As you probably saw, the stock market had a bit of a panic attack yesterday over an inflation report that was released by the government. Anyone who spends money knows that inflation is still way higher than Washington is ready to admit, but that is nothing new. It's been that way for a while and the stock market has adjusted to account for it and the multiple rate hikes the Federal Reserve has planned. Yet somehow yesterday morning, all of that was forgotten and it seemed as though it was the first time the market had ever considered this scenario. We went on to have the worst day since June of 2020, which was a profit taking day after the big COVID recovery we saw in the couple of months prior to that.
Just like the COVID crisis was a biological event that turned into a financial event, this inflationary cycle we are dealing with now and the corresponding interest rate hikes that will follow are not like some of the previous cycles we have seen in the past. Roughly 40% of all of the money printed since the Federal Reserve's creation back in the early 1900s was printed in the 18 months that followed the COVID shutdowns. So, it's not surprising that we have inflation now with all that new money entering the system so quickly and carrying demand higher at the same time supply chains everywhere were severely restricted. Unfortunately, the people that created that problem are the same people we have to trust to fix the problem - and yesterday the market was simply not having it.
But what does it really all mean? The answer is absolutely nothing. In fact, when the market behaves like it did yesterday, we have a technical word for that. It's called an “overreaction.”
In truth, the market is at an oversold level right now, just like it was this time last week when we were at the exact same levels. We had a few positive days and then yesterday reset us back to where we were. That’s another “nothing” to not be worried about…
When we are oversold as a whole it usually means our odds of heading higher vs. lower are better. There are also several other key economic and monetary factors that are pointing to better days ahead, at least in the short run. As I mentioned in my last email update, September is historically a very challenging month for the financial markets. This September is living up to its reputation perfectly so far, but I am still seeing more positive than negative signs on the horizon.
So much of what happens on the stock exchanges these days are triggered by large institutions using algorithms and AI programs to search the news looking for special keywords. When the words they are looking for are positive, their algorithms buy. Likewise, when the words are negative it triggers sell programs, which typically bring prices down and result in more bad news being reported... which results in more selling... which brings prices down more... which results in more bad news being reported... and so on we go – and it can all happen very quickly at times. Nothing, however, in this current cycle has anything to do with fundamentals or any new information. We know inflation is high and we know the Federal Reserve is going to keep raising rates for the foreseeable future. That's not an ideal situation for us to be in as investors, but it does not leave us with the same level of uncertainty that we had a couple of years ago when we were trying to determine the impacts shutting down the country would have on our economy.
I share all of this to tell you that yesterday's movement was by itself not a cause for alarm. The financial media and some of your family and friends may tell you differently, but they either have advertising space to sell (and need to keep you tuned in to do so) or they could be operating in a manner that is more emotional than rational. Emotions often trigger reactions, but assessing the facts, making wise decisions based on proven principles, and staying focused on following a master plan built around your goals allows you to remain more rational and stay on track when everything around you seems to be chaotic.
What we've seen again this week is really not news, it's only noise. Realizing the difference between the two will help you avoid falling prey to overreactions that can rob you of your joy and impede the growth of your portfolio over time. Neither of those serves your best interest, so look past the headlines and the fear they are designed to generate during times like these. Your customized gameplan will serve as your true north and help you keep moving forward toward your goals – and we’ll be there to help keep you on track each step of the way.