Investors can’t seem to help themselves.
Once again yesterday, the market went a little crazy as everyone tried to figure out whether the latest interest-rate increase from the Fed was good news or bad news.
If you weren’t following the minute-to-minute trading – and good for you if you weren’t – then here’s what happened…
When the initial statement came out, investors got a little giddy as the 0.75-percentage-point increase was just as expected and the language in the Fed’s statement sounded like they were open to possibly pausing rate hikes.
But if you grabbed a snack and left your phone on the counter or on your desk, the good vibes were probably gone by the time you came back.
Fed Chair Jerome Powell held his press conference soon after the statement was release, and everything went south (more than it went north 30 minutes earlier) as Powell left open the possibility for additional increases.
The market is much bigger than any one person or any one policy announcement, however important it may be. This kneejerk reaction from both the pros and individual investors to be the first to read the tea leaves – often wrongly – amuses me, but more than that, it disappoints me.
There is a better and smarter way to view “Fed days” and to invest…
As I’ve said before, it’s not that the Fed’s rate hikes are irrelevant; it’s that the market puts too much emphasis on particular one-off meetings or events.
The trend is what matters, and there’s no question that the interest rate trend of the last few months has been up. And we’re seeing more of that trend since the Fed hiked rates once again as of yesterday’s meeting.
But we may be approaching the silver-lining stage – the moment when investors begin to believe that the Fed has accomplished its task of taming inflation. I think that moment is very close.
All trends point to subsiding inflation.
Energy, in terms of crude oil, is generally trending lower and experiencing more pullbacks. The supply-chain issues are clearing up. And final demand from both consumers and businesses is moderating.
Because of these key disinflationary factors, I expect the market to begin “looking ahead” to when inflation concerns have diminished. I want to revisit some thoughts from July when, as they are wont to do, the Fed terrorized investors.
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Trying to predict the market’s reaction to a Fed announcement is risky, especially when we’re down in the market rabbit hole when good news is bad news, and vice versa.
For example, if the Fed raises rates less than expected, you would think that would be good news. And it could be… but it could also be viewed that the economy is slowing faster than expected and maybe heading for a deeper recession, which would be bad news.
Or if the Fed raises rates more than expected, it could be good news that the central banks are going after inflation aggressively. On the other hand, it could mean that nothing is working so far, and inflation is on the verge of being out of control.
It’s just like jobs reports. A stronger-than-expected jobs report seems like it would be nothing but good news, but if it means the economy is continuing to heat up and the Fed will need to raise rates more aggressively, it could be bad news.
I think we’re likely past the tough part of figuring out where inflation and the economy stand and what the Fed will do about it. The market has already priced those factors in, so unless there is a huge surprise of some sort, today’s and tomorrow’s meetings probably won’t have the same impact as those earlier in the year.
To be clear, I’m not dismissing in the importance of the Fed and monetary policy. Of course it’s critical.
But unless the inflation and/or interest-rate trend has changed and the Fed shocks the heck out of us, I believe we are now in an environment where investors can put their cash to work in expectation of solid and even large profits down the road.
True, you may invest in a stock that drops another 10%-20% in the current volatility, but it is unlikely you would be looking at the 50% or more shellacking that many stocks have gotten so far in 2022.
Most important of all, there is now a greater chance that short-term losses will reverse and become 10%, 20%, 50%, or even bigger gains in the coming months and years – provided you’re investing in quality stocks, of course.
And on Saturday, I’m going to talk about one of my favorite megatrends we haven’t talked about in a while… and one of my favorite stocks in that space.
P.S. While buying quality stocks is critical to making money, so is purging your portfolio of the crummy ones. And right now, I have 25 stocks that I think every investor should kick to the curb right now… before they implode and take your money with them. Click here to get the list.
On the date of publication, Eric Fry did not have (either directly or indirectly) any positions in the securities mentioned in this article.