Is It Time To Buy? Here Is What I Think About This Crazy Market.

The FED

The Federal Reserve will be raising interest rates a few times this year, as much as 5 times as I predicted here. The FED will also stop asset purchases and start selling some of these assets. The FED seems “hawkish” which describes the behavior of the FED as outlined above. Last year the FED was rather “Dovish” because it let the market and the economy run hot without much intervention to cool it down.

You could argue that a dovish FED is good for the stock market, but we are currently living in unique times that require many unprecedented initiatives. That aside, the FED has been accommodative to the stock market in the last two years, but we must remember that it is not the FED’s job to keep the stock market up. The FED shouldn’t really even be looking at the stock market when making their decisions, but they do, at least Jerome Powell does. The stock market has tanked recently partly because the FED is warning us of its new stance, and a pullback is justified if asset reduction, higher interest rates, and the rising inflation rate are on the table. How much of a problem will this be for the average investor?

The FED changes interest rates all the time. In good and bad times, and most of the time the market overreacts, higher interest rates by themselves are not a problem. On the contrary, higher interest rates are what is needed to combat the increasing rate of inflation. That is why the FED shouldn’t just look at the stock market when making policy decisions but the overall economy. The overall economy is much broader than just the stock market and all of that must be in the picture to make it run properly. Interest rates are usually not a benefit to the market, but depending on which stocks you like, money lending companies like banks will benefit from higher interest rates so it is not all bad for stocks. In any way, the benefit of higher interest rates likely outweighs the risks of "lower" performance in the stock market.

That covers rates and the FED, but the context today is a bit different than just regular interest rates rising. Coupled with an off-loading of the FED’s assets we could actually see some damage done to stocks because the FED in its shopping spree, to the tune of $80 billion a month for the last two years, bought corporate bond ETF’s. This is one of the actions that kept the economy going through the pandemic, but the buying is stopping and the companies must carry their own debt again. The higher interest rates will make this debt more expensive, in reality, the companies that are part of these ETF’s basically only received a short breather through the pandemic but must now work through even more issues than before like the rising cost of labor, fast-rising inflation, and a hawkish FED. My conclusion is that the FED will not be as much of a “friend” to the market as it has been for the last two years, this should be priced into the market. I don’t see that at the moment, especiallyif we go back to our recent highs or early January 2022 levels.

Geopolitics

I went into detail about Russia and Ukraine's potential for war here. There is no worry in my mind that there will be a full-out war in Europe. There might be a regional crisis that will require humanitarian aid but not WW3. But what I think is more troublesome when strategizing about the stock market is oil. The U.S. has willingly abandoned energy independence and being a net exporter of energy. This is a huge issue because the lifeblood of the world happens to be fossil fuels. OPEC and other oil-producing countries will worry more about their own profitability than keeping the price of oil stable around the world. Especially for the U.S., which is the number one consumer of oil in the world. Currently, the price of oil is hovering in the high 80’s ($88 1/28/22) but it is very likely that oil will continue to climb and so will transportation costs for companies and consumers. Joe Biden's ridiculous energy policies will not be beneficial to the U.S. energy needs in the near future. But the issue is tricky because it is a transient situation (depending on who wins the next Presidential election), but oil could become very pricey. Which is good for the tried and true oil stocks like Chevron ($CVX), Exxon Mobil ($XOM), Dominion Energy ($D), etc.

Buy or Sell? I Think Buy.

The market is not looking confident right now and this is partly because it has been flushed with cash that should not have been there in the first place. Large IPO’s, SPAC's FED bond purchases, cheap debt, and stimulus have contributed to that. I believe this is why we can't seem to find the bottom (even though I believe it's looking like we are very close if not there already). All this "new" capital in the market is creating an unconventional environment. Another issue is the ETF market and how much of the biggest companies make up these ETF’s. Often stocks go down that have nothing to do with each other simply because they are in the same ETF, investors that invest in individual stock are the ones hurt by this. But it is important to remember that the market still has not fundamentally changed, even though it appears like that more often than not. What I mean by that is, a good company is a good company. If Apple is a great company, literally the largest company in the world by market cap, and is highly profitable, grows organically, and creates wealth for its shareholders, it will be bought at some point in time. The market might be down as a whole, but this correlation is mostly because of ETFs and inexperienced investors and fund managers. As always, as an investor, you should be on the lookout for good companies that are innovative and/or do profitable things, or that rely on a tried and true format that creates wealth, looking at you Raytheon ($RTX), Salesforce ($CRM), Boeing ($BA), Coca Cola ($KO), Disney ($DIS), Abbvie ($ABBV), Microsoft ($MSFT), etc...

Thanks for reading!

The Punkrock Capitalist