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The week that was:
There is a very old saying: "Never fight the Fed". That is exactly what the market has been doing this past month.
As I have mentioned many times in my last few newsletters, the market has been going up purely on optimism. Optimism that the Fed will start slowing down interest rates, and cutting them less aggressively for the rest of this year. The market even went far enough to think that the Fed will start cutting interest rates by next year.
A statement from the Fed chairman on Friday brought the market back to reality. The statement was that the Fed will keep on raising interest rates, as they have been doing recently, unless inflation drastically decreases. The last inflation report showed inflation as 8.5%. The Fed will only consider slowing down rates when inflation is down to 2%. There is a long way to go for that. Both high inflation, and high interest rates are here to stay for a while.
In my last few newsletters, I had explained why the market going up on optimism was not right, and I predicted that the market could end up with an egg on their face if interest rates are increased a lot in the next Fed meeting. That meeting is yet to happen, but the Fed has pretty much confirmed that their raising of interest rates has not slowed down. The market was fighting the Fed by making assumptions and being over-hopeful because they misunderstood one statement the Fed chairman uttered a few weeks ago.
This statement has put the bear market rally that was fueled by optimism to an end. The market will probably go on a downtrend for the next few days. However, there is no reason for the market to go down too much lower. The Fed's statement did not reveal any new news. The Fed has been doing that all along, though the market has not been paying attention to that. The market should not have dropped down so low anyways. If this bear market rally had not happened, and the market was not so over-optimistic, the Fed's recent statement would not have made a difference.
Even if the market goes on a down trend because of this, my strategy stays the same. Stay calm, and continue to invest in high quality blue chip companies. Bear markets and down trends always end at some point. I started new positions in Google (GOOGL) and Amazon (AMZN) on Friday when the market crashed.
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