“I know nothing in the world that has as much power as a word.” Emily Dickinson
The Fed ended the stock market decline this week by simply changing a sentence or two. In the space of a few hours, global markets soared, creating billions of dollars in gains for investors worldwide. Don’t ever doubt the power of words.
Rumor had it that on Wednesday, the Fed was going to remove “considerable time” from their guidance on when interest rates would rise. Investors worried that thanks to the gathering strength of the economy, that FOMC members were becoming hawkish and might raise rates sooner than expected. Sure enough, the Fed removed “considerable” from their statement on the time period itself, but added that the Fed would be “patient” before raising rates. That’s all it took to ignite a truly breath-taking rally in stocks.
“But, but, what about Russia and the slide in oil,” sputtered a California client who was sure that the declining oil price was going to be the end of us all.
“The oil price,” as Janet Yellen, the Fed Chairwoman, said yesterday,” is a transitory event.”
For longer-term investors (anyone with more than a week’s time horizon in this market) the decline in oil will at some point be over. Prices will rise once again as the world economies grow and demand more energy to fuel that growth. I wrote last week that in the meantime, lower oil prices are great for our economy and all other oil-consuming nations. Japan, if you are interested, stands out as the greatest beneficiary of declining oil prices.
Until Wednesday’s Fed meeting however, traders were using the oil price as an excuse to sell-off the equity markets. That short-term maneuver only works until it doesn’t. The Fed meeting blew that trade right out of the water and traders, happy to be short stocks, suddenly found themselves up a certain creek without a paddle. Since then short-covering has been the name of the game. And by the way, the oil price is still sliding, despite a 500-plus point move in the Dow over the last two days.
As for all the consternation concerning Russia, investors who read last week’s column “Is the Russian bear back in its cave?” were not surprised at the ruble’s decline this week, nor the spike in Russian interest rates to 17%. I have also noticed that several publications are coming around to my view that the oil price decline could have been engineered by the U.S. and Saudi Arabia in order to bring Putin to his knees, at least economically.
Given the action of the markets over the past two days, I would guess that we have put in a bottom for 2014. Next week traditionally has been a good one for the markets and I don’t see any evidence that this year will be different. The bears could try once again to establish a link between a declining oil price and the stock market, but usually stocks only discount a maneuver like that once.
For me, I would buy any further dips in the market. This one amounted to about 5.4%, which is within the range of most of the pull-backs we have experienced so far this year.