Wall Street’s Little Red Riding Hood was skipping along through the forest yesterday. She was minding her own business, and the markets were fairly calm. Then, at 2:00 p.m., she was stopped in her tracks by the Big Bad Wolf… er, Fed. But the danger should have passed as soon as the Federal Reserve decided to leave rates unchanged.
The wolf’s appearance wasn’t unexpected, but the markets’ actions seemed confused. Crisis averted, right? The market should have been happy. They should have gone up, and they did… at first. The Dow rose almost 200 points.
But then Fed Chair Janet Yellen started talking. The markets fell, and the Dow gave up those gains and more. All of the markets continued to fluctuate into the close, but closed flat or slightly down.
Madame Chairwoman stuck to her stump speech, saying the Fed would raise rates only when it sees “some further improvement” in the labor market. It is still confident the U.S. will hit its 2% inflation target, although it may take longer than initially expected. Of course, inflation is not even close to the Fed’s mark. Many Fed watchers zeroed in on the beige book and its concerns about “development abroad.” The beige book mentioned the obvious monkey on the back of the U.S. economy – China – more than a handful of times.
Red’s fellow wolf-hating, I mean, Fed-hating friends, the Three Little Pigs, came out in full force. And boy, were they squealing.
The Three Little Pigs were on television, in the newspapers and on their blogs. None of the pigs are happy with the Fed’s statement.
The First Little Piggy was upset the Fed didn’t raise rates 0.25%. After all, the U.S. economy is growing. The Fed should have raised rates months ago. “Let’s get back to normal monetary policy,” piggy No. 1 said.
The Second Little Piggy was perturbed by Fed Chair Yellen’s press conference. This pig believes that Fed Chair Yellen is still in favor of raising rates. “The economy is not strong enough for that yet,” said pig No. 2.
The Third Little Piggy was the most displeased of them all. This piggy took the Fed’s decision not to raise rates as a sign that the Fed couldn’t commit. Piggy No. 3 said, “What is the Fed seeing that I don’t? It must be bad.”
But nothing has really changed. Stocks continue to trade and the cheap money party will continue, at least for a few more months. Investors are better off ignoring the Three Little Pigs. After all, everyone has heard the saying “pigs get slaughtered.”
When will the Fed raise rates for the first time since June 2006?
So what is an investor to do? “Stop watching the Fed” is my advice. Do your homework, invest in fundamentally sound companies and tune out the noise. Quality is key in this uncertain monetary policy environment. In fact, this investment strategy works in any environment. Stick to your trailing stops and ride out the winds the Big Bad Wolf blows. Don’t let the Fed drive your retirement dreams down.