Do Not Fight The Fed: The Message is Real

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As discussed in the last letter, the performance of major indices and stocks are highly dependent on the outcome of the FOMC meeting on Wednesday. Here are some key takeaways from the meeting:

  • The new target range for fed funds is 3.00% to 3.25%.
  • The FOMC cited “robust” job gains, a low unemployment rate (US jobless claim reported earlier is lower than expected), and “elevated” inflation (higher than expected August CPI reported earlier) as main reasons for raising rates.
  • The FOMC sees the ongoing war between Russia and Ukraine as a key driver of inflationary pressures (Putin ordered partial military mobilization on the same FOMC day).
  • The Fed will continue with its balance sheet reduction plan announced in May.

Not only that, central banks around the world have also announced massive rate hike around the same time.

The reaction of the market to this outcome? Major indices and almost all stocks tanked hard as treasury yields surge and investors flock to US dollars for safety amidst growing recession fear. The crypto market also tanked but the magnitude is not as large as the stock market.

This is the heat map for the performance of major stocks at the end of the week:

Meanwhile, $DXY surged to record high of 113 in 20 years.

The analogy between SP500 in 2008 and 2022 is still holding well, suggesting that further meltdown could be continue in the coming weeks.

Similar analogy for the volatility index $VIX still holds as well:

If you have followed my advice of piling into the US dollars in my last letter, then you would be in a better position than many investors now. Again, the message is clear: DO NOT FIGHT THE FED. The Fed is hawkish as ever and will strive to achieve their goals at all cost, and this painful process could take at least 1–2 years.

The safest strategy seems to be staying in a large cash position (and work hard to generate more cash from other sources if you could) for now. It is also a good time to do diligent research on the stocks and cryptos that you wish to add to your portfolio so that you are well prepared to buy the dip when the market calms down a bit later. More importantly, it is crucial for us to stay healthy (both physically and mentally) so that we can survive through this challenging environment and come back stronger. There is no better thing to invest in other than you yourself! Until then, take care and invest safe!

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Originally published at https://theboredholder.substack.com on September 24, 2022.