What is a Tide
BREAKING DOWN Tide
In the science of physical oceanography, tide is a term that refers to the phenomenon of sea levels rising and falling due to gravitational forces emanating from the sun and the moon. The tides have been of interest to humans since at least the beginning of human history, and they have directly impacted humans by affecting navigation, among other activities. Because tides are controlled by heavenly bodies outside the control of any one human or institution, and impact the activities of humans, they make a useful metaphor for describing financial markets.
Financial markets, like the oceans, are also affect by powerful forces outside the control of any one investor or group of participants in the markets themselves. For instance, the value of the stock market is affected by forces like collective psychology, the business cycle, the actions of central banks and demographic trends. As these forces act alone or in coordination to affect the value of assets traded in financial markets, investors should take heed of them, or risk ruin.
Examples of the Tide Metaphor
On January 24th, 2018, the Wall Street Journal published a story titled, “Stock Market’s Rising Tide Lifts Junk-Rated Bonds,” which describes the market for junk bonds being buoyed by economic forces and investor preferences outside the control of any of the companies issuing so-called junk bonds in public markets.
Junk bonds are bonds issued by companies that have been rated less than investment grade by independent ratings agencies. These bonds command a higher yield on the open market, either because the issuing company has a shaky business model, or because it’s heavily indebted. Normally, such bonds command much higher interest rates than so-called investment grade bonds, but the Wall Street Journal describes a market for junk bonds where investors are eager to buy even when these bonds pay interest rates not much higher than those paid by firms offering investment-grade issues.
The Wall Street Journal makes use of the metaphor of a rising tide to explain what is happening in the market. Just as a boat can be lifted by a rising tide, bonds in the junk market are being lifted by forces like a strong U.S. economy and an an abundance of money in search of high yields.