How I Handle Market Uncertainty

The Federal Reserve meets every few weeks. After the meeting, they issue a statement. This time, the statement was unusual.

Fed officials were blunt, which is, in itself, unusual. If you’ve followed Fed statements for as long as I have, then you know they’re typically rather bland. The most recent statement noted that:

“The path of the economy will depend significantly on the course of the virus.

The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.”

Traders were uncertain about how to react to the news. In the chart below there was a round of buying followed by a bout of selling.

Then, Chairman Jerome Powell held a press conference. The chart shows volatility continued as traders attempted to understand what the Fed planned to do.

Powell noted, “We have seen some signs in recent weeks that the increase in virus cases and the measures taken to control it are starting to weigh on economic activity.”

Traders are nervous because the Fed has already taken significant actions, and Powell was very clear that the economy is at risk of slowing even more. Interest rates are low — near zero — and at the last meeting, officials indicated rates could stay low for years.

Until a few years ago, interest rates were the Fed’s primary tool to revive the economy. With rates near zero, the Fed turned to nontraditional policies. These policies can be seen in the next chart. This chart shows the Fed’s balance sheet, a measure of its quantitative easing programs. The large jump in assets has so far failed to put the economy on the path to recovery.


Source: Federal Reserve

[Related: What These Fed Comments Mean For YOUR Income]

Action To Take

As I noted a couple of weeks ago, the risks are high right now. Uncertainty about the economy is visible in my stock market data, and it’s getting tougher to get clear trade signals. This is unusual, but it’s partly due to the same conditions the Fed sees. Uncertainty about economic growth is making it difficult to determine a valuation for many stocks.

The good news is we will have more insight into valuation in a couple of weeks. By the end of last week, more than half of the companies in the S&P 500 have reported earnings. That means it will be important this week to assess this data and see if we can get any more clarity.

At times like this, I believe it is best to wait for clarity rather than forcing a trade. As we saw back in March during the selloff, you don’t want to get caught on the wrong side if things head south.

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