What is the message of the markets?
Do markets tell us anything, anymore? Maybe a little bit.
Many people think the markets are manipulated by the central banks and large funds. To a limited extent, there is some truth to this, but the markets are much bigger than any one central bank or fund. Markets still react to changing economic conditions and different central banks make policies that they think are best for their own country and markets. But the real question is, how have the markets reacted to the Fed recently.
Last June, the Federal Reserve announced that they would begin considering reducing emergency stimulus, laying out the conditions for removing quantitative easing (QE) and raising interest rates. Initially, the bond and stock markets responded positively. If inflation was transitory and the Fed normalized policy, everything could go back to the pre-Covid normal. Markets rose, commodities fell.
In early August, continued high inflation readings encouraged Senator Manchin to write an open letter to the Fed to raise rates to stop inflation. The Fed did not respond publicly. Markets chopped slightly higher in August.
September arrived with more high inflation readings and a Fed dragging its feet to normalize policy. Now we see bond and stock markets weakening together and commodities rising strongly.
The message from the markets is that real sustained inflation is becoming a big problem.
Robert Lloyd, CFA®
Chief Investment Officer
Lloyds Intrepid Wealth Management
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