The Fed Meets in another 3 days, and after today's job numbers, it is almost a certainty that the Fed will pause in its interest rate campaign. This will cause the markets to run up today, as they have over the last 2 weeks. It was a bad miss on my part - I moved out of the markets in May just before they started melting, which was smart. But I failed to re-enter when they were low. Trading makes sense only if one can do both the things right - sell high and buy low. If one does only one of these, results would be lower than in a buy-and-hold strategy. But what should I do now ?
Are equity markets a good place to be now? Lets look at the positives:
a) low P/E ratios - 14x forward P/E
b) Presidential cycle - stocks are weakest in the second year of US Presidency, and Congress elections should be over in the next 3 months.
c) A potential fourth quarter rally, which should start in another month.
What are the negatives?
a) A weakening US dollar - as soon as the weak job reports came out today, the dollar weakened significantly. This in itself could have a number of ramifications, including:
i) Commodity prices rising up again, as they are inversely correlated to the dollar. This could support oil prices at these high levels, cutting into consumer spend.
ii) This could make US bonds less attractive to foreigners, pushing bond yields up. (Parenthetically, I am unable to understand why Chinese sell all these goods to the US, take this huge money that comes into their economy, and reinvest in US bonds. For if their principal starts eroding because of devaluation of US Dollar, their central bank will show losses in its forex reserves).
iii) It could hurt export oriented economies such as Japan, Korea etc, and hit their stock markets. It would hurt Indian software exporters such as Infy, Satyam. And that could hurt US markets, as happened in May. Or will it? Is US market dependent on what happens internationally?
iv) Even if the US market rallies, the returns are lower because of dollar weakness.
v) On the positive side, dollar weakness helps US exporters, which is good.
vi) Could this dollar weakness and yuan's peg to dollar cause China to crack up? If dollar weakens => yuan goes down => Europe and Japan pressure on China mounts => China revalues yuan => China slows => demand for commodities goes down, which offsets increase in commodity prices due to dollar weakness. Could China do a soft landing? If China does not break the peg, it is a big problem.
b) The yield curve is now firmly inverted. The Fed has stated in the past that the yield curve has lost its predictability in forecasting recession. If that it true, it is fine. If it is not, and there is a recession, markets would turn down later.
a) Never bet against the Fed. They are smarter than I am. More importantly, the ball is always in their court, as to whether they want to act or not.
b) If I am able to sell high, I should also buy low to make money. Otherwise buy and hold is the best strategy
Strategy going forward:
a) There would be no company news in the next month, as the earnings season is over. So news will be dominated by geo-political events and hurricane stories, which is negative At the same time, many people who had jumped out of the market would be itching to move back in.
b) Is it a good strategy to invest in the broader stock market, or buy individual stocks now? I would prefer later, as the risks are known.