For long-term investors, this week’s amazing equity volatility is little more than a distraction. But the moves we’ve seen in the last few days shouldn’t be shrugged off: they are indicative of a market that is facing a host of new fundamentals.
Serious investors should pay heed to the following:
1) It’s Over for the Fed
As evidenced by Thursday’s reversal, the days when the Fed can end a market decline with a few choice words are over. Sure, they can dictate short-term rates, but long-term rates are set in the marketplace.
As I said in my third quarter commentary, a steepening yield curve—higher long-term rates and low short-term rates—is inevitable.
Banks should be the biggest beneficiaries, so an allocation switch to large cap value is in order.
2) The Dollar Will Keep Appreciating