What do you think the Federal Reserve is going to do if/ when the stock market tanks after they raise the fed funds rate 1% by August?
Short answer is that the Fed will break something before engaging in another plan of approach.
Longer answer: The real question should be: “What will break?” No shortage of candidates there.
How many low hurdle due to near zero return potential corporate loans will quickly (I know a relative term) lead to default? Which lenders will be harmed by previously not-widely-known counter-party risk and exposure?
If the impact of the beginning of QT is broadly higher rates, then what response will the average American consumer provide?
If the broad market declines due to QT, will there be a follow-on effect of lower retirement savings? If so will that effect be so lagged as to have the impact of lengthening the overall revaluation of equities and bonds?
My base case assumption is that real interest rate must broadly increase. Is that base case entirely accurate?
What will it take to break the “buy the dip” default setting? What happens if that paradigm breaks?
If one can derive thoughtful answers to the above questions, then can they develop an investment strategy, other than going to cash, which will be served well by such outcomes? Or is this question just another version of “buy the dip”?
I once advised a friend who wanted to learn how to invest/trade/speculate in the US markets: “Are you prepared to learn lessons about yourself that you never wanted the answers to? For the market will extract a heavy price for every poor choice you make until you learn the lesson you need to learn…and the lessons just keep coming.”
The people who post here are, for the most part, very experienced investors/traders/speculators. However, over the ~25 years I’ve been visiting and contributing to the Fool boards, many thoughtful people have gotten wiped out. A few have admitted it, others have dropped away quietly. How many of us will become part of that cadre? Will I be one of them?
Tough questions to pose and to answer. But it far better to ask them now than not; for we are in the early stages of a generational paradigm shift and to wait until the pain gets greater will not ensure that one will be more objective. Fear and greed, so difficult to recognize in matters involving money, retirement, lifestyle.