A critic once wrote about the film Fear and Loathing in Las Vegas - “[…] the entire point of this film is the meandering aimlessness.”
Over the last month, the financial news cycle is meandering aimlessly…stoned out on recession, interest rates, fed rate hikes, the economy, volatility, etc. This gonzo journalism is jammed pack with hyperbole and conjecture. Needless to say that the financial porn is bad for your portfolio and will give you a massive hangover if you follow its advice.
I am not in denial that “things” aren’t dicey or concerning but the constant “hair on fire” narrative does not serve you well when the reality is that investing is always about risk and reward. This is why a financial planner or advisor is needed—a well thought out plan has already contemplated these types of economic cycles. No matter your age or income need, there are ways to prepare for such volatility and weather these times.
Do yourself a favor and ignore all of it. Headlines like these do you no favors.
The latest news concerns the Fed raising rates and what it means to investors. The fear for many is that the raising of rates will have a cataclysmic impact on an investor’s portfolio.
The nerds over at DFA (I say nerds with all due respect since they are super smart, study the markets, and I am somewhat jealous that I am not as nerdy as them), share some interesting findings regarding Fed rates and the market.
In 2017, DFA wrote an article called “When Rates Go Up, Do Stocks Go Down?” DFA concluded that “while there is a lot of noise in stock returns and no clear pattern, not much of that variation appears to be related to changes in the effective federal funds rate.”
In a more recent article (”Surprisingly Benign: How Stocks Respond to Hikes in Fed Funds Rate”) dated May 5, 2022, Kaitlin Simpson Hendrix, Senior Researcher and VP at DFA wrote - “We study the relation between US equity returns, measured by the Fama/French Total US Market Research Index, and changes in the federal funds target rate from 1983 to 2021. Over this period of 468 months, rates increased in 70 months and decreased in 67 months.
Exhibit 1 presents the average monthly returns of US equities in months when there is an increase, decrease, or no change in the target rate. On average, US equity market returns are reliably positive in months with increases in target rates. Moreover, the average stock market return in those months is similar to the average return in months with decreases or no changes in target rates.”
“What about the months after rate hikes? This question may be of particular interest when the Fed is expected to increase the federal funds target rate multiple times. Exhibit 2 presents annualized US equity market returns over the one-, three-, and five-year periods following one or two consecutive monthly increases in the fed funds target rate, as well as following months with no increase. In reassuring news for investors concerned with the current environment of increasing rates, the US equity market has delivered strong longer-term performance on average regardless of activity at the Fed.”
So, get on with your life and ignore the financial press. Use the internet what was meant to be used for…cat pictures and epic memes.