Marc Cuniberti: The Fed moves the market
The latest in economic figures out from the Commerce Department (CP) shows Gross Domestic Product (GDP) at 2.1%. GDP for the second quarter of 2019. GDP is defined as the sum of the market values, or prices, of all final goods and services produced in an economy during a period of time. (Investopedia). 2.1% puts it on par with the post 2008 expansion which many regard as anemic (The 5 Min. Forecast).
Figures from the previous quarter (1st qtr. of 2019) were also revised downward and are short of the Whitehouse target of 3%.
Many economists argue GDP is non-representative of the living standard of the average American as the figure includes many parameters, adjustments and assumptions that don’t apply to the day to day living expenses of the consumer.
The latest figures show government and consumer spending as the biggest contributor with business investment woefully lagging. Stock buybacks by companies took up some spending and that kind of makes some sense. If businesses aren’t spending money on expanding, they might opt to spend some excess cash buying back stock from the public. By taking some stock back off the market, which is what happens during a stock buyback, it has a tendency to lift the stock price. Not always mind you, as once again the caveat “nothing is for sure when it comes to the stock market” comes into play.
One of the big questions that seems to never leave the evening news when it comes to the stock market is, are the GDP figures bad enough to prompt the Federal Reserves, hereforth called the Fed, to lower interest rates again just like they did on July 31st, 2019 where they dropped it for the first time since the 2008 crisis. The most watched interest rate manipulated by the Fed (fed funds rate) went from 2.25% to 2%, a quarter percent reduction.
What’s the thinking when it comes to dropping rates?
From USA Today:“The Fed lowers the fed funds rate to stimulate the economy by making it cheaper to borrow money. Rates on credit cards and home equity lines of credit track the fed funds rate closely and provide more spending power for American”.
More often than not, in recent decades at least, what the Fed does can have a significant impact on market reaction. As always in the markets, one never knows what the market will do as a whole, and if economic conditions deteriorate, the markets may run in anticipation of a Fed interest rate drop in response. On the opposite side of the spectrum, if the economy shows itself to be booming, where normally one might think that would prompt stock buyers, the opposite might happen. Good economic news might lead to a drop in markets as investors anticipate a Fed rate increase.
What’s to learn from all of this and how can we use it to guide our investing? In reality, the best move is not to worry about day to day movements in the markets. My personal opinion is the common belief of holding for the long haul exposes one to a 2008 type melt down and no one can say for sure whether next time it will stop falling like it eventually did in 09 (-54.1 % loss Oct. 7 – March 9- The Dow- Wikipedia). Who is to say next time won’t be worse right?
But day to day movements due to Fed interaction can be a flash in the pan. Economic fundamentals are a more reliable indicator, at least in my opinion, to better base investing decisions on, and those fundamentals can be better evaluated and communicated to you by an economic professional obviously.
Keep in mind investing involves risk and you can lose money. Consult a qualified financial professional before making any investment decisions and do your own research before investing. This is not a solicitation to buy or sell any securities.
This article expresses the opinions of Marc Cuniberti and are opinions only and should not be construed or acted upon as individual investment advice. Mr. Cuniberti is an Investment Advisor Representative through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Marc can be contacted at SMC Wealth Management, 164 Maple St #1, Auburn, CA 95603 (530) 823-2792. SMC Wealth Management and Cambridge are not affiliated. His website is http://www.moneymanagementradio.com. California Insurance License # OL34249
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