The Powell Effect
You might be wondering why your portfolio dipped into the red today; after all, things have been going so well for the big indexes, right? Well like the markets often do, the decline was in reaction to the news, specifically from Jerome Powell. Now in case you’re not familiar with Jerome Powell, he has been the Chair of the Federal Reserve since February 2018. Powell’s job is to serve as the public face of the Federal Reserve Bank.
So why did the market decline so much from one man? Well, during a mid-day speech, Powell said that that he expects the economic reopening after the pandemic to cause inflation, but that price increases won’t be significant enough to lead to higher interest rates. In fact, the concern for rising interest rates, according to Powell, is still a while away and won’t happen until the economy gets back to full employment and inflation hits a sustainable level above 2%. But because interest rates and inflation often have an inverse relationship, investors seem to be fearing a rise in inflation.
The reason interest rates are low right now to encourage borrowing and stimulate the American economy still dealing with the burden of the pandemic. Even though the impacts of this news have not come to fruition, the stock market often makes its moves in speculation of what could happen in the future, so even if something is far off, some of its effects could be factored in much beforehand because at the end of the day the sentiment of Investors is what creates either buying or selling pressure. Some of the instruments hit hardest by today’s drop is Tesla, as well as the famed ARK ETF. On the other hand, commodities, which are viewed as a hedge against inflation, saw gains today.
Will you be buying the dip? Or is there a lot more room to fall?
I am not a financial advisor and my comments should never be taken as financial advice. Investments come with risk, so always do your research and analysis beforehand.