There’s one fact about markets that most investors don’t quite understand… The stock market is a creature whose personality mimics the psychology of the investors who give it life.
If investors are calm and optimistic, the market reflects that positivity.
But, when investors are unsure about the immediate future (like now) and have to juggle their apprehension about politics, interest rates, economic growth, and whether the tech leadership stocks they believed were the Holy Grail are about to be subject to all kinds of new regulations (thank you, Facebook Inc. (NasdaqGS:FB)), their nervousness manifests itself as volatility, mirroring their fears.
That’s where the market is now. That’s where it’s been since February. The market’s turned from Steady Eddie into Nervous Nellie.
When that happens, the market does what it always does; it takes the path of least resistance.
What is that path now? You might want to come a little closer, because I’m going to whisper it, so as to not scare the living daylights out of you – and, by extension, the market.
What Happens Now
It was an easy ride on the way up. And a very long one, too. Everything that mattered was contained in a giant, magical vault.
The Federal Reserve, leading the charge of global central banks at the forefront, slathered free money on big banks after the financial crisis, throughout the Great Recession, all the way up to last year.
The Fed (as other central banks continued their handouts) drove interest rates so low that the only yield game in town was out on the “stock market risk” limb of the “investment” tree.
It doesn’t matter now if the Fed should have done what it did for as long as it did it.
It happened, and it worked to drive money into the market. Mission accomplished.
In front of all Steady Eddie investors now is the prospect of the punchbowl being taken away and the party ending.