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If you’re looking for reasons to be bearish right now, Wall Street is giving you plenty of ammunition.
Oil is back above $100 as the conflict in the Middle East continues to rattle global energy markets. The 10-year Treasury yield briefly crossed 5%. Stocks have been under pressure for three straight sessions. And later today, the Federal Reserve is widely expected to raise interest rates another 25 basis points.
I’ll get one thing out of the way right now: I think raising rates here would be a mistake.
The Fed can’t produce another barrel of oil. It can’t reopen shipping lanes in the Middle East. And making mortgages, business loans, and virtually every other form of credit more expensive isn’t going to solve an energy supply shock.
But there’s an important distinction investors need to make. What I think the Fed should do and what one additional 25-basis-point hike will actually do to the economy are two very different things.
There’s no question $100 oil and higher interest rates create challenges.
Higher energy prices eventually work their way through the economy. Consumers pay more at the pump. Airlines and trucking companies pay more for fuel. Manufacturers face higher transportation costs. And businesses eventually have to decide whether to absorb those costs or pass them along to customers.
Then you have the 10-year Treasury yield hovering around levels we haven’t seen in years. Higher yields increase borrowing costs and create competition for stocks, particularly growth companies whose biggest profits may still be years into the future.
Put the two together and you get the exact combination Wall Street hates: inflation concerns and higher interest rates.
But does that mean the bull market is over?
I don’t think so.
This is where I always try to separate the headlines from what’s happening underneath them.
Has $100 oil stopped companies from building AI data centers? Has a 5% Treasury yield stopped robots from moving into factories? Has another potential Fed hike ended the nuclear renaissance, slowed breakthroughs in genomics, or suddenly made quantum computing irrelevant?
Of course not. The factors I just mentioned are real, but they DO NOT stop innovation.
In some cases, higher energy prices could actually accelerate the trends we’re following. The more expensive and less reliable traditional energy becomes, the stronger the incentive to invest in nuclear power, renewables, battery storage, and the electrical grid.
More importantly, the massive capital investment behind the innovation economy hasn’t disappeared. Neither have corporate earnings.
That’s why I continue to believe we’re closer to 1995 than 1999 in this innovation cycle.
The great technology bull market of the 1990s didn’t move straight up. Investors lived through aggressive Fed tightening, the Mexican peso crisis, the Asian financial crisis, and eventually the Russian debt crisis and collapse of Long-Term Capital Management.
There were plenty of reasons to sell along the way.
The investors who focused only on those crises missed the bigger story unfolding underneath them: the internet was changing the world.
The bottom line is that too many investors based their long-term investment decisions on short-term factors. This is a recipe for disaster in your portfolio.
That brings us to this afternoon.
Markets are pricing in a high probability that the Fed raises rates another quarter point. Again, I’m about as opposed to that move as I can be. I don’t believe the answer to a geopolitical energy shock is making money even more expensive for American consumers and businesses.
But I also don’t want to exaggerate what one quarter-point hike means. A single 25-basis-point increase isn’t going to suddenly shut down the U.S. economy or stop companies from spending hundreds of billions of dollars on the technologies that will define the next decade.
Markets aren’t always rational in the short term, though.
That’s why I’ll be paying even more attention to what Fed Chair Kevin Warsh says after the decision. One hike is manageable. A message suggesting this is the beginning of a prolonged new tightening cycle would be more concerning.
And if the market doesn’t like what it hears, we could easily see another round of selling.
Oil could remain above $100. Treasury yields could stay uncomfortable. And the Fed could give investors another reason to hit the sell button Wednesday afternoon.
That could keep volatility elevated for days or even weeks.
But I’m not going to confuse volatility with the end of the bull market. For that, I’d need to see something much more significant – deteriorating earnings, collapsing investment, and evidence that the innovation trends we’ve been following are actually slowing.
We’re not there.
So, while everyone else is watching the price of oil and waiting for the next word out of Washington, I’ll be doing what I’ve done through plenty of market scares over the last 25 years…
Looking for great companies that fear has temporarily put on sale.
P.S. Speaking of finding what fear puts on sale… at the exact same hour the Fed hands down its decision today, 2 p.m. EST, my colleague Bryan Bottarelli is going live with a strategy built for days like this one.
He calls it a Flash Rally: a sharp reversal that tends to follow a stretch of panicked, fear-driven selling. Depending on what Kevin Warsh says after the announcement, we could see plenty more of that kind of selling before the day’s over.
Bryan’s broadcasting live, in real time, while the market reacts to the Fed’s decision, so you’ll watch the signal work in exactly the kind of volatility I described above, not some calm, cherry-picked example.
2 p.m. EST, today. Be there.
