Don’t Panic, Dovish Fed Policy Will Prevent Repeat of Last Year’s Correction

Remember the steep break from October to late December? It was blamed on the Fed’s hawkish monetary policy. Stocks took off after the US and China started talking and the Fed turned dovish. The US and China never signed a deal, but the Fed held rates steady. Yet the S&P 500 Index and the NASDAQ Composite still hit new all-time highs.
James Hyerczyk
Bull Market

A rise in trade and tariff tensions fueled the largest pullback in the global equity markets so far this year last week. By historical standards, the down move was modest despite some analysts already blaming President Trump for the next recession.

If you can’t stand the heat then get out of the kitchen. I can’t recall seeing so many negative comments about a market or an individual just weeks after U.S. markets hit all-time highs. It was definitely amateur week for some analysts, who seemed to take pleasure in feeding the bear with doom and gloom headlines. Some even used the term bear market.

Once again I think we’re going through the cycle where analysts race to be the one to “call the top” as if there was a prize for that.

Forget the long-term, the politics or the predicted doom and gloom, smart traders should embrace the volatility, no matter who causes it.

Dream Week for Short-Term Traders

This week was a dream for short-term or day-traders as volatility spiked to a four-month high. Traders were also driven by the headlines, which at times created a dramatic two-sided trade. Volatility can be your friend if you don’t abuse it. Heightened volatility should help improve your trading performance if you know what you’re doing in terms of risk and reward.

Stock traders should have enjoyed the week. How do you think gold, crude oil and currency traders feel after a week of lackluster movement? Their time is coming, however, because of the Laws of Volatility.

The Cboe Volatility Index, which tracks the level of worry in the market and is commonly known as the VIX, spiked to its highest level since January on Thursday. The measure of the 30-day implied volatility of the S&P 500 or the “fear gauge,” hit a fresh high of 23.38, its highest level since January 4.

President Trump Had a Hand in the Price Swings

If you made money last week by trading the intraday price swings, then make sure you thank the President, because his comments and actions fueled most of the volatility. Don’t blame him.

Trump’s surprise announcement of additional tariffs on China fueled the initial break in the stock market. The markets were driven lower in Asia and Europe and in the U.S. futures markets. However, when the U.S. markets opened on Monday, professionals saw value and they snapped up lower-priced shares.

Volatility and weakness continued on Tuesday, but once again bargain-hunters saved the day with a late session rally.

At a campaign stop in Florida on Wednesday evening, Trump ignited another wave of selling after he attributed his recent threat of increased tariffs to Beijing’s lack of commitment to the negotiating process. He said China, “broke the deal. They can’t do that, so they’ll be paying.”

Stocks rebounded from steep intraday losses on Thursday after Trump struck a more optimistic tone when asked if he would speak with Chinese President Xi Jinping.

“Well, he just wrote me a beautiful letter, I just received it, and I’ll probably speak to him by phone,” Trump said. The President also said it might be possible for China and the U.S. to strike a deal this week. “It’s possible to do it, they’re all here. The vice premier one of the most respected men one of the highest officials in China is coming,” he said.

On Friday, shortly before the cash market opening, Trump was at it again. This time making comments that erased the previous session’s gains that he created. Trump said in an early morning tweet storm there’s “absolutely no rush” on a trade agreement with China.

The major indexes recovered all of their earlier losses and finished higher for the session after Trump tweeted that the talks with China were “candid and constructive.” Additionally, Treasury Secretary Steven Mnuchin said China trade talks had ended for the day and were “constructive.” Chinese Vice Premier Liu He also said the talks went “fairly well,” according to reports.

Value, Volatility, Bargains

Remember the steep break from October to late December? It was blamed on the Fed’s hawkish monetary policy. Stocks took off after the US and China started talking and the Fed turned dovish. The US and China never signed a deal, but the Fed held rates steady. Yet the S&P 500 Index and the NASDAQ Composite still hit new all-time highs.

What this means is the Fed is more important to the stock market than the US-China trade deal. Yes, we could see setbacks and position adjustments, that’s just trading. Trump’s too smart to let this trade deal fall apart. His short-term decisions may cause a little pain, but his administration and the Fed aren’t going to let this turn into a recession.

The bottom-line:  Watch for value if you’re an investor. Look for opportunity. It’s way to early to start looking for signs of a recession.

Don't miss a thing!

Discover what's moving the markets. Sign up for a daily update delivered to your inbox

Latest Articles

See All

Expand Your Knowledge

See All
The content provided on the website includes general news and publications, our personal analysis and opinions, and contents provided by third parties, which are intended for educational and research purposes only. It does not constitute, and should not be read as, any recommendation or advice to take any action whatsoever, including to make any investment or buy any product. When making any financial decision, you should perform your own due diligence checks, apply your own discretion and consult your competent advisors. The content of the website is not personally directed to you, and we does not take into account your financial situation or needs.The information contained in this website is not necessarily provided in real-time nor is it necessarily accurate. Prices provided herein may be provided by market makers and not by exchanges.Any trading or other financial decision you make shall be at your full responsibility, and you must not rely on any information provided through the website. FX Empire does not provide any warranty regarding any of the information contained in the website, and shall bear no responsibility for any trading losses you might incur as a result of using any information contained in the website.The website may include advertisements and other promotional contents, and FX Empire may receive compensation from third parties in connection with the content. FX Empire does not endorse any third party or recommends using any third party's services, and does not assume responsibility for your use of any such third party's website or services.FX Empire and its employees, officers, subsidiaries and associates, are not liable nor shall they be held liable for any loss or damage resulting from your use of the website or reliance on the information provided on this website.
This website includes information about cryptocurrencies, contracts for difference (CFDs) and other financial instruments, and about brokers, exchanges and other entities trading in such instruments. Both cryptocurrencies and CFDs are complex instruments and come with a high risk of losing money. You should carefully consider whether you understand how these instruments work and whether you can afford to take the high risk of losing your money.FX Empire encourages you to perform your own research before making any investment decision, and to avoid investing in any financial instrument which you do not fully understand how it works and what are the risks involved.