The US has seen a steady Bull market for the past nine or so years, so when February 2nd, 2018 saw the biggest stock sell-off in recent history, causing the Dow to plummet a whopping 1,175 points and dip below 25,000, eyebrows were raised. Were we in the midst of a long-time-coming correction or possibly the beginning a mini recession? Most all key predictive factors suggested that a recession was not warranted, so why the massive and very sudden dip? The answer lies within the soon-to-be altered game plan of our monetary policies by the federal government.
Jerome Powell was ushered in as the new chairman of the Federal Reserve yesterday and one key new policy was at the forefront of the massive sell-off from the previous Friday. With such a strong and consistent bull market for the past few years, investors are waiting for that tipping point to cut and run with their astronomical double figure gains. That fear, coupled with the fact that interest rates are near historically low levels means that in the event of a downturn, the federal government would have little leeway to aid the economy. These somewhat benign factors were the reason why the selloff occurred.
The fed’s solution to the above problem: Slowly lifting interest rates in tandem with increasing inflation to provide more room to cut rates in the event of a recession. There are a few ways that the feds can do this, including (1) raising the inflation target, (2) adopting a target inflation range, (3) instituting a price-level target, or (4) establishing a target for nominal gross domestic products. The last two options would be more difficult and less black and white, but all avenues are being explored and debated.
As I was completing the proof-reading of this latest blog, Bloomberg.com happen to release an article with the title “Stocks Recover From Selloff With Best Day Since 2016.” I smiled and chuckled to myself as I knew that intelligent investors would use that Friday selloff as an AMAZING opportunity to buy back in on stocks that dropped double figures for no apparent reason. Now, just 3 days later, the Dow has climbed 600 points. Cause and effect, it’s really quite simple; but when people’s hard earned money is at stake, days like Friday are bound to happen.
The major take-away is that any litigation, law, or even debate regarding monetary policy that is broadcast to the public will scare the living crap out of investors. We have been financially cruising without a care in the world, so when the federal government admits that some issues need to be solved going forward, that fear breeds selling. What we need to do as educated investors is provide ourselves with information before making brash decisions such as massive sell-offs or re-allocating our portfolios.