Most investors are conditioned to believe the Fed will bail out stock market investors whenever there is a big move down. That’s pretty much what has happened in every big selloff of the last 20+ years. Over the past few decades interest rates have been kept artificially low, providing the fuel for the stock market. Savers have been punished with near zero returns while some have taken the plunge into stocks in search of some semblance of a return. Stock investors over the past many years have become accustomed to historically outsized gains… and when there is a selloff are conditioned to buy any dip, confident that there will soon be a move higher. Many of those with excess cash to plow into the market have come to feel a sense of entitlement to the 10% a year or more they have been getting … as savers have had to settle for a fraction of 1%. Now is all likelihood those days are over and a rude awakening awaits masses of these complacent investors.
The Fed pre-announced it’s intention to raise rates until it tames inflation. Stock investors who don’t know market history do not understand the old Martin Zweig rule of ‘Don’t Fight The Fed’ or ‘3 Steps and a Stumble’.
As expected by those who know market history, the stock market, even with its’ recent bear market rally, is down thus far in 2022. And now as the end of summer approaches, so do the historically two worst months of the year for stocks…September and October. Add to the equation the Fed’s commitment to not only continue to raise rates, but also to commence QT (quantitative tightening) in September in order to shrink its’ massively bloated balance sheet.
And maybe increased interest rates will not do the job the Fed hopes for. From an average consumer standpoint, half the country is struggling to pay the mortgage or rent and put food on the table. Maybe it’s those at the very top that needs to have it’s spending slowed. Maybe a stock market crash will slow their spending. Notice that Ferrari just posted record quarterly sales and profits as did Bentley and Lamborghini. Maybe a stock market crash is what the Fed wants.
Meanwhile, Europe is in a mess on many levels. Energy prices are soaring. Inflation is off the charts. And the US Dollar is soaring in a flight to safety. It all feels eerily like some kind of systemic accident is brewing. Stay tuned!