In my 20 years working in and analyzing financial markets I can’t remember markets as reactionary to itsy bits of statistics as they are today. The markets are literally hanging on economic reports; the employment rate, unemployment rate, underemployment rate and, let's not forget ye ole Bureau of Labor Statistics, JOLTS (Job Openings and Labor Turnover Survey) report, to name a few.
We have Locker Room Banter from thealways straight forward politicians without agendas on why to raise or not raise rates that send the markets up or down 1-2 % before reversing. We have normally correlated asset classes, the dollar, gold, and oil acting like they’ve never met.
Even without elections and locker room banter of other sorts, the markets are experiencing quite the kerfuffle.
The purpose of Monetary Policy is to stimulate or stifle the United States Economy.
Simply stated, increasing interest rates stifles the economy by making it more expensive to borrow money, thus removing it from the system, curbing inflation; This approach is known as tightening or as a hawkish policy. In turn, the dollar strengthens, making it a more attractive investment.
On the other hand, decreasing interest rates
To raise or not to raise?
Here are some facts along with potential implications:
The dollar is apparently rising – it's gaining strength. That’s due, in part, to banter alluding to potentially raising rates to curb the sizzling US economy. It’s all the talk right now.
What you are not hearing much talk about are the other factors in play here:
Year to Date We’ve witnessed approximate declines in:
- The British Pound 17%
- They Japanese Yen 14%
- The Chinese Yuan 7%.
Hard Brexit, Negative interest rates, government devaluation to boost exports. It’s just locker room banter. But banter or not, these are major factors fueling strength in the dollar.
Even if the US economy was sizzling right now, which it’s not, perhaps they raise rates to exploit weakness overseas to put more pressure on other currencies and increase our buying power. Cheaper good leads to higher profits; though, longer term, our exports would suffer because it would be more expensive for foreigners to purchase US Goods.
Today, exports account for approximately 13% of GDP and the latter would increase the trade deficit even more. So, a rate hike might cause more harm than good if the world recession finally spreads this way.
The reality is that no one can predict exactly how the market is going to react to any scenario, so there’s no reason to get all worked up about it. The bottom-line is that, while some of this locker room banter is important, much of it is just noise.
To be a successful investor you need to be able to block out the noise and remove emotions by using technical analysis. A stock chart is a fairly accurate picture of human emotion in relation to the underlying issue being charted. The price of which is directly determined by where the market thinks it should be at that time. Sometimes it’s too hot; sometimes it’s too cold and, on other occasions, it’s just right.
By using sets of rules and indicators developed by some of the greatest technicians in the world, prudent money management techniques are interwoven to develop systems and strategies intended to deliver a return and manage risk.
Regardless of what happens, when it happens, or if it even happens at all, by having a downside exit strategy, you can help manage risk, block out the noise, and take advantage of opportunities with more confidence and conviction.
We are in the longest-running bull market in history and it will stay that way until it doesn’t. So block out the noise and stay disciplined. After all, it’s just locker room banter.
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