Your Castle Real Estate
Call Us: 720-289-0260

Don’t Fret the Fed

Taken from Ken Fisher’s July 21st article in Forbes, "Don’t Fret the Fed"…

"There is a spreading fear that we are in for a period of tightening by the Federal Reserve Board. It has gotten to be obsessive. On a recent round of New York media interviews, I encountered two almost unanimous views: that the Fed would hike rates later this year, and that Barack Obama would be elected President. Both events are viewed as all but certain, and as all but certain to do great damage to the stock market.

Put aside your fears. The market will recover.

It is presumed that increases in the Fed’s target rate for overnight loans are bad for stocks because high interest rates make the future earnings from corporations less valuable today. But the connection is not so neat.

Since 1970 there have been eight stretches in which the Fed was tightening and eight in which it was loosening. These periods ranged from 6 months to 56 months long. Recently I made two tables, one showing stock returns (as measured by the MSCI World Index) over various periods beginning at the starting points of the tightening periods, the other showing returns beginning at the starting points of the loosening periods. The periods covered 3, 6, 12 and 24 months. I’ve asked both large audiences and individuals to tell me which set of returns was for the tightening times and which for the loosening. They’ve been stumped. There’s no pattern. They look almost identical.

For example, 24 months after tightenings started, returns averaged a cumulative 16.9%; 24 months after loosenings they averaged 19.7%. But look at medians instead of averages and the results flip-flop to 18.1% for tight money and 12.4% for loose money. You can’t find any pattern over shorter holding times, either. Despite what your gut tells you, central bank action holds no useful information about where stocks are going.

In my May 19 column I detailed why you needn’t worry about an Obama presidency. Another observation: U.S. stocks do better than foreign ones (in dollar terms) in the last five months before a presidential election. Since 1928 this has happened three-fourths of the time; the advantage to domestic stocks, averaged over all 20 elections beginning with Herbert Hoover’s, is 9.1 percentage points. And when it hasn’t happened, the other quarter of the time, U.S. stocks haven’t lagged by much. When they’ve led it has been by more than 13%. Simple explanation: Markets dislike uncertainty, and uncertainty declines as Election Day nears.

No guarantee the pattern will hold in 2008, but that’s the way to bet."