Risk Reward Vol. 403
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
At its meeting this week, the Federal Reserve raised the overnight rate of interest and indicated that two more upward moves were likely in 2019. Moreover, in his Wednesday afternoon press conference, Fed Chair Jerome Powell stated that the Fed would continue to reduce its balance sheet at a previously announced pace. As predicted last week, Mr. Market reacted negatively to the news. The Dow Jones Industrial Average fell 350 points that day. Thursday was even worse, and the bloodbath continued Friday. When the closing bell rang, Mr. Market had suffered his worst week since October, 2008. The Dow and the S&P 500 were down more than 6% for the week and 9% year to date. The NASDAQ was down over 8% for the week wiping out all of its year to date gains.
OK, so the news from the Fed understandably caused some negativity, but why has it persisted? In my humble opinion, the answer is obvious. It is so obvious I am surprised that the financial press does not emphasize it. Here is my take. The decision to invest is, to a large extent, a psychological one. When one feels good about the future, one wants a piece of it and is willing to bet on equities. On the other hand, when the future looks gloomy, one flees to the safety of government bonds or cash. With another shut down underway and the prospect of impeachment looming, who feels upbeat about anything political. Indeed, if you are not depressed by the current state of things, you are sick in the head. No wonder Mr. Market is rotating out of equities.
Is this negativity warranted? Based purely on economics, no. Indeed, lost in this week's gloom and doom was news that the economy expanded at a respectable 3.4% annualized rate in the third quarter. But if you haven't noticed, everything is politics these days. Politics is the new, universal unholy religion. It not only impacts the zeitgeist, IT IS the zeitgeist. Today politics dominates the 24 hour news cycle and social media. Politics is on everyone’s mind and lips. It splits families and ends lifelong friendships. And as I have stated for more than six months, it will only get worse once the House transitions in January. Literally and figuratively, winter has arrived.
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