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- Scoop Market Mysteries 1-29-22
Scoop Market Mysteries 1-29-22
🔎 Market Mysteries: What the heck’s happening in the market right now?
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Market Mysteries of the week
What the heck’s happening in the market right now?
Answer:
The economy has been on a consistent steroid regimen to recover from the pandemic.
The steroid program is ending, and investors are nervous
about how strong the economy will be without the support.
What are these steroids?
The Fed, aka the Federal Reserve, aka
the Central Bank, controls our whole money system.
It is responsible for stimulating the economy when it's struggling and moderating it when it starts to overheat.
The Fed stimulates with two primary forms of "steroids." It
lowers baseline interest rates,
affecting everything from savings accounts to credit cards, mortgages, and corporate loans. If it's cheaper to borrow and less attractive to hold money in savings, people and corporations are incentivized to spend and invest, stimulating the economy.
The Fed also "prints money." They
pump new money into the system
to keep the pipes flowing so the banks can cover all the new loans and spending.
What's happening now?
The Fed has been
winding down its money-pumping.
To create money, it doesn't print physical bills like the Treasury. It buys things like bonds from banks with money that it essentially speaks into existence. It's been buying
. It started buying less each month in November and plans to stop buying in March. So i
the amount of regular stimulus.
The Fed's
planning to raise interest rates back to normal.
. Raising rates will make it incrementally more expensive for people and corporations to borrow, slowing down economic activity.
The Fed's
considering selling some of the assets it's been buying
(or letting them expire)
. That would essentially do the opposite of buying, pulling money out of the system, and slowing activity.
Why is this happening?
The Fed
wants the economic engine warm and running but doesn't want it to overheat.
Right now, the Fed is seeing indications that
the economy has recovered
, that the stimulus plan worked. We saw this week that
.
, back near pre-pandemic levels.
Inflation is the Fed's economic temperature gauge. If prices are rising too quickly, that means there's too much lending and spending for the given available resources. Due to supply disruptions, labor shortages, and other pandemic-related reasons, consumer demand has recovered faster than companies can produce and deliver.
So the Fed is thinking the economy is warm, showing signs of overheating, and has
started removing those steroids to prevent the economy from truly overheating.
Seems logical; why is the market freaking?
It's not that big of a freakout.
.
This is normal
. These kinds of sell-offs are just what investors do. Their whole day is just focused on anticipating what will happen in the economy.
Higher trading activity isn't correlated to better returns, but investors can't help themselves but move money around. They're human, and this is all they think about. Investors get super confident in the economy, they take on a bunch of risk, but then they get worried and move back to safety. Then it all happens again. That's why riskier investments like technology companies, younger companies, and cryptocurrencies are getting hit.
Investors are pulling back from some of their riskiest investments,
rotating into others. If they decide they're more confident in the economy again in a few weeks or months, they might rotate back.
Should I be worried about growth?
Not yet
. The Fed's removing the stimulus for a reason - because the economy looks strong enough to handle it.
Investors just hate uncertainty.
This is a new situation. We've never completely turned our global economy off, then back on, pumped in unprecedented stimulus money, then tried to get back to normal two years later.
Right now, investors can't make up their minds whether they think the Fed will execute this plan well. Will they move quickly enough back to normal conditions to control inflation without moving too quickly that they throw the economy off track?
We'll have to wait and see.
For now, speculation and worry are not usually reasons for a diversified long-term investor to make any drastic changes.
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