50, 75 or 100?

Banish Fear (of) Markets - Issue 16/2022 - 15 June 2022

The Federal Reserve meets later this evening, KL time, to discuss whether they should raise interest rates by 50, 75 or 100 basis points (i.e. 0.5%, 0.75% or 1%).

Markets are very unsettled about this uncertainty. From Jerome Powell's speeches prior to the most recent US inflation report, markets assumed a 50 basis point increase at the next meeting and markets were beginning to settle down. Then on June 10th, the US inflation numbers were published, and all hell broke loose.

Inflation showed no signs of slowing down. It clocked in at 8.6% year on year, the highest ever since December 1981. This spooked markets, as now the assumption that the Fed will raise rates to 50 basis points no longer holds water. The higher the Fed raises its interest rates to tame inflation, the higher the risk of a recession, as consumers and companies alike cut back spending to adjust to higher interest rates. Stock markets too will suffer as funds switch from equities to US Treasury bonds, which now offer a higher rate for a safer investment.

So tonight, the Fed will decide if it's 50, 75 or 100. Pick your poison. If 50 basis points, some analysts will say that the Fed is not taking inflation seriously enough and will sell down. If 100 basis points, others will say that the Fed runs the risk of choking the economy and will sell down. In either case, news being what it is, the dominant narrative will be the most negative one. So do not expect markets to settle after this Fed move. More roiling, more choppy waves, until inflation is tamed.

So what is an investor to do? Sell out now, and you'll lock in your losses. Equity investing is about investing money you do not need immediately, so if you don't have to sell, don't. But think about repositioning it. If there are unprofitable, speculative companies in your portfolio, think about selling them and buying profitable ones whose stock price have been beaten down. If you have spare cash, you can wait on the sidelines until the inflation has been tamed.

For me, I look at the moves of an investor who thrives during troubled times: Warren Buffett. In its 13-F filing in May 2022, his investment company Berkshire Hathaway disclosed that it had bought US$613 million worth of Apple stock in the first quarter of 2022. Apple formed 42% of Berkshire Hathaway's TOTAL portfolio on 31 March, 2022.

In his interview with CNBC on 1st May, Buffett said he snatched up $600 million worth of Apple Inc. shares following a three-day decline in the stock. In his words: “Unfortunately the stock went back up, so I stopped. Otherwise who knows how much we would buy?".

This is one investor who has no fear of markets (which is the theme of this newsletter, by the way).

I checked Apple stock price history in Q1 for that 3 day streak, and it looks like it happened during 14-16 March, where Apple's stock price closed at $150.10, $150.38 and $154.46 respectively, the lowest streak in the quarter.

At yesterdays' close, Apple closed at $132.76. I'm sure Buffett would have gone on to buy more Apple since then.

Me? I'm waiting for the markets to roil after tonight Fed's rate hike. Then I'll submit myself to the wisdom of the Oracle of Omaha and reposition my portfolio to buy more Apple.

Disclaimer

This column is to help people who fear investing to experience the investment rationale of a long term investor in global stock markets. It is for informational purposes only and not intended as advice or recommendation to buy any stocks. Please consult a licensed professional adviser before making any investment decisions.

Malek Ali, - Founder BFM 89.9, The Business Station - a CFP professional