Imagine sketching a doodle and making 280-times your money…
Well, this actually happened…sort of.
It all started back in 1971. Wayne Pickette and Phillip Tai drew this picture. It’s of a computer-on-a-board, with Intel’s 4004 microprocessor powering it all.
OK, so maybe it’s a bit more than a doodle. But this initial drawing would go on to fuel Intel’s future success.
Intel got a couple thousand orders for the 4004. And they thought that was that. The marketing heads guessed demand for the chip was maybe 2,000 a year.
Little did they know their microchip and its iterations were going to power almost all electronics.
That first sketch of a computer-on-a-board would go on to change the world.
Today, there’s another sketch circulating the news. I doubt it will change the world. But it does have stock markets in a tizzy.
The sketch that brought markets down
I don’t need to tell you. You know what’s happened.
Santa isn’t coming to save us. The US central bank — the US Federal Reserve — made sure of that.
Markets are down. The Dow, the S&P 500, the All Ordinaries. They’re all down over the last few days.
And it’s all because of one silly sketch.
The Fed is now targeting a benchmark interest rate of 2.25–2.5%. It’s up from their previous 2–2.25% target. Investors were expecting this rise.
The Fed also changed their future projections of interest rates. This is what investors weren’t expecting. And it’s encouraged a whole lot of selling.
Maybe you’ve seen a sketch like this before…
Source: US Federal Reserve
It shows where Fed members (there’s 12 of them) believe interest rates should be in the future. The median is then taken as the Fed’s forecast.
So what’s this graph telling us?
Policy makers believe rates should be just below 3% next year. And by 2020–21, rates should reach a peak, just above 3%.
What got investors reeling are these forecast changes. Here’s the same sketch with September projections added in…
The Fed forecast has fallen. Look at the sketch and you can see the median forecast for 2020–21 is noticeably lower. Fed members now believe interest rates should be lower in the immediate future.
But why the sudden change? Is the American economy doing worse than expected? Will they need lower rates to help them through a tough time?
Scott Minerd from Guggenheim Partners thinks people are just scared:
‘We’re looking at a world where markets have gotten so spoon-fed for so long that any big change in anything upsets them. The interesting thing is the volatility around financial assets is introducing another element of risk that I don’t think any of us anticipated to happen right now. I think people are scared.’
The market might not even care what the sketch is saying.
Investors are voting with their dollars. And right now they think interest rates will be even lower than the Fed’s revised projections, says Zhiwei Ren at Penn Mutual Asset Management:
‘The market is pricing a much more dovish [expecting lower rates] Fed than the dot plot is. It’s showing two more hikes next year — that’s different. The market is billions of dollars of capital being allocated. The dot plot is just several Fed governors, their personal opinion, with no money on the line. Talk is easy, money is worth more, in my opinion. In the past several years, that’s what happened — the dot plot converged to market pricing.’
What’s crazy to me is why investors even care.
I know interest rates are important, not just for stocks but all assets. But it just seems like everyone in the mainstream is betting on assumptions.
Does anyway really think they can accurately guess what interest rates will do next?
The real Grinch of Christmas
If you’re in the market right now, the sketch above likely did some damage. Hopefully the damage wasn’t too much and luckily it’s just on paper for now.
But while expectations are moving stocks around, I’d urge you to stay out of the guessing game. It’s not a high probability bet for success.
In a 2007 CNBC interview, Becky Quick asked Warren Buffett if he thought the Fed should cut interest rates:
‘I don’t care,’ was his response. ‘I represent a different view, maybe, than your other viewers,’ Buffett said.
‘I don’t think it makes any difference whatsoever to an investor in stocks what they do today. I don’t care, I wouldn’t care whether they raise the rate in terms of what I would do in stocks. If I knew exactly what they were going to do, I would not change a buy or a sell order that I have in.
‘The important thing in stocks is to buy a stock in a good business at a reasonable price. Anybody that is buying or selling stocks based on what the Fed is doing, or what they think they’re going to do at their next meeting, I think is destined to not having a great financial future. It really doesn’t have anything to do with the value of good companies 3, 5 years from now.’
I’m sure Warren might say the same thing today. And I believe you should adopt the same mentality.
Who cares about the Fed and their changing dot plot? Care about the businesses you buy.
But if you’re looking at the market and eager to point fingers, might I suggest you point them at the speculators (that includes the Fed).
They push prices around with all their guessing. They give the industry a bad rap. And they mess up performance (in the short-term) for everyone else.
But it’s not all bad.
Like I mentioned yesterday, lower prices heading into 2019 should benefit you a whole lot.
Lower prices usually mean potential returns go up. Stocks that you were fuzzy about might become clear buys now.
I’ll bet if you dig deep enough, you can find a couple of stocks with huge potential heading into 2019.
Think of it as a delayed Chrissy present.
Your jolly friend,
Editor, Money Morning
PS: In this just released report, Matt Hibbard shows you his top five dividend picks for 2019. Click here to claim your copy today.