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@Mark: Did you get any important “take-aways” from the most recent newsletter you might distill for us?
I got this far and than they wanted me to setup a free account: “A Steady Fed Suggests Further Gains In The Overall Stock Market”
That’s been the conventional wisdom for a long time now. Money is / has been cheap (since 2008). We could play some games with that widely held belief by plugging in various possible scenarios
1. Rates stay low indefinitely and stocks go up forever.
2. Rates fall even further (below 0) and the Fed begins buying up equities to “protect” investors, 401-Ks and the like. The stock market goes even higher - forever.
3. Inflation soars. Rates stay low. The stock market continues to rise - but your market “winnings” buy substantially less. (This may not persist for long, as debtors would fare better during prolonged high inflation than the wealthier individuals / corporations who lent the money.)
"The tables show the stock market as a whole did best when rates were steady, as contrasted with what you might expect, with an average annualized return of 26.73% during four such periods. Surprisingly, it did the worst when rates were falling with an average annualized return of -3.72, and with an average annualized return of 10.89 when rates were rising!"
Equal's - by the time the Fed reacts, raising or lowering, the results have already been generally cooked in.
Implications for Investors
"Right now, even though the Fed is highly likely to quite soon begin phasing out its bond purchases, called quantitative easing, that is not the same as actually raising rates. Since the Fed Chairman has repeatedly stated the Fed is not expected to raise rates until those purchases have ended sometime later next year, we can assume that rates will remain stable until then, as they have been since the last series of cuts ended on March 15, 2020. Given this data and the fact that the overall market has shown to perform best when rates are stable, it appears likely that stocks can do considerably well until then."
@Mark. Thanks much for the excerpts! And I agree with your explanation.
1st paragraph is accurate in that during normal times an overheated equity market (and economy) are likely to invoke Fed tightening. Eventually (late in the tightening cycle) the market cools off. Than, as the economy cools, the Fed lowers rates in hopes of reigniting growth. That’s a normal cycle. The question remains as to whether the present (as well as the past decade or two) represent “normal”.
2nd paragraph seems an accurate summary of the Fed’s position as they have relayed it through various means (press conferences, meetings’ minutes, statements). No quarrel here. That’s what they’ve said.
Than comes the following inference: “Given this data and the fact that the overall market has shown to perform best when rates are stable, it appears likely that stocks can do considerably well until then." Here, we’re dealing in the realm of probability.
I have no crystal ball. If we’re in normal times, and if the Fed acts going forward in the way it has indicated it will, and if probabilities based on past patterns hold true …. off to the races!
Since March 2020, Fed short-term rate policy has been on hold and stocks have soared. Such prior "on hold" periods have also led to excellent returns. While this hold cycle continues, Growth funds/ETFs are likely to excel the overall market. But even better than Growth, small cap stock funds/ETFs have outperformed during these on-hold periods. When the Fed does raise rates, Financial and Real Estate funds, along with Growth funds, will be your best bet.
Comments
Tom Madell Funds Newsletter
I got this far and than they wanted me to setup a free account: “A Steady Fed Suggests Further Gains In The Overall Stock Market”
That’s been the conventional wisdom for a long time now. Money is / has been cheap (since 2008). We could play some games with that widely held belief by plugging in various possible scenarios
1. Rates stay low indefinitely and stocks go up forever.
2. Rates fall even further (below 0) and the Fed begins buying up equities to “protect” investors, 401-Ks and the like. The stock market goes even higher - forever.
3. Inflation soars. Rates stay low. The stock market continues to rise - but your market “winnings” buy substantially less. (This may not persist for long, as debtors would fare better during prolonged high inflation than the wealthier individuals / corporations who lent the money.)
4. Inflation soars. Rates rise steeply. Stocks tumble.
"The tables show the stock market as a whole did best when rates were steady, as contrasted with what you might expect, with an average annualized return of 26.73% during four such periods. Surprisingly, it did the worst when rates were falling with an average annualized return of -3.72, and with an average annualized return of 10.89 when rates were rising!"
Equal's - by the time the Fed reacts, raising or lowering, the results have already been generally cooked in.
Implications for Investors
"Right now, even though the Fed is highly likely to quite soon begin phasing out its bond purchases, called quantitative easing, that is not the same as actually raising rates. Since the Fed Chairman has repeatedly stated the Fed is not expected to raise rates until those purchases have ended sometime later next year, we can assume that rates will remain stable until then, as they have been since the last series of cuts ended on March 15, 2020. Given this data and the fact that the overall market has shown to perform best when rates are stable, it appears likely that stocks can do considerably well until then."
1st paragraph is accurate in that during normal times an overheated equity market (and economy) are likely to invoke Fed tightening. Eventually (late in the tightening cycle) the market cools off. Than, as the economy cools, the Fed lowers rates in hopes of reigniting growth. That’s a normal cycle. The question remains as to whether the present (as well as the past decade or two) represent “normal”.
2nd paragraph seems an accurate summary of the Fed’s position as they have relayed it through various means (press conferences, meetings’ minutes, statements). No quarrel here. That’s what they’ve said.
Than comes the following inference: “Given this data and the fact that the overall market has shown to perform best when rates are stable, it appears likely that stocks can do considerably well until then." Here, we’re dealing in the realm of probability.
I have no crystal ball. If we’re in normal times, and if the Fed acts going forward in the way it has indicated it will, and if probabilities based on past patterns hold true …. off to the races!
outperforming-the-market-while-the-fed-is-on-hold