After a terrible May for U.S. stock markets, with investor confidence continuing to decline, any good news is welcomed, even the subtle hints made on Tuesday by Jerome Powell.
With economic growth shrinking, and the trade war with China not only raging on but doing so even more intensely, along with new tariffs announced on Mexican imports, the stock market sure could use a stiff drink to calm itself. The bar at the Federal Reserve has some pretty potent ones in stock, and even the hint of our drinking from the fountain of lower interest rates can go a long way.
All we really needed is an assurance from Chairman Jerome Powell that they are watching this trade battle that has so many people concerned, and are prepared to act if necessary, even though this should have been a given really, as that’s part of what they do, and a pretty big important part in fact.
Still though, sometimes you need to just hear it, just like people often want another to tell them that they love them no matter how many times they have heard it before, whether there is a reason to need to hear it again or not. Reassurance is like that, it is like the sound of our own name, it can be music to our ears beyond what our rational thinking would seem to require.
We might think that investors are stoic beings, or in the case of today’s trading, unfeeling artificial intelligence, as AI drives most of the trading on stock markets these days, not people. People will always take the lead though, and emotions certainly play a part in that, which includes both worry on the downside and exuberance on the upside.
In our present situation, it is worry that we are struggling with, and worrying is a very common problem with us humans, especially with all the uncertainty involved in trying to predict future stock prices. It makes a lot more sense to just observe and react without the color of emotion, and the best of us do exactly that, where concerns about where we will be headed over the next few months or the next few years will be revealed in good time, when we get close enough to tell or when we are already there.
For a great many of us though, this is a lot easier said than done, and even the best traders have struggled with this at times. Mastering investment and trading is really about self-mastery more than anything, and this includes avoiding acting in both haste and stubbornness.
We Need to Account for Everything When We Decide on Stocks
A more focused approach will have us watching the economy, the Fed, the market, and our positions, and watch whatever transpires unravel and base our decisions upon actual outcomes and not just pure speculation, but a whole lot of speculation does go on and there’s never any shortage of that.
This doesn’t mean that we should not seek to do our best to predict these things, but the value of this is more in having us better prepared for the changes that might happen, such as bear markets or recessions, but ultimately we need to refer back to the present to decide what to do in the present, otherwise we will risk being wrong and jumping the gun.
People do sell out of concern of the future though, and the future outlook does bear heavily on stock prices, and that’s actually what drives them, almost completely in fact. Once something has happened, it’s in the past, and we can only trade on the future, and that’s exactly what we do whether we are aware of this or not.
We might be in a stock that has gotten hammered, and there are some that have been bearish for years in spite of the overall market being very bullish, but when we are deciding whether to hang on or not, or to jump in or not, the chart does run left to right and we can reference what has happened but only to the extent that it may shed light on what will happen. It’s only the things to the right of our charts that really matter though.
The U.S. stock markets are very much at a crossroads right now, and remain very much under pressure, something that is quite obvious to any observer or participant. We’ve had a long run so far, does that mean that it will tire soon and correct? Valuations are abnormally high, will they soon normalize? Will the U.S./China battle end soon or will it go on for a long time, perhaps a very long time?
Will growth continue to shrink, where we keep revising growth down until we get to the point where it runs in the negative? Are bond traders right in bidding bonds up so much, with the implied lack of growth that this indicates? Are we on the brink of an earnings recession, where they go down instead of go up and cause a lot of people to bail on stocks? Will the Fed continue to sit on its hands as things worsen, perhaps waiting too long, where things end up going so far that they can no longer use their tools to bail us out without a lot of pain involved?
There are always a lot of questions out there, and if someone is looking to get out of stocks, it’s always easy to find reasons to support this if we want to. The task must be to maintain an unbiased view though and weigh all the evidence, and especially look for real evidence that the tide has turned and the ship is going down before you jump into the life boats.
Where do we draw the line though? The market might be going down like it did in May, but does that mean that this will continue? If it does, how far is too far, how high does the water have to rise on the ship before it’s too close to the top of the deck or how much water does it have to take on before we really need to jump off?
The Fed Really Is a Benevolent Ruler
Of all these considerations, what the Fed might do is clearly the biggest one, and if we questioned this, we only need to look at Chairman Powell’s comments on Tuesday and how they were met.
Powell merely put his hand on the shoulder of the market and reminded it that he and his team are here for them, and are keeping an eye on things. There were no promises made, not even any suggestions that they will cut rates soon, only an assurance that if this does need to be done, it will be.
This caused the biggest one-day gain in stocks since January, in spite of all the concerns out there. Interest rates are indeed king and have proven to be once again.
The Fed is the captain of our ship, that’s how big a deal this all is. For stock investors, this actually isn’t quite the same issue than the one that the Fed is focused on, which is economic growth. For those invested in the stock market, lower interest rates are more like a drug that will get the companies that we invest in high, making us high as well, and that’s a high we really love and no other high compares to it.
This is really all about the cost of borrowing for the companies that we invest in, and lower cost of borrowing means lower costs relative to revenue, leading to more prosperity. Companies carry a lot of debt generally, especially these days with this at an all-time high, and this can really impact their ability to expand their businesses, pay dividends, and buy back their own shares, all which contribute to both the present and future value of our stock ownership.
Knowing that the Fed has our back here and if things go further south, they are ready and willing to step in can be pretty comforting, although we should already know this. We do need to realize that none of this has to do with the performance of the stock market though, and they don’t jump in for that reason ever, but they do get involved when it’s the economy that is either taking it on the chin or getting overheated by their standards.
Things do look pretty stable right now in spite of the tariffs that are going on, and in fact we can probably thank these tariffs for the Fed not raising rates this year. The Fed was raising rates during the earlier part of this trade war, and if not for tariffs, then perhaps their plan to raise them some more this year would have come to pass.
The doomsayers are still out there in full force, and growing with each passing week it seems, but the actual situation isn’t so bad at all, which is the real reason why the Fed is standing pat. They do have their hands on the wheel and their view on the horizon though, and maybe we just needed to be reminded of this once again.