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What Happened on Friday?

Imagine a kid with a belly full of jelly beans plus a can of Mountain Dew, who is complaining about a bellyache but cries when given a tablespoon of Pepto-Bismol or other medicine.

That’s how I see the current stock market.  After riding high thorough a pandemic with a belly full of deficit spending and cheap money, it complains about inflation but cries when given interest rate increases and quantitative-tightening.

Just like the kid who survives a stomachache, the current stock market will also survive.  It may vomit for a while, but it will not die.

The 981 point drop in the Dow on Friday sounds worse than it is, less than 3%.  During “Black Monday” and “Black Tuesday” in October of 1929, the Dow dropped almost 25% — eight times worse!

Remember:  the stock market can handle bad news but not bad surprises.  For the last few weeks, the market has been getting its head around the quarter-point increase in interest rates expected next month, when Fed Head Jerry Powell said on Thursday that a half-point increase was “on the table” or twice what the market expected.  So, blame the drop on Powell!

However, he did the right thing by admitting now that a bigger increase was coming — bigger than the market expected.  If he had not admitted it now, the market reaction next month to a half-point increase would have been much worse.  The market WILL get its head around a half-point increase.  Just give it time . . .