I have long said that the Fed has never met a printing press it didn't like nor a dove that it didn't want to set free in the name of higher stock prices. And, yesterday, yet again, Yellen proved it.
Within minutes of releasing its latest set of notes hinting that the Fed will keep rates near zero, the S&P 500 took off on a 34-point gain that is the biggest so far this year. Moving first 45 points from its low of 1,925 to its peak of 1,970 in less than five hours (it later settled slightly lower), the index shrugged off the prior day's losses amidst global growth concerns and weaker European economic data.
This is manipulation of the highest order. It's also proof positive we NEED a correction. Now more than ever.
A lot of investors will take issue with me on this and I don't blame them one bit - corrections are scary. But, they are also essential when it comes to big returns.
1. Down Markets Aren't a Big Deal
People forget that nothing goes up forever. The reason why recent market conditions felt so strange leading into the Fed's announcement is that the current bull market has been on a five-year run since March 2009, thanks almost entirely to the Fed's meddling. The irony is itself ironic.
Less than a decade ago, we used to see 200-point days in both directions regularly. If anything, the fact that we've gone more than 1,042 calendar days without a 10% correction at this point is what's abnormal.
As bad as it felt coming into Wednesday's trading, the downdraft was child's play. The S&P 500 dropped 16% in 2010 and nearly 20% in 2011, both far more in the red than what we've seen in 2014.
2. Investors Are Beginning to Understand Risk Again
That's important because risk weeds out the weak money. What I mean by that is that there are lots of people who think they are investing in the markets and they talk a good game. But, in reality, they're speculating.
So when the going gets tough, they get going. They're the ones who have their fingers on the "sell" button and for whom a 1% drop is enough to give them heart palpitations. I've seen thousands of 'em over the years and they have no business whatsoever being in the markets. Sorry to be so blunt but the markets are about profits and success, not roulette wheels and games of chance.
Savvy investors, on the other hand - i.e. the strong money - wade in knowing that great companies are being put "on sale." They are fully prepared to reconcile short-term gyrations with the long-term perspective needed to bag profits consistently. They're net buyers every time there's a downdraft.
3. Capital Is a Creative Force
That means downdrafts are really nothing more than a glaring signal that there will be more buyers ahead in the next bull market rally. People always ask "When?" but that's largely irrelevant if you're lined up with globally unstoppable trends backed by trillions of dollars. But you've got to have them periodically. All gain and no pain is a political tune, not an economic reality.
Think about it for a moment - everything that's driven this market for the past several years is in place today to drive the markets higher after it blows off some steam.
Fundamentally, the U.S. economy has cracks so large in its foundation that you can drive a garbage truck through them. The World Bank's recent pronouncement about slowing growth is three years too late. That's not news. That's a bunch of analysts looking in the rear view mirror. The best CEOs are looking forward and they're investing in the future, not pulling in their horns. Earnings will follow and so will stock prices ultimately.
Inflation is under control officially. Unofficially, of course, we know that's not true. My breakfast costs 60% more now than it did a few years ago. Medicine, education, insurance... they've all skyrocketed. More importantly, though, all that money is flowing to somebody's bottom line. It may as well be yours...
Profits in large caps remain solid. Sure they're slowing, but business, like the markets, is a process of cycles. Companies come and go all the time. Winners make it big for a while then retrench as upstarts enter the markets and displace them. Remember Kodak? Eastern Airlines? Myspace?
The Fed is nervous and, as I have said repeatedly since the Financial Crisis began, highly politicized despite Washington's insistence that it's independent. Frankly, I'd hate to see their definition of "dependent" under the circumstances but that's a story for another time.
What matters is that the Fed will implement another round of QE at the slightest provocation - reality be damned. Ebola, ISIS, and Europe will see to that. So will Washington's glad-handing politicos, especially those up for re-election. Yesterday's Fed minutes are de facto proof that the much ballyhooed Bernanke "put" is stronger than ever on Yellen's watch.
4. The Stock Market Darlings Are Getting Clobbered
I've made a huge stink for years about the importance of buying companies that offer goods and services people "need" as opposed to those that are merely convenient or "nice to have." That's because the nice-to-haves will get creamed when the markets pitch a fit.
And the market has made my case for me in recent days by punishing fad-oriented companies like Soda Stream International Ltd. (Nasdaq: SODA) and GoPro Inc. (Nasdaq: GPRO), for example. Big brands like Monsanto Co. (NYSE: MON) and Becton, Dickinson and Co. (NYSE: BDX), on the other hand, are doing just fine even though they came under pressure with the broader markets, too.
If you're tempted to bail out or put your head in the sand with a sign on your rear that says "kick me when it's over" I get that. I'm human, too, and I feel the angst you do. That's natural.
What's different for my Money Morning readers is that we know this too shall pass and, when it does, there's going to be a lot of money created.
So, get the Fed out of the way and bring on a correction!
Give me Apple (Nasdaq: AAPL) stock at $70, Tesla Motors Inc. (NASDAQ: TSLA) stock at $200, and Alibaba Group Holding Ltd. (NYSE: BABA) at $80.
Buy low and sell high - that's how markets work and how profits have always been made.
Up Next...
Keith has just launched Total Wealth Research. It's a free service that tracks six emerging high-profit trends and shows you the best trading tactics to play them. Click here to subscribe and you'll get Keith's latest report, How to Tap Into a $17 Billion Trend for Just $1 a Share, along with weekly follow-ups at no charge.
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About the Author
Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.