Before we jump into a discussion about market confidence, let’s make one thing clear: The market was not only fed liquidity by the Federal Reserve over the past 5-6 years, but it was also given a major shot of confidence.
After the 2008/09 financial crisis, there was little reason to get involved with anything equity-related. If you started talking about stocks to any random person on the street, and they would run in the other direction. As the Fed worked hard to drive up investor confidence with assurances, guarantees of assistance, and promises to be more transparent, investors’ appetite for risk increased.
Of course, at some point we knew that the medicine the Fed was so carefully administering was going to have to stop – and that point is drawing ever closer. Investors may soon be as needy and unsteady as drug addicts unless they accept the new world order of “less Fed” and more “normalized market.”
There has been absolutely nothing normal about the markets over the past few years. The biggest abnormality I have noticed is the speed of moves, which tend to mess with everyone’s minds. In the “old days,” big moves could take many days to materialize, allowing time for investors to change their strategies. Today, the markets drop or go up with startling speed, and investors can barely keep up. If they end up on the wrong side, they get trapped. Nothing shakes confidence more than the inability to get out.
The speed issue is a result of high-frequency trading, algorithms, program trading and ETF rebalancing. Moves are exaggerated sometimes as imbalances are corrected. As a result, it is nearly impossible to swing trade – UNLESS you follow longer term trends and have the confidence to stay with it.
This brings us back to the Fed. With taper upon us and talk of raising rates in the air (it was going to happen at some point, so get used to it!), the Fed is slowly removing itself as the big player in the game. The Fed will always have control (as Marty Zweig said, “Don’t fight the Fed!”), but they would like to see a more normalized market with regular cycles that move from peak to trough and back again.
News has its effects on investor and market confidence from day to day, and with less Fed support, nerves get more easily rattled. Lately it’s Russia/Ukraine and Israel/Hamas, but we need to put these conflicts out of our minds and focus on market trends – they show where money is flowing. If investors lose all or most of their market confidence again, this time the Fed will have a hard time restoring it.