Study says don’t fight the Fed

Last Friday, John Waggoner, in a USA Today article, “Rate cut could skew investing path toward stocks, gold,” re-hashed the nearly universally accepted wisdom “don’t fight the Fed.”

Credit expansion, the opposite of a crunch, is good for stocks. When the Federal Reserve pumps money into the financial system, it makes more money available to lend, driving rates down. Lower interest rates stimulate the economy, lower companies’ cost of borrowing and make stocks look more attractive in comparison with bonds and bank CDs.

Waggoner cited a study by a group that represents certified financial analysts:

A recent study by the CFA Institute found that tweaking your investments according to the Fed’s monetary policy can be highly beneficial. The stock market averaged a 12% annual return from 1973 through 2005. When the Fed has pursued an expansive monetary policy and lowered short-term interest rates, the stock market gained an average 17.41% a year. When the Fed was raising rates, the stock market gained an average of only 5.34% a year.

The other lesson, buy cyclicals:

You could have substantially improved your record by investing in the correct sectors. Analysts have long divided the market into cyclical stocks and non-cyclical stocks. Cyclical stocks fare well during an economic expansion. Non-cyclical stocks, such as health care, tend to hold up well when the economy is faltering.

The study found that cyclical stocks gained an average of 20.27% a year when the Fed was lowering interest rates. When the Fed raised interest rates, cyclical stocks gained just 2.25%.

My comments:

  1. Long cyclical stocks (materials, tech, industrials, energy) is a crowded trade.
  2. After at least 25 years of “successful” crisis intervention, the mainstream financial community is convinced the Fed is omnipotent.
  3. It is not.

No Comments

No comments yet.

RSS feed for comments on this post.

Leave a comment

You must be logged in to post a comment.

WordPress Themes