What is the Fed?
The Federal Reserve board is a group appointed by the president to oversee banks and interest rates. When they say the Fed is going to raise rates, it is only on the base rate or the rate in which the government will loan money to a bank or banks lending to other banks. It is not set by supply and demand, but by mandate of the board. All other rates, bonds, mortgages, C.D.’s are set by supply and demand in the open market. These are all debt instruments. In other words the bank borrows our money and owes us for it. It is a debt to the bank. None of this effects distributions from stocks.
Federal Reserve meeting. Chairmen Jerome Powell is at the right.
The Fed does not Affect Stock Prices…in the long run
Forty years ago not much was made of the Fed. Forty years ago it seemed a lot of advisors got up and looked at oil prices. If oil was up, it was going to be a tough day for stocks they reasoned. If oil was down, things could get brighter. It really didn’t have anything to do with performance, but it was the thought DuJour.
Fast forward to 20 years ago until today. Financial media leads the way in training investors to think in ways that is hazardous to their wealth. Boring stuff like earnings and sales growth, excellent execution, top talent, unique products. Those really don’t matter much today. Those companies will go up over time. But the really key thing is the Fed meeting next Tuesday! Let’s see how to read the mindset of the Fed obsessed investor.
Scenario One
With the Fed in charge, it works like this: Well, Bob, Looks like the jobs market came in a little too strong today, with 262,000 jobs created vs the estimate of only 234,000 jobs. With all those people working and spending money, that means inflation could stick around, and since the Fed in turn probably won’t lower rates, the market is not liking that! We are down across the board!!
More jobs, more money in people’s pocket, more tax revenue? Totally positive news but the market goes down. The “Fed” is spooked by this and thinks it means more inflation, which in turn will keep the Fed from lowering rates which seems to be the only thing the media thinks is relevant.
Scenario Two
Well, Bob, according to today’s reports this economy seems like a rotting possum in a 105 degree garage! The market is loving it! Of course, as we all know when it stinks that leads to the chance that the Fed may soon lower rates! We all know that is the only way for stocks to go up; the Fed lowering rates! Hooray the Market Stinks!
This really is comical, but it takes up most of the oxygen in any market report. The fact that the market is still up for the year coming off a great year in 2023 with the same narrative doesn’t deter them. Inflation can be good for stocks and real estate to a point. It gives sellers more pricing power including sellers of goods and services.
Here is a famous saying from John Templeton,you may have heard; “The market climbs a wall of worry.” So true. The point is there is always something to worry about. But the market prevails. Why?
Quality Equity Assets go up over time. And they only do this in the long run from the growth of earnings, dividends, rents or property values. Everything else is entertainment.
The media is almost always wrong. Investors are mostly wrong. They are extrapolating people’s fear into the future. They create the fear and hesitate and we who wait and continue to opportunistically invest, get wealthy.
See you soon,
Craig