Fear Strikes the Market

Fear struck the market yesterday, and it wasn’t pretty. Today is down too, but it could be all over the place before the day is done. So, what’s going on?

Yesterday’s Market Performance

One Statement

“The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated.” This was Jerome Powell’s (Fed Chairman) statement to the Senate Banking Committee on Tuesday. And that was all it took.

This has been the story all year, and pretty much for 2022 as well. The market has been hanging on Powell’s every word. Now, for the most part, the market in 2023 has reacted positively to his tone and the progress being made on the inflation front. I think there was an expectation that the aggressiveness of rate hikes would begin to lessen, and that we might even see rate reductions in 2024.

But, the Fed’s latest comments would suggest otherwise, with Powell stating the Federal Reserve would consider raising interest rates by a larger half percentage point this month and was likely to lift rates higher than previously expected this year to slow an economy that has shown surprising resilience.

The market obviously did not like this apparent shift in sentiment.

Inconsistency of Message

Personally, I think the Fed has done a decent job of combating inflation. They are in a really tough spot because raising rates is their primary weapon, but not all parts of the economy respond the same to this weapon. Some sectors are directly impacted by a rise in rates, whereas other sectors are largely unaffected. So, you end up with a very uneven distribution of results.

However, all-in-all, we’ve seen improvement in the inflation data, and the Fed’s actions have not sunk the economy. Although slowly, we are moving in the right direction.

In my opinion, we need a little more consistency of message coming from the Fed. What we sometimes get is very extreme pendulum swings from positive to negative commentary. And in actuality, the numbers have not exhibited that dramatic a change in direction. We all know there will be a back and forth in the fight against the inflation monster, so why not be a little less dramatic in the tone and messaging?

Something like, “We’re going to do whatever it takes to tame inflation and cool the economy. Unfortunately there will be some pain along the way, but we are making progress toward that goal.” And just leave it at that.

And would it kill them to just not talk as much? 😉

But, they didn’t ask my opinion and I’m not in charge. It’s just a thought.

Final Thoughts

There has been tremendous progress in the fight against inflation, and I see more positives than negatives. This tidal wave of rising prices and now rising rates is one of the biggest market headwinds in the last 50 years. To think we’d come out of it without any collateral damage is unrealistic. And 2022 was damage.

I am optimistic about the future, but I know there will be many more ups and downs on this market rollercoaster before the battle is over. The long-term prospects for stocks, bonds, and our economy are bright – I have absolutely no doubt in this.

I know it can be hard, but try and tune out the short-term noise of the financial media and daily swings of the market. And for you Texans, turn off your devices and enjoy the upcoming Spring Break. ⛱️🍹

We’re going to be fine.