S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance; MarketWatch; djindexes.com; U.S. Treasury; London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.
INVESTORS VS. THE FEDERAL RESERVE. In the 1970s, Martin Zweig cautioned investors: Don’t fight the Fed. He believed there was a correlation between Federal Reserve monetary policy and the direction of stock markets, reported Steve Sosnick of Barron’s. Here’s generally how it worked:
- The Fed makes more money available – pursuing loose or expansionary monetary policy – during economic downturns or recessions. It adjusts the money supply by moving the federal funds rate lower so companies can borrow inexpensively and hire workers. In turn, workers spend more, and the economy grows. Stock markets tend to rise when the Fed is pursuing loose monetary policy.
- The Fed makes less money available – pursuing tight or restrictive monetary policy – during periods when the economy is overheating, and inflation swings higher. It adjusts the money supply by moving the federal funds rate higher, making borrowing more expensive for companies, which can lead to layoffs. Workers have less to spend, and the economy slows or enters a recession. Stock markets tend to fall when the Fed is pursuing tight monetary policy.
Ultimately, Zweig’s advice meant that investors should be more aggressive when the Fed was pursuing loose monetary policy, and more conservative when it was pursuing tight monetary policy. Will Daniel of Fortune reported:
“Investors understood this dynamic during the recovery from the bursting of the U.S. housing bubble, buying stocks in droves while the Fed held interest rates near zero…The central bank’s loose policies helped bring about the second longest bull market in the S&P 500’s history, between Mar. 9, 2009, and the COVID-19–induced bear market of 2020…”
Today, the Federal Reserve is pursuing tight monetary policy, and has indicated that lower rates are not on the table for 2023. Investors seem to think otherwise, though. The Fed raised the federal funds rate in March, but not all Treasury yields followed suit. Yields on longer-dated Treasuries moved lower, suggesting investors think rate cuts are ahead.
Who’s right? Stay tuned. (And remember that many factors influence financial market performance. Fed policy is just one of them.)
Weekly Focus – Think About It
“One of my fondest sayings is fail, fast, forward. Recognize you’ve failed, try to do it fast, learn from it, build on it, and move forward. Embrace failure, have it be part of your persona.”
—Carol Bartz, former CEO and president
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