This week is likely to be historic. How likely? How about 83%. At least that’s what the wisdom of the crowds says and it’s the best indicator on the planet for predicting Fed decisions. It’s the closest thing we trading types have to a crystal ball. In light of the long-awaited rate hike I’ve been inundated with questions about how the liftoff will affect the stock market.
The best answer I’ve ever seen to the question comes from a tweet by Morgan Housel. He’s a columnist, and a good one at that, for the Wall Street Journal and Motley Fool. Morgan rights mostly about long-term passive investing, asset allocation, you know, the kinds of things that put active traders to sleep. But, remember the old phrase, “keep your friends close but your enemies closer?” Well, I’d say that applies to traders. If you’re an active trader you might consider passive investing to be an enemy of sorts. When passive pitches cross your path your instinct may be to tune out. Resist that temptation! You need to know the arguments for passive investing so you can better internalize, not to mention articulate, how you’re going to do better with a more active approach. Don’t completely ignore passive preachers, learn their craft and identify how to improve it through the use of options or tactical trades.
On to the tweet:
I couldn’t have said it better myself. See, you can spin the effects of the pending rate hike anyway you want. Were I a permabull falling prey to confirmation bias I would focus on the arguments that are good for stocks while ignoring (hello, selective perception) those that are bad for stocks. On the flipside I could very well do the opposite if I were bearish. Honestly, people who think they know the outcome to a rate hike are deluding themselves. It’s an interesting example of something I’ve observed firsthand over my decade long obsession with markets. When you first start out as a starry-eyed trader you think that if you could only learn a few more indicators, read a few more books, and become a bit smarter you’ll become a bona fide member of the psychic club. Led by Miss Cleo, of course.
In your mind you associate being smart with knowing the future and being dumb with not knowing the future. Sadly, ‘tis not so. In fact, it’s virtually the opposite. Want me to go all Shakespearean on you?
Don’t tempt me.
Okay, I’m doing it.
“The fool doth think he is wise, but the wise man knows himself to be a fool.”Billy Shakespeare —
Too flowery for ya? No sweat. Here’s a more scientific phrase from the evolution king:
“Ignorance more frequently begets confidence than does knowledge.”Charlie Darwin —
I have no qualms admitting I haven’t a clue how the pending rate hike will affect asset prices. The biggest problem is we don’t know what’s already priced in. Remember, the markets are always looking six to nine months into the future and attempting to bake known future events into the cake. Shoot, I wouldn’t even be surprised if rates fall on the news and stocks rally. Obviously there’s been a bit of turmoil in the past few weeks leading up to today’s hotly anticipated Fed announcement. Oil’s getting slippery again (bye-bye USO), stocks are taking it on the chin (poor IWM), scaredy-cat investors are running into Treasuries (TLT spike last week), and the junk bond dive is going vertical (JNK ker-splat).
Whether or not the Fed’s action serves as a healing balm for our suffering market or exacerbates the destruction remains to be seen. Like you, I’ll be watching the market’s reaction from the cheap seats with my trusty old binoculars.
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