Amid the complex matrix that comprises the financial markets, investors must sort through a torrent of noise and mixed signals from the media, self-appointed gurus, and the onslaught of available data. You can profit from the chaos – but only if you can make sense of a seemingly senseless market.

The key to success is to prioritize: determine what really matters and commit to focusing on that and that alone. In the current market environment, you have to weigh the factors that influence asset prices and then either choose to heed them or ignore them.

In other words, ignoring the inessential is essential. For example, you might receive a “hot” stock or cryptocurrency tip from a co-worker at the water cooler or a family member at a holiday gathering. These tips will often come with the best of intentions but little to no real research or insight.

This isn’t to discount people’s opinions on the future direction of asset prices; after all, if we can’t opine on the future, then we can’t invest. Still, it’s advisable to measure any opinion on the financial markets via the yardstick of data and the scale of hard data. Anything less would be foolhardy, but unfortunately the desire for easy money can derail our better judgment.

All that being said, there is a small swath of the population whose opinions do matter because they have the power to move markets. The clearest example of this would be the members of the Federal Reserve Board, who don’t even need to utter actual words to send the financial markets into a tailspin or, conversely, into utter euphoria:

Courtesy: U.S. Federal Reserve

In case you aren’t conversant in dot-plot language, this June 10 issuance from the Federal Reserve indicates that the world’s most influential central bank envisions the federal funds rate (the guiding rate for a variety of bond yields) remaining close to zero through the remainder of this year, the next year, and the year after that.

Investors might or might not agree with this course of action (or inaction, as the case may be) but nonetheless must consider the impact on the markets. The old quip “Don’t fight the Fed” isn’t a quip anymore as America’s central bank has made it crystal clear that government bonds (and other fixed-income instruments such as certificates of deposit and savings accounts) will yield next to nothing for the foreseeable future.

On the other hand, this should provide a tailwind to asset classes that benefit from suppressed bond yields. The likely beneficiaries, in this case, would include long-term holders of stocks and precious metals. Gold and silver in particular have had a historical tendency to appreciate in value when bond yields aren’t competitive.

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    Another key consideration is the breadth (or lack thereof) of the stock-market rally that’s been in progress, with every dip being quickly and relentlessly bought up since March of 2009. With a small handful of tech names disproportionately responsible for the rally, one has to wonder how much longer the few can carry the many:

    Courtesy: ZeroHedge

    In light of this, true contrarians could consider rebalancing out of the tech-centered FAANG stocks and into asset classes with less stretched valuations. If we view the financial markets as cyclical in nature, assets that have been unfavored for years should, at least in theory, come back into favor again at some point.

    These are unusual times, however, in which long-standing natural cycles seem broken and large swaths of the trading community have apparently abandoned traditional valuation metrics. For evidence of this, feel free to check the trading volume on so-called “bankruptcy stocks” (yes, that’s an accepted term now) like Hertz, J. C. Penney, and Whiting Petroleum.

    Additionally, investors must keep tabs on the almighty dollar, whose value isn’t as mighty as it once was. The U.S. government’s response to the onset of the coronavirus has been a dramatic increase in the money supply coupled with mega-scale stimulus payments. This course of action isn’t likely to come to an end anytime soon.

    This, combined with the Federal Reserve’s ramp-up in asset purchases, should bolster stocks and, to perhaps an even great extent, hard assets. As J.P. Morgan analyst Dominic O’Kane puts it, “Expansion of government balance sheets, plus increased money supply among reserve currencies raises a risk of future fiat currency devaluation in our view, which enhance gold’s store of value credentials.”

    There are certainly other factors to consider for informed investors, but hopefully these musings will serve as a starting point as we strive to navigate choppy and, to a large extent, uncharted market waters.

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