Have Markets Found A Bottom?
I remember my dad playing hide-and-seek with us when my brothers and I were kids, and he would sometimes make scary noises from his hideout, which terrified us.
At first, at the initial sign that I was feeling overwhelmed and frightened, he would leave his hiding spot and reveal himself to us.
That, of course, brought me plenty of reassurance that all was well and I asked him never to put me through something like that again; I was probably four or five, so obviously, my dad did it many more times, knowing that hide-and-seek is just a game.
He would definitely stretch the boundaries by shutting off the lights, putting on spooky music, coming at me and my brothers from various angles and creating suspense, not just in hide-and-seek, but even in pulling pranks around the house.
In the end, we knew that it was all fun and games, and were relieved when he hugged us.
As we grew, though, he felt compelled to lengthen the drama, to exacerbate the horror and strengthen the dramatic effect; we were able to handle more, so he gave us more…
This was all done in the name of sport – he was moving the goalpost, seeing how much fear we could stomach.
Other parents don’t do that; they see some distress and immediately call it quits, fearing their children will be traumatized otherwise.
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Markets have kind of a similar relationship with the Federal Reserve; at this point, it is almost a given that the central bank will not let too much panic ensue, when push comes to shove — they’re not looking to stress-test the global equities market.
Central bankers believe in free markets, but not totally unconstrained ones, but rather those they can help to stabilize and contain, when things get out of hand.
They “help” stabilize panics, by offering up three main tools:
1. Verbal Acknowledgements – Simply saying publicly that they’re thinking about how to react and respond might be enough to calm markets down.
A perfect analogy here is when I used to tell my dad, “I know it’s you making these noises,” and he would respond by laughing.
In 2020, the FED told the markets that they’d buy junk bonds if need be, and markets bottomed that day… the FED has never bought a single junk bond to this day!
2. Interest Rates Hike Slowdown or Postponements – The FED has already committed to tapering and tightening, but they can alleviate concerns of overdoing it, by acting in stark contrast to the timeline the markets are pricing in.
In other words, they can take their time, do it moderately or have a wait-and-see policy in place.
3. The FED can pause – This is the best outcome for markets, when the FED affirms that the market had said its piece and that they’re making the appropriate tweaks to reflect the new dynamics.
With some FED officials finally acknowledging inflation isn’t transitory, they are implementing stage 1 of their stabilization plan; they are telling us we are not delusional about our concerns and that they see eye-to-eye with the rest of us.
Secondly, they are not reneging on their promise to raise rates, because that is the right thing to do. But they know the pace can’t be aggressive, so they’re implementing stage 2.
Why isn’t the market rallying yet, then?
It is because it doesn’t know when the FED will decide that they need to pause!
In other words, the FED is allowing us to remain in doubt and fear as to where the threshold is; therefore, investors are weary about the dip, since it could be months before the FED finally comes out of hiding and reveals itself to us as the orchestrator of bullish rallies.
After yesterday, it seems downside risk, the possibility of an epic crash, has greatly diminished, but the catalyst for a clear runway to new highs, has not yet appeared either.
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