Chris Ciovacco: Markets are never driven by any single factor at any moment in time. Asset prices are impacted by an almost limitless amount of inputs including Fed policy, earnings, valuations, geopolitical events, supply, demand, conviction, greed, and fear.
The Fed And ECB Are Important Factors
Central banks, including the Fed and European Central Bank (ECB), can alter the supply of money, provide loans to struggling banks, and even pick winners and losers (see 2008). Therefore, central bank policy represents one of the most important factors impacting markets and the prices of all assets, goods, and services.
This Is Nothing Particularly New
When you are new to the markets and begin to understand what the Fed can do (print money, buy assets, inject new funds into the financial system, etc.), there is a certain shock value along the lines of “do people understand what is going on here?” While the concept of central banking is odd in the context of free markets, central banks have been impacting, altering, skewing, goosing, and/or propping up asset prices long before most of us were born and they will most likely be doing so long after we are dead.
Blaming The Fed Is Not The Answer
Any successful trader or investor will tell you a key point in the market’s cruel learning process is accepting that we are 100% responsible for our own actions and results. It is easy to blame the Fed when things go wrong in trading and investing. Rather than blaming, it is better to understand the Fed is an important part of the markets, the U.S. central bank is not going away anytime soon, and we must account for Fed policy when making investment decisions.
Many Ways To Skin The Market Cat
A great thing about the financial markets is there are an almost infinite number of ways to skin the risk management and market cat. One way is to focus on price or the markets themselves, based on the premise that “price captures everything”, including the impact of central banks.
Are Central Banks In Full Control?
One of the biggest misconceptions held by some investors is that the Fed can always bail out the markets. If that were true, why did the Fed let stocks fall over 50% in both the dot-com (2000-2002) and financial crisis (2007-2009) bear markets? If they lost control then, then it seems reasonable they can lose control again.
The Next Inevitable Bear Market
The Fed is one of many factors impacting asset prices…not the only factor. At some point the economy, earnings, inflation, deflation, geopolitical events, or the next crisis will overshadow the attempts by central bankers to keep everything propped up, which is when the next inevitable bear market will arrive. When that will be is the million dollar question, but we know one thing with 100% certainty; price and the charts will not miss the turn from bull to bear. If that sounds crazy to you, watch this video which explores the question2008: Was There Anything Investors Could Have Done?