The Stock Market Plunge Is Wall Street Sending a Message to the Fed

Stock Market

The September slump on Wall Street took a turn for the worse yesterday, as stocks plunged on Monday in their worst sell-off since July. Even with a huge end-of-day bounce, the Dow Jones still closed down 1.7%, while the S&P 500 shed 1.6% and the Nasdaq tumbled 2.2%.

Source: Shutterstock

The catalyst?

It wasn’t obvious. But most folks pointed to the Evergrande crisis over in China. Long story short, one of China’s largest property developers is at serious risk of defaulting on its $300 billion debt mountain, and investors are concerned that a default of such size would have collateral effects across the global economy.

But that’s not really what’s going on here…

Evergrande is big in China, and it collapsing would have a negative impact on the Chinese economy, but the impact of a default on the rest of the global economy (especially in the United States) would be minimal.

So… why did stocks plunge yesterday?

The Fed.

The Fed is slated to meet today and tomorrow to discuss monetary policy. Many Fed members have voiced a hawkish tone ahead of that meeting, advocating for some tightening via a tapering of asset purchases.

Wall Street is braced for this – investors are largely “OK” with a gradual and smooth taper.

But Wall Street doesn’t want anything more, and they’re letting the Fed know by selling stocks ahead of the meeting, basically saying: “Hey, Fed, if you tighten more aggressively than you’ve signaled, the stock market’s going to collapse, and the whole world is going to blame you.”

It’s a warning shot.

And it’ll work.

For all the talk the Fed gives us that it doesn’t follow the market, it absolutely does – this Fed, in particular, has a history of responding to the financial markets. Heck, it even owns stocks!

The smart money on Wall Street knows Fed Board Chair Jerome Powell and company are watching the markets, and they’re know that if Fed members see the market bleeding on Monday, Tuesday, and Wednesday, they’ll be less inclined to tighten any more aggressively than absolutely need be…

So, here’s how my team and I think the next few days will play out.

Monday was bloody. Tuesday and Wednesday will be choppy. Then, Powell will take the stage around 2 p.m. ET on Wednesday to discuss the Fed’s meetings. We expect him to announce a taper at that conference, but nothing more, and to ultimately sound an ultra-dovish tone (which the markets want to hear).

Stocks will reverse course and rebound from this sharp sell-off in the back half of the week.

That’s our base case outlook for the next week. But, please remember, this is a volatile market and anything could happen. Stocks could bounce back today. They could slump into the end of the week.

And that gets to our bigger point here: If you want be a successful investor, you have to develop an immunity to these short-term market gyrations.

What matters more than how stocks fare over this week, is how they fare over the next 12 months. And what matters more than how stocks far over the next 12 months, is how they far over the next three years… the next five years… the next ten years.

When the stock market drops, you have to zoom out and look at the big picture. Ask yourself: Is today’s drop because of something fundamentally wrong with my stocks and/or the global economy, to a point where my stocks will be adversely affected over the next 12 months? Or three years? If no, move on – if yes, then reassess.

It’s that simple.

And, as we ask ourselves that very question right now, the answer is unequivocally no, so we move on.

We ignore the noise. We gradually roll into the dips as they come. We cost-average into our favorite positions. And we put ourselves in a spot to see big gains in the market over the next 12 months… three years… five years… so on and so forth.

Easy to say. Harder to do.

Which is why we’re here.

We run an exclusive investment advisory called Innovation Investor that focuses entirely on investing in the world’s most innovative technologies and world-changing trends. We don’t care about the Fed. Or interest rates. Or inflation. Or even pandemics.

We care about innovation, because humankind has multi-millennia track record of relying on innovation to always – always – beat a crisis. Doesn’t matter if we’re in a world war, a global pandemic, or if Wall Street is just worried about a Fed meeting. Innovation, which powers the world forward, always wins at the end of the day.

That’s why we invest in innovation. It’s the one thing you can always count on to generate huge returns for you in the stock market.

So, don’t stress this market sell-off. Instead, sit back, relax, and join us in investing in innovation.

Click here to find out more.

On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Articles You May Like

ViacomCBS Can Rise 55% If Q3 Earnings Show Strong Free Cash Flow
How to Fill Out an I-9 Form (Step-by-Step)
3 High-Yield Energy Stocks to Buy Now
Stocks making the biggest moves after hours: Snap, Intel, Chipotle and more
Shaq & Alkaline Water (WTER)