The Fed's Bizarro World - Simplified

Over the past few weeks, I've been asked the same basic question by a number of very smart and successful people. The generalized version of the question is:

"The economy appears to be doing well, so why does the market keep falling?"

In most cases, they are referencing good jobs reports, increasing wages, increased capital spending, corporate earnings, or various other possibilities.

You might also be wondering why there seems to be a disconnect.

It's a reasonable question because in a normal world, when the economy is doing well, the markets typically do well.

The problem is that we aren't living in a normal world right now; we're living in the Fed's Bizarro World.

To help everyone make sense of today's unique environment, offering a brief recap of the last couple of years might be helpful. Here's how we got to where we are today:

Coronavirus hit. We shut the entire economy down for a few months. To avoid a financial crisis, the government sent out lots of free money. When the economy reopened, people wanted to spend their money. But there were fewer goods to buy because global supply chains were slower to restart. The result was high demand and low supply, which not surprisingly, caused inflation. The Fed said inflation was transitory. It wasn't transitory. The Fed eventually realized they were wrong, so they committed to increasing rates to counteract inflation. Good economic news and inflation continued despite the rate increases. The Fed ultimately decided to rapidly raise rates until there is "some pain" (i.e. bad economic news) that, hopefully, reduces inflation.

As a result of this aggressive shift in Fed philosophy, the market has taken note and now tends to fall when good economic news is released because it means the Fed will continue on its warpath until they get what they want. In other words, the Fed is actively seeking bad economic news. It's why it feels like a bit of a hostage situation.

But what will be interesting to see is how the market responds to bad economic news as this probable Fed-induced recession takes shape.

If good news is bad news right now, does that mean bad news will be good news? Will bad news actually cause the market to rise? Or is bad news still bad news?

Is this making your head hurt? Mine is too. That's the thing about Bizarro World: Nobody knows anything.

In light of this wild uncertainty, a logical question to ask is, "What should we do?" It won’t surprise you to know that the answer is the same today as it always is—exercise patience and discipline. Because here are the only two things we know for sure:

1. 100% of all previous bear markets have come to an end and then moved on to higher highs.

2. The only way to guarantee we don't miss the recovery is to stay invested.

As Kevin Bacon said in A Few Good Men, "These are the facts of the case, and they are undisputed."

I understand it's not fun right now. Bear markets (and hostage situations) never are. But the Fed's Bizarro World will end, and the market will return to normal. And we should remember that historically speaking, the market typically begins its recovery well before they announce the "all clear." Our job is to make sure we're there when it happens.