Hello Trader,
Until recently, the bull market in stocks has largely been driven by the Fed:
- Dropping interest rates to zero
- Pumping $120 billion in money into the system monthly
- Saying they were going to be super easy for as long as the eye can see
That is all changing.
I've written about this else where (Watch this video. Read this article.).
The Fed is now tightening!
They are doing it through the back door. The thing that people look at is interest rates and they have not raised that yet. That would send a shudder through the economy and the stock market. But they are tightening!
Tightening affects the stock market in three main ways:
- Higher interest rates create competition for investor dollars. Why take risk in the stock market when I can buy a bond with a guaranteed return?
- Higher interest rates cause corporate profits to decline due to higher borrowing costs.
- Higher interest rates reduce the value of future cash flows due to the fact that they are discounted at a higher rate (That was so technical. I'll explain it another time,)
- Reducing liquidity in the system means brokers have to pay down their margin debt which has a knock on effect on their clients who may also be required to pay down their margin debt. All this creates selling pressure in the stock market.
Now, Generous Jerome is hedging. He is not doing an all out tightening campaign. He is still pumping the $120 billion into the banking system.
But, at Jackson Hole this week, he basically said they are planning how to taper that $120 billion. And the market took that as a sign they will start the taper sometime next year, earlier than expected before.
Tomorrow, I will shock you when I tell you what the impact of the Fed's policy changes will be. You won't hear this analysis anywhere else!
Good Fed trading,
Courtney Smith
P. S. Our unique and stunning How to Make Money In A Bear Market course is on sale right now and only for this week at half price! Click here to learn more!
P.P.S. Here is what one student said about the course: The Bear Market Course has information I have not found elsewhere. – Michael
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