbourne 1.1% (↑)      Brisbane 1.0% (↑)      Adelaide 0.5% (↑)      Perth 0.5% (↑)      Hobart 1.4% (↑)      Darwin 1.7% (↑)      Canberra 1.4% (↑)      National 1.1% (↑)             AVERAGE DAYS TO SELL HOUSES AND TREND       Sydney 30.3 (↑)      Melbourne 31.5 (↑)      Brisbane 31.7 (↑)        Adelaide 25.7 (↓)     Perth 35.4 (↑)      Hobart 33.7 (↑)        Darwin 36.2 (↓)     Canberra 32.0 (↑)        National 32.1 (↓)            AVERAGE DAYS TO SELL UNITS AND TREND       Sydney 31.3 (↑)      Melbourne 31.9 (↑)      Brisbane 32.1 (↑)        Adelaide 24.8 (↓)       Perth 38.7 (↓)     Hobart 37.6 (↑)        Darwin 46.5 (↓)     Canberra 39.2 (↑)        National 35.3 (↓)           
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Worried About a Stock-Market Correction? Here’s How to Lock in Recent Gains

The best course when stocks slide is for investors to stand pat, but ‘put’ options are one way to hedge against a drop and lock in some profits

By DAN WEIL
Wed, May 1, 2024 9:10amGrey Clock 5 min

The past five years have been good to stock-market investors. The S&P 500 index has climbed an annualised 12% during that period, outstripping the 9% annualised gain over the past 40 years. This year alone the index is up 6.9% as of April 26, tacking on to the 24% gain in 2023.

But signs are emerging that the stock market could be due for a breather. As of April 25, the S&P 500 went 133 trading days without a decline of at least 10%, according to PNC Institutional Asset Management. To be sure, that’s still short of the 172-day average since 1928. But the S&P 500 has jumped 24% in the past six months (about 180 days), which buttresses arguments for a correction.

What’s more, the multiyear ascent has arguably sent stocks to overvalued levels. The S&P 500’s forward price-to-earnings ratio—a gauge of market valuation based on earnings estimates for the next 12 months—registered 20 as of April 26, exceeding the five-year average of 19.1 and the 10-year average of 17.8, according to FactSet.

“A correction is certainly possible,” says Jack Ablin , chief investment officer at wealth-management firm Cresset Capital, pointing to the high valuations and the prospect that rate cuts will come later than expected thanks to inflation that has been higher than expected.

Given the danger of a stock-market correction, commonly defined as a 10% to 20% drop, how can investors guard the profits they have made in recent years?

Wait and see

Assuming you have a well-diversified portfolio and aren’t counting on the money from your stocks to finance an imminent expense, financial advisers say the best strategy is to hang tight.

Corrections generally don’t stick around long. Since 1985, declines between 10% and 20% for the S&P 500 have lasted only 97 days on average—three-plus months—according to a CFRA analysis of S&P data.

It then has taken the market an additional 101 days on average to recover the ground lost during the correction. So in about six months, investors tend to be back where they were before the correction.

“If there’s a shallow correction of 5% to 10%, we recommend riding it out,” says Karim Ahamed , an investment adviser at wealth-management firm Cerity Partners. “Eventually the market recovers. The idea of selling out and climbing back in is difficult to achieve. You’re more likely to stay on the sidelines with your losses crystallising.”

The S&P 500 did fall more than 5% in recent weeks, from March 28 to April 19.

Sell losers

Some people, though, simply find it impossible to do nothing if they fear a correction is looming. At the least, they want to protect the gains they have earned so far. What’s the most prudent way for them to reduce their market exposure?

Keep in mind that most actions you can take to guard your stock profits carry a cost. The easiest method, selling stocks, subjects you to capital-gains taxes unless you are selling from a tax-advantaged retirement account. That tax rate varies according to your income, but will likely be 15%.

One way to limit the burden is through tax-loss harvesting, says Amanda Agati , chief investment officer of PNC’s asset-management group. That is when you sell stocks at a loss, lowering your net capital gain. If you have any dogs in your portfolio—stocks with poor fundamentals—you can unload those.

If you do sell stocks, you could put the proceeds into a money-market fund for now, financial pros say. Many such funds yield 5% or more, far higher than rates over the past 15 years. Or if you want to increase the safety of your overall portfolio, you could put the money into safe government bonds. Three-year Treasury notes yield around 4.75%.

Play defence

If you are going to unload stocks, but don’t want to sell right away, you can put in a stop-limit sell order through your brokerage. That order can automatically sell your shares if they slide to a level you designate (they can go below it, too), protecting you from big drops.

Say you bought 100 shares of Tesla at $140, and they are now trading at $165. If you don’t want your profit to disappear in a downturn, you could enter a stop-limit sell order with your brokerage at $150 for some or all of your shares. Those shares can be sold if the price reaches $150, securing some of the gains.

