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Correction

Aug 19
Federal Open Market Committee

FOMC: Are Investors Underestimating Fed’s Resolve

By Federal Reserve, FOMC, Interest rates, Investing, Stocks No Comments
FOMC: Investors May Be Underestimating Fed's Resolve

The Federal Reserve is poised to raise rates yet again

‍The Federal Open Market Committee (FOMC),  otherwise known as the Federal Reserve or Fed, has proven its resolve to normalize monetary policy by raising interest rates. You may have read that many investors are underestimating the central bank’s resolve in its upcoming meetings. Several recent statements from voting FOMC members have indicated that more rate hikes are inevitable. Its focus, reducing inflation. As a result, they will continue to tighten monetary policy even if equity markets react negatively. What should our next steps be as investors?

Why Investors Are Underestimating the Fed’s Resolve

There are a few reasons why investors are underestimating the FOMC resolve. We have been expecting the Federal Reserve to pause in the face of a potentially volatile correction. Recent experience tells use when things go haywire with the markets the Fed jumps in and lowers rates. This has been true, but we have not had inflation in the equation. The Fed-funded survey of business confidence has shown signs of weakening, which may give the Fed pause in its decision-making.

The key role of unemployment in the Fed’s decision-making

There are reasons to believe that the FOMC is prepared to continue its rate hiking campaign. Consider the Fed’s primary focus, inflation, and the trajectory of the labor market. The Fed’s tightening campaign has been dependent on the state of the economy. Since the beginning of 2022, the Fed has been steadily reducing its balance sheet, which has kept the central bank on track with its plan to normalize monetary policy and bring an end quantitative easing.

See: Federal Reserve Focus is On Inflation, Not Recession Fears

Equity market implications of anticipated rate hikes

Short-term implications of higher interest rates may be bearish for stocks. Equity markets have been supported by an accommodative monetary policy, which has allowed companies to issue debt at record low rates. As rates are raised, the higher costs may weigh on company earnings as companies issue more expensive debt. You may have noticed that the yield curve is inverting, an indication that investors expect lower growth in the future. This inversion may be a signal of a market correction or recession in the not-too-distant future.

Potential Fallout

Higher rates negatively impact fixed-income investors, as higher rates may put downward pressure on bond prices. As the Fed continues rate hikes, it puts pressure on the short-term rates, making it difficult for borrowers to service their debt. Higher rates may increase the U.S. dollar value. This hurts U.S. companies that derive their revenues from abroad.

The Importance of Understanding the Fed

The Federal Reserve has a dual mandate of maintaining full employment and keeping inflation in check. The FOMC may be approaching its intended goals on inflation. The Fed’s survey of business confidence has shown signs of weakening in recent months, which may indicate that the Fed is approaching its employment goal. The FOMC seems eager to hike rates and end its stimulus campaign. Expect continued market volatility. As investors, we must prepare for the Fed’s continued rate hikes. We should strive to understand its decision-making process and adjust our investment strategies in a rising interest rate environment.       FEL-PM-220819

Trading futures and options involves substantial risk of loss and is not suitable for all investors.  Past performance is not necessarily indicative of future results. This matter is intended as a solicitation to trade futures and options.           

Aug 01

Is This a Normal Stock Market Correction?

By Investing, Stocks No Comments

Stock market correction? Inflation creates uncertainty.

The great author and journalist Damon Runyon wrote in 1929: “We’re probably all going to permanently forget about the stock market for about another 20 years or so.” As you may have guessed by now, he was right. That very same year, known as Black Monday, saw a massive drop in U.S. stock markets as well as globally. Nearly 90 years later and we find ourselves in an almost eerily similar situation. This time around it is not just tech stocks that are taking a hit but pretty much all major stocks have been feeling the heat. The Nasdaq has also fallen below its 200-day moving average for the first time in almost two years.

What is a Stock Market Correction?

A stock market correction is a 10% fall from a previous high. It’s normal for the stock market to go up and down, but a correction is when the stock market has a big, sudden drop. When investors get nervous about the economy or their stocks, they sell because they think the stocks are going to go down. This causes stocks to go down, which makes investors even more nervous, leading to more selling. A stock market correction happens when selling is on a large scale. A stock market crash is a bigger, sudden drop in the stock market. A crash happens when investors are extremely nervous and there’s a lot of selling feeding on itself. A market crash can cause major economic damage.

Why is a Stock Market Correction happening now?

Well, the recent drop and fall below key averages have brought back memories of the dot-com crash, or the bursting of the tech bubble back in 2000. However, the real culprit here appears to be the war between Russia and Ukraine, with the S&P falling almost 20%, including a huge drop in tech stocks. These dramatic falls come as the FED reduces liquidity, raises interest rates, and energy supplies come into question. We are purposely slowing economies around the world because of inflation. The problem is that we could be looking at the equivalent of giving chemotherapy to a patient. We hope the toxic concoction delivered will have the desired outcome, but many times complications arise. This may end up causing more pain for businesses and consumers worldwide.

Why should you care about a stock market correction?

The stock market is a representation of the state of the economy as a whole and, in this case, we find ourselves amid a correction. That is to say that while the market has had a rough patch, it does not look like it’s in the midst of a full-blown crash or the start of a major economic downturn. However, should the markets continue to fall and hit a new low for the year, this would be a sign that a larger correction could be in the works. What this means is that if you have investments in the stock market, and we hit new lows, you may have to reconsider investments. Another consideration is your age and can you afford the risk of an extended bear market.

The problem with corrections is that they are confusing

Market corrections are largely a result of investor psychology, which can be difficult to predict. When stock prices rise rapidly, investors may decide that the increase is unsustainable and that a correction is due. This can lead to a rush for the exit as investors attempt to sell their stocks before the correction hits. This can cause further drops in stock prices as the number of shares being traded falls. If a correction grows into a full-blown bear market, the momentum for a fall can become self-perpetuating. Investors who are afraid of losing money may rush to sell their stocks, which causes stock prices to fall even more.

Conclusion

We may once again see stocks soar in the months and years to come, but you can be certain that there will be corrections along the way. It is when these corrections hit, however, that we are reminded of the sheer volatility of the stock market as a whole. You can be sure that there is going to be an extended bear market, but you also have to be ready for it. There is no doubt that the stock market will continue to rise in the years to come.     FEL-PM-220728

Trading futures and options involves substantial risk of loss and is not suitable for all investors.  Past performance is not necessarily indicative of future results. This matter is intended as a solicitation to trade futures and options.