The recent roller coaster ride in the stock market has some investors asking if the bull market has run its course. It has other investors asking if it’s safe to buy these dips, or is now a time to look for more stable returns. Two recent events have overjoyed investors and soothed their frayed nerves: 1) Fed Chairman Jay Powell “walked back” his comments about interest rates, and 2) the trade war between the US and China appears to have subsided, depending on who and what you want to believe.
With respect to the Federal Reserve Chairman, his comments have been interpreted as a reversal of course. However, a more accurate statement might be that they are more of a clarification. Powell’s recent statement that interest rates are close to (“just below”) neutral, may be intended to give the Fed more flexibility to respond to economic events as they occur. This comment seems to clarify or modify his comments from October, where he stated that rates were a “long way” from neutral. If neutral is defined as a broad range between 2.5% and 3.5%, and rates are still around 2%, then it would still take four (4) rate increases (at a quarter point each, which is and has been the plan) to get to the middle of that broad range.
On Monday this week, investors reacted to reports that there was progress between Donald Trump and China’s Xi Jinping in the trade war between US and China, and the Dow rose about 300 points. On Tuesday this week, stock declined over concerns that the discussions between Trump and Jinping were not as successful as hoped, and that there are risks that the trade war spate will continue. Comments by both administrations seem to indicate that both countries are coming away with different interpretations of these discussions and their implications, than the other. In other words, they heard what they wanted to hear, similar to investor’s reaction to the Fed’s recent comments.
As an investor, you should be asking yourself questions like: am I willing to risk my hard-earned profits in the current environment and continue to ride this roller coaster? Or, as the sadistic dentist who tortured Dustin Hoffman’s character in the movie Marathon Man asked: “Is it safe?”