11-09-2021: What Really Controls the Market!
Last week, during an online presentation to a group of accredited investors, I made the following statement:
“This market is completely Fed-driven. It’s addicted to free money, $120 billion each month, hitting the market. Earnings don’t matter and the economy doesn’t matter. The only thing that matters is what the Fed does.”
To tell you the truth, there were some people who were a bit angry at that statement, based on their questions.
They challenged me that their newsletter gurus were telling them to get out of the market because inflation is going to kill the markets. The Fed is causing runaway inflation and the markets always drop when that happens. They said they were putting their money into gold stocks because they’re so undervalued and they do well during inflationary periods.
I hate to be the one to break it to these investors, the idea that we’re going to have runaway inflation because of the Fed’s actions is just a guess. It’s somebody’s opinion. It’s not based on any data. It’s not based on any “secret” understanding of the Fed and the markets. Unfortunately for these subscribers, newsletter writers have zero accountability to their readers. If the newsletter author is wrong, so what? It’s no skin off their teeth. If you lose a lot of money based on their wild predictions, well, too bad. Caveat emptor, let the buyer beware.
Sure, you can cancel your subscription, but they’ll have moved on to their next sensationalist effort and have new subscribers to take your place. And you’ll have losses to deduct on your taxes. Not exactly a great consolation prize.
Yes, last week, the Fed did announce that they’re going to taper their bond purchases by $15 billion a month. They also announced that the rate of the taper will increase on a monthly basis. That means a decreasing supply of new money will hit the market each month.
So what did the market do? It has flown higher. From the time of the Fed announcement on Wednesday to the close of the market on Monday, the S&P 500 has moved higher by more than 1.75%. Not a bad return for just 3 full business days.
“Yeah Mike, but what about interest rates?
The Fed taper is a prelude to higher rates, right?” Well, not so fast. The yield on the 10-year Treasury dropped from 1.60% to 1.43% over the same timeframe. Hardly “runaway inflation”.
Again, the Fed’s actions moved the markets. It wasn’t any earnings report. It wasn’t any change in the economy or the economic outlook. The market loved the Fed’s actions and moved higher, accordingly.
Bottom-Line: The market reacted positively to the Fed’s actions, the opposite of what the so-called gurus predicted. The market continues the strong uptrend that was re-established at the end of October.
That’s the most important thing to consider when it comes to investing. Invest your money for what the market is actually doing, not what the market “might” or “could” do in the future. Follow the data and the trends. That’s the key to being successful in any market condition.