What Is The Fed Doing?

Yesterday's decision by the Federal Reserve to "do nothing" has given us a swooning stock market today. Why? Because the Fed's indecision to do the right thing (i.e. raise interest rates) is a signal of lack of will to the financial markets. Not surprisingly, financials held ground yesterday, while industrials dipped, and commodity-related securities rallied in the face of more inflation. Today oil topped $140/barrel due to a weaker dollar, and combining the United States' lack of will to find its own oil reserves, the U.S. market has fallen.

Imagine that the market is a coiled spring that has been wound down to the floor by the heavy weight of negative sentiment, inflation expectation, high oil prices, a weak dollar, a weak economy, and an impending dead-heat Presidential election in which one candidate espouses higher taxes, and the other does not (leading to much market uncertainty). This is all bad, right? Yes, and now it's all baked into the current stock market pricing mechanism. Any improvements on any of these fronts will lead to a higher stock market. In particular, a Fed willing to combat inflation through monetary policy would be welcomed by the market, and we would experience market rallies, even with an added threat to the banking system.

Part of the value of dispensing financial advice is not just about "what to do", but sometimes more often "what not to do". Selling into a weak market is a "no-no". There may be some exceptions to this, but they are rare. Buying into a weak market is a "yes" provided an investor has a long term perspective. So for anyone sitting on the sidelines, it's time to start picking at this market, buying temporarily weak sectors or high-quality out-of-favor companies at low prices.

If you have friends that are paralyzed by this environment, have them give us a call. This type of environment is typically when we receive the most referrals.