The Market’s Problem Isn’t Psychology, It’s Policy
As the S&P 500 has been struggling with its first bear market since 2008, it’s been interesting to watch various pundits and money managers talk about when the market will bounce.
They look at when the market has bounced in the past few years or past decade. They look at all the negative factors for the market, such as inflation, Ukraine, slowing earnings growth, Fed interest rate hikes, and then they offset the negatives with the positives – mostly people wanting to get stocks on the cheap.
You’d think they have no idea we are in a bubble stock market. Because this is one time that market psychology, charting etc. doesn’t matter that much. This downturn has much more to do with a change in policy than a change in psychology.
The Fed is raising interest rates. If this wasn’t a bubble stock market, that wouldn’t matter so much, but it is a bubble stock market (and a bubble economy).
This isn’t just another Fed tightening cycle after a Fed easing cycle, as so many people seem to think. This isn’t a cycle at all! Heck, the last time the Fed even raised rates at two consecutive meetings was in 2006!
This isn’t a cycle; it is the end of the Fed’s super easy money policies. And that means the eventual end of the bubble stock market. The only thing that can revive it isn’t “cheap” stock buying, but a change in Fed policy.
So, until the Fed reverses its policy and stops raising rates, you can throw out all your charts and your psychology measurements – the market won’t fully recover. However, we have seen a partial recovery in part because the Fed has been very reluctant to sell off some of the bonds it bought with printed money. That has meant longer term rates, such as for the 10-year Treasury bond have actually gone down 1% since mid-June after the Fed raised the overnight rates by a total 1.5% in June and July. That’s means the Fed’s policy change may be less than promised. But, either way, policy is ruling now more than simple psychology and past Fed rate increases.
However, they will become sort of useful again, once the Fed stops violating about the only rule in a bubble stock market: YOU CAN’T RAISE INTEREST RATES IN A BUBBLE ECONOMY!!!