Baker Column: Stock Market Insights

Dr. Richard L. Baker, AIF,
Executive Vice President/Wealth Advisor at Prime Capital Investment Advisors

Growing up around Table Rock Lake teaches you something about lake life. For instance, it can be really difficult to jump off a boat onto a dock, especially when the boat is still moving. In a similar way, the Federal Reserve is trying to do something just like that. However, it seems they are too scared to jump.

On June 16, the Federal Reserve decided to maintain the federal funds rate at the very low 0.00-0.25% at its Open Market Committee meeting held last Wednesday. Their do-nothing decision was expected, but one must wonder why keep pouring gas on a fire that is already raging? Investors have been concerned about rising inflation rates as the U.S. economy continues to reopen.

The Fed vote was unanimous to keep rates as they are and to continue to buy $120 billion of bonds each month in their asset purchasing program to help the economy and markets. These types of moves are generally ones they use to help a struggling economy or a market in freefall.

Yet the Fed chose to hold steady when the economy and stock markets are booming. It’s almost like they were saying, “we’re going to keep buying assets and keep interest rates crazy low long after they are needed because we can.”

The Fed is acting like there is no negative consequence to their actions and that the inflation isn’t real. But there are consequences. The markets have cycles and they need to get ready for the next one.

Right now, as I type, farmers all around us are moving their hay bails out of the field (now that it’s finally dry) so they can get the field ready for the next cut. In the same way, the Fed needs to slow their bond purchases and begin slowing weaning the market off the ridiculously low rate so when the market turns downward, as it always does, it will have the ability to lower rates and buy bonds to stimulate the market and economy again. As the good book says, everything has a season, and the Federal Reserve needs to prepare for the next season.

Many analysts predict the Fed to raise their rates in 2023, possibly two different times, and that they will begin slowing down their bond purchases in the spring of 2022.

Sometimes you just have to jump, if you get scared and don’t jump off a boat onto the dock the driver has to turn around and try to line up again. The economy and stock market are lined up pretty well right now for the Fed to exit their defensive strategies, but if they miss their opportunity, it might be some time before they line up again.

Have a blessed week!