You also might shift your holdings more toward defensive stocks, such as utilities and consumer-staple companies, which generally outperform during market downturns, says Michael Sheldon , executive director of wealth-management firm RDM Financial Group.

PNC’s Agati suggests an emphasis on quality stocks, those with high recurring revenues, strong and dependable profit margins, high cash flow and low debt. These stocks—such as AutoZone and Visa , she says—have lagged behind the leaders of the market’s surge over the past year.

Consider options

Advisers also suggest looking at “put” options to protect your stock gains. Puts give you the right but not the obligation to sell a security at a preset price by a preset deadline.

Note that we’re talking about a risk-reduction approach here, not the kind of risk-taking—to try to amplify returns— that has been rampant in the options market . The simplest strategy could be to purchase a put option on a market-index exchange-traded fund, such as one based on the S&P 500. You could buy puts on individual stocks rather than an index ETF, but that may get expensive and complicated as each option carries a purchase premium.

Here’s how the ETF strategy would work: First, buy an option that would let you sell the ETF at a price below the current one, protecting you from declines beneath that level. You wouldn’t have to sell the ETF, and you wouldn’t even have to own it. As the S&P 500 falls, the put option gains in value, and you can sell it.

Say on April 16 you wanted to protect 100 shares of SPDR S&P 500 ETF Trust (SPY) from a decline of more than 10%. With the ETF trading at $505 a share, you could buy an option that covers 100 shares for $1,050, or $10.50 a share. You’re paying a premium equal to 2% of your position.

The option’s expiration date is December, and its strike price is $455 a share, or 10% below the current value. The strike price is the price at which you could exercise the option. But generally you sell the option rather than exercising it, so you don’t have to dump any shares, especially if you don’t own them.

If the market doesn’t go down 10% by December, you let the option expire worthless, and you’re out the $1,050 you paid for it. If the market drops more than 10%, you can sell your option at a profit whenever you want until December.

While it might be more lucrative to sell it early, Ablin recommends holding until expiration if you’re using the option to protect your portfolio. “Think of it like homeowner insurance,” he says. “You pay a premium, like a deductible for insurance, and your coverage runs for a term.”

Keeping the option until expiration extends your coverage for the longest possible period.

By using options, you don’t have to sell any of your stocks, which are typically the best asset to generate strong long-term returns. “If you have the wherewithal to hold the S&P 500 for 10 years, your odds of making money are over 90%,” Ablin says.



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The sticky economic factor making an interest rate drop unlikely this year

It’s a key indicator in the RBA board’s decision making process, but it is proving difficult to move in the right direction

By Bronwyn Allen
Thu, May 30, 2024 2 min

The consumer price index (CPI) rose in April to an annual rate of 3.6 percent, which was 0.1 percent higher than in March, raising doubts about an interest rate cut this year as inflation starts looking stickier than expected. This is the second consecutive month of small rises, potentially indicating that Australia is experiencing the same stalled progress in bringing inflation down that is being seen in the United States, as both nations approach their central banks’ target inflation bands.

In Australia, the target inflation band is 2 to 3 percent, with the Reserve Bank of Australia (RBA) aiming to achieve the midpoint under its new agreement with the Federal Government following a formal review. In its interest rate decision-making, the RBA does not give as much weight to the monthly inflation data because not all prices are measured like they are in the quarterly data. On a quarterly basis, inflation has continued to fall. In the March quarter, the annual rate of inflation was 3.6 percent, down from 4.1 percent in December, according to the Australian Bureau of Statistics (ABS).

CBA economist Stephen Wu noted the April data was above the bank’s forecast of 3.5 percent as well as the industrywide consensus forecast of 3.4 percent. He predicts the next leg down in inflation won’t be until the September quarter, when we will see the effects of electricity rebates and a likely smaller minimum wage increase to be announced by the Fair Work Commission next month compared to June 2023.

The most significant contributor to the April inflation rise were housing costs, which rose 4.9 percent on an annual basis. This reflects a continuing rise in weekly rents amid near-record low vacancy rates across the country, as well as significantly higher labour and materials costs which builders are passing on to the buyers of new homes, as well as renovators.

The second biggest contributor was food and non-alcoholic beverages, up 3.8 percent annually, reflecting higher prices for fruit and vegetables in April. The ABS said unfavourable weather led to a reduced supply of berries, bananas and vegetables such as broccoli. The annual rate of inflation for alcohol and tobacco rose by 6.5 percent, and transport rose by 4.2 percent due to higher fuel prices.

Robert Carnell, the Asia Pacific head of research at ING, said they no longer expect a rate cut this year after seeing the April data. Mr Carnell said an increase in trend inflation was apparent and “rate cuts this year look unlikely”. In the RBA’s latest monetary policy statement, published before the April CPI was released, it said: “Inflation is expected to be higher in the near term than previously thought due to the stronger labour market and higher petrol prices. But inflation is still expected to return to the target range in the second half of 2025 and to reach the midpoint in 2026.”

 

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