Imagine you’re huddled down in a bunker, with the enemy approaching, and you only have nine bullets left. Do you fire a preemptive shot or two, hoping it will deter the enemy? Or do you save those bullets and wait patiently until you’re sure an attack is imminent? That’s the situation the Federal Reserve is facing right now.
It’s frankly astounding to me how much power the Federal Reserve holds over the psychology of market participants. One reassuring comment from Jay Powell can send the market 5% higher in a week, while an offhand comment, such as we saw in October, can throw the market into a severe correction.
I’ve used this analogy before, but on days like today, one can’t help but feel like investors are nothing more than Pavlov’s dogs, salivating for the inevitable treat they’ve been conditioned to expect. As for Pavlov, he is of course played by Fed Chairman Jerome Powell, also known as the Wizard of Oz.
The financial markets have been telling a fragmented story ever since the beginning of 2019, but that appears to be changing. Over the past month, the messages coming from stock and bond markets have begun to coalesce in a manner that unfortunately, will likely leave a bearish taste in your mouth.
We’re going to mix things up today and talk about a topic I’ve been meaning to get to for quite some time: factor investing. My original intention was to create an in-depth report on this topic – which I’m still planning to do – but today’s article will serve as preliminary attempt to get those juices flowing.