Is the Fed the Best Hope?

If you follow Deutsche Bank and you are a fan of bear markets, now is a time to start getting excited. In a recent interview, representatives from the bank stated that they believe that we are officially in a bear market, and that stock prices are going to keep dropping for the foreseeable future. While a bear market seems likely, anything worse than this is still up in the air. As one representative from Heartwood Investment Management says, the U.S. economy is anemic, but not failing. However, things need to change if a full on recession is to be avoided. To get a better feel for a negative scenario, let’s explore the Deutsche Bank statement.

There are a few things to watch for if what is being warned of is, in fact, true. First, the typical bull market lasts about seven to nine years. The one that we are supposedly just coming off of fits within that range. Next, bear markets can last quite a while, and the upward rallies that can occur within them can be prolonged to the point where people think that the bear market might actually be over. This is not the case, though. A rally within a bear market can last for a few weeks, at times, and this means that if you think the market is beginning to reverse within a bear market, you need to be very cautious. Ways to do this include limiting market exposure, taking out smaller position sizes, and using alternative methods of trading to alleviate risk. For example, if you typically invest in the stock market, try using binary options to achieve the three risk mitigation techniques described above.

One other idea that Deutsche Bank is throwing around is that only the Federal Reserve is in a position to help stock prices. And because the Fed doesn’t seem to be taking action any time soon, this could be a cause for alarm with some traders. The thing to remember is that you do have tools available to help you offset your personal risk in dropping markets. Remember the old investing maxim: buy low, sell high. When prices are dropping all around you, putting money into long term positions can be helpful. Yes, prices might go lower, but these are long term positions, and twenty years from now, there is only a very slim chance that you will not have made money off of these positions, especially if they are solid companies.

Deutsche Bank spokesmen commented that the best way to stave off defaults within U.S. companies would be for the dollar to drop further, and only a Fed intervention can make this happen quickly. If you are a Forex trader, or are interested in expanding to this category, paying attention to this side of things may also be helpful to you. But also remember that the Deutsche Bank view is not the only one out there. This is a German bank, and Germany is being hit hard by falling prices right now. However, in the United States there are different perspectives, and there’s not yet definite proof that the U.S. economy is in a recession. A recession could occur if prices keep dropping, and there’s potential that a Fed move right now could prevent that, but also know that if a recession occurs, this would represent a 20 percent decrease in European equities as well, and Germany would be one of the ones hardest hit by this. They have reason to want this to happen, so the above described scenario may be skewed a little because of this desire.