Markets are on the move this morning. Over the coming days, expect to hear and read much about global markets selling off with calls for the end of society as we know it capturing headlines.
As I am fond of saying at times like this, “The world only ends once, and it hasn’t happened yet.” This is not meant to be glib. Rather, it simply is an attempt to frame the conversation so that emotion takes a back seat to reason.
Let us take stock of what has happened leading up to this Monday selloff. Again, to frame the conversation, I work to suss out the primary catalyst or catalysts that are driving every “scary” selloff. It is important not to over complicate the analysis. There are certainly cross currents creating volatility and fears about possibilities that have not even played out, not to mention the fear of the unknown. All these inputs do more to affect the emotions of investors than explain what is happening. Emotion has no place in the process of making sound investment decisions. Clearly understanding the variables leads to sound investment decisions as we navigate these waters.
In the case of today’s selloff, its roots are based on a couple of influences. One is the market’s reaction to Japan’s decision to hike interest rates. Another is the market’s reaction to an unexpected spike in the unemployment rate here in the U.S.. These events have brought about a fear of a growth slowdown. Everything else in the news is supplementary.
As I have been telling clients for years, especially during presidential election years, the Federal Reserve is a more important factor driving markets than one candidate over the other. This year is no exception. Markets are focusing on the Fed today more than how the two campaigns acted over the weekend. Politics is not driving this selloff.
In 2022, the Fed embarked on a shift in their policy from “ZIRP” (Zero Interest Rate Policy) to an aggressive attack on inflation. This attack led the Fed hiking rates from zero percent to five and a half percent in record time. Stocks reacted negatively to this shift in policy because of the fear that it might not accomplish its objective of lower inflation and could slow the economy down in the process.
Stocks regained their footing when attention turned to how strong the economy is to shrug off the Fed hitting the brakes. Since then, stocks have rallied, and inflation has softened. All the while, many geopolitical risks popped up, fears persisted and yet the world did not end.
Now we are at the point where the Fed is claiming victory against inflation. It has now begun turning its attention toward the recent spike in unemployment. This is precisely what we have been telling clients to expect over the past few years.
While the Fed was tackling inflation, unemployment continued to be tame. This was a wonderful set up for Fed policymakers because handing inflation and unemployment at the same time difficult to say the least. Being able to address one issue at a time is the better scenario and it is exactly what has played out.
So, now we have an unemployment rate that is only now beginning to move higher. This is right on time as far as I am concerned. It is coming at the end of a tightening period when the Fed is well-positioned to bring rates down to address economic growth and unemployment.
Stock markets are fickle at times like this and tend to behave more like a child who hasn’t gotten its way than a sophisticated global financial mechanism. This is what I see in markets this morning.
Right now, the bond market is pricing in a Fed that is not going to react to the deceleration in economic growth. Short interest rates have fallen sharply as money flows from stocks into bonds. This appears to me to be an overreaction. The Fed will move, and they will move earnestly to add liquidity into markets.
The stock market is reacting to currency moves, especially in Japan after their central bank unexpectedly hiked interest rates. This will settle down as investors who were caught off guard move to the sidelines.
Individual investors are scared and make rash decisions to sell first and ask questions later. This has never been the best process to make sound investing decisions.
CNBC, Bloomberg, Fox News and all the other companies that make money from selling advertising will take advantage of the turmoil by parading a never-ending parade of doomsdayers. This happened during every market decline since the invention of the press.
August and September tend to see the worst stock market performance during the year. So, a sell-off in August is not a shock. A presidential election is happening this year. It happens every four years so this is not a shock. Stocks are selling off as the Federal Reserve is shifting policy. Seeing a stock selloff as the Fed shifts its policy from hiking to cutting is not a shock either.
The Fed will begin to signal to markets what their next move will be. This will add stability to markets. The knee-jerk investors who are panic selling will run their course soon and stability will return. In the wake of these and other reactions, there will be tremendous buying opportunities that present themselves. We will be there to deploy the cash we have sitting in client accounts to take advantage of such opportunities.
As always, we appreciate the trust and confidence you have placed in Kessler Investment Group.
Sincerely,
Kessler Investment Group, LLC
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