Historically speaking, U.S. Federal Reserve policy had a direct and sometimes predictable impact on investment direction. In the 20th century, lower overnight lending rates meant good things for stocks. And, if the Fed tightened its grip by raising target rates, you might cut back your equity exposure with great success.
As we arrived in the 21st century, however, the results of ”following the Fed’s lead” has had mixed results. The Fed’s rapid rate increases leading up to the dot-com collapse did little to deter Nasdaq euphoria… at least for several years. Then in March of 2000, the reality of the rate increases contributed to the quickness with which sentiment became bearish. (Only then did many exclaim, “See, you can’t fight the Fed and win.”)
In 2004/2005/2006 the Fed raised rates consistently, albeit slowly.Yet stocks prospered throughout a rate raising environment. And even the dramatic rate cuts throughout 2008 did little to stop the 2nd worst bear in 100 years. In other words, you could easily have fought the Fed’s rate cutting activity by deciding against the stock market… and won.
Now the Fed is buying U.S. treasuries. Most seem to think it would be a better idea to sell them. And the Fed is also buying mortgage-backed securities. Most seem to think this is actually a good investment. (See “Rethinking Mortgage-Debt ETFs.”)
Following the Fed in the 21st century, then… mixed results. Similarly, we might have been inclined to buy what the U.S. government wished to buy through its TARP program. Former Secretary Paulson infused capital into banks via preferred shares acquisitions. Even uber-bank-bear Meredith Whitney agreed that preferred shares were a good buy for investors. Yet nearly all preferred shares of the majors are trading at lower prices today than they were trading at when TARP 1.0 went into effect.
In the end, one comes to the conclusion that there’s no sure-fire thing. Just because your government’s “doing it,” does that mean you should jump on the same bandwagon? Sometimes yes, sometimes no.
It follows that another major economic force in the world has been making scores of investment decisions. One has to wonder, might we choose to buy the things that China is buying?