So the zero-interest-rates-forever crowd got its way on Thursday.
Their reward? Another market slump, sending the Dow down 1.74% and the S&P 500 down 1.62% Friday.
The drop is even larger if you calculate it from the peak of the spike right after the Fed announcement on Thursday, at about 3%.
In “normal times,” this would make sense, though a full 3% drop would be overly dramatic.
Higher interest rates do create a damper for business, after all, though I’d argue it is more accurate to say that an increase from 0.15% to 0.4% is more like weaning a patient off of high-octane steroids.
However, these days it flies in the face of precedent. Bad news is the new good news, and as long as the markets, domestic and international, show some sign of faltering at convenient moments, the Fed remains uncertain.
Rumors of rate hikes have repeatedly caused knee-jerk reactions in markets, driving temporary outflows as the ratio of buyers and sellers skew to the latter, pushing shares back to slightly less astronomically high valuations.
So, the big question today will be “what gives?”
Which Is It?
There are tons broad conclusions for what caused this change, and most will at least be related to one of these three basic statements:
- The market is slowly returning from its long stint in Bizarro world, and long-established, rational economic and market correlations are no longer inverted.
- The high prices of equities while there is great uncertainty in the rest of the world have finally been recognized and outweigh the extraordinary attention given to what is essentially a very minor Fed decision.
- No one knows, people are getting scared, or some combination of both.
All three are being paraded out from time to time, though the third is kind of like a third rail for talking heads on television, since it implies the speaker is not omniscient.
Any explanation relating to the first seems to be a mix of wishful thinking and premature conclusions based on little real information.
Economic indicators aren’t all that healthy, though they are steady and largely positive. Yet they do not even come close to historic averages, from wage growth and consumer confidence to inflation and growth.
Essentially nothing has changed from the last several years where delayed rate hikes were a giant green light for a several-day or week rally.
In fact, that has been the whole point of the anti-rate hike campaigns playing out on business and market “news” shows all along.
As for the second option, what is really new? China’s market imploded, but China’s stock market is a farce.
Chinese and emerging market economics have been iffy for years, and what we’re seeing today is not especially abnormal.
And I’m not even going to start on worrying about Chinese economic growth dipping below 7%, when the process and information is so opaque that I’d bet a Communist Party committee adjourns to set the number before looking at any confidential data.
Then there is the third. As much as fear and lack of knowledge probably defines more of what is happening than any other explanation, it is the one that is the hardest to swallow.
In theory, everything we need to answer, “Why?” is out in the open for us to gather and tie together, and it reminds us not only of how little we know, but also our limited capacity to figure it out.
It lends a degree of uncertainty in ourselves that few can stomach. It makes us feel inadequate for the job required to navigate through treacherous times.
It makes us flawed and vulnerable.
How to Cope
The odds are good that we’re not going to get a definitive answer to what is going on in the markets today until someone researches and publishes a book on the topic several years from now.
It isn’t what anyone will want to hear, I know.
However, as investors and traders, we need to be brutally honest with ourselves. We need to resist the urge to try and blame a singular catalyst.
Everyone wants to point to one thing. It is human nature to do so, but it isn’t how the market works. Never has, never will.
The Fed and pro-ZIRP partisans need to embrace some uncertainty, too. Nothing will ever be perfect. There will never be the one obvious time to raise rates. Regardless, it needs to happen, and is long overdue.
Going forward, the best advice anyone will give you is to establish strategies and understand how they will work, how they won’t work, and what catalyst will differentiate between the two outcomes.
That may be as simple as buying select, high-quality stocks at a discount and letting compound interest soar, like Jimmy Mengel.
It could mean using a hybrid approach to bring in high yields from “baby bonds” while taking positions in small, high-growth companies, like Jim Collins.
Or it could mean evaluating undervalued commodities and maintaining a time frame that can easily stretch longer than our current economic climate will persist, like Nick Hodge’s approach to gold and silver.
We all may have to embrace uncertainty and volatility in the broad market, from the Fed all the way down to the small mom-and-pop savers. However, we don’t have to do the same for our personal investments.
