Do I buy this title from Randall Forsyth and Barron’s this weekend? NO. It is just one more example of the media stirring the pot on a trivial issue that it has managed to build into a tower of worry and grief. The tag-line on this header is even worse, “Fed tries to avoid torpedoing global economy and market.” What a great evocative verb torpedo is — fire on the water, oil-soaked survivors clinging to life boats with the stern of the USS Economy sinking into the deep blue. When the Fed meets this Wednesday, Forsyth gives this (a quarter point bump in the fed funds rate) a 50-50 chance of happening. If they pull the trigger, we get to stop worrying about ‘when it will happen’, and focus will be, ‘how bad will it be?’ And, of course, the media will not provide any context or history upon which to make an educated judgement. I will later in this post.
“The only thing new is the history you don’t know.” – Harry S. Truman
I think the 33rd President of these United States had it right, especially as it pertains to the markets. There will be booms and busts, bear and bull markets, rallies and corrections, scams and scammers, and catastrophic events like 1929. The only reason 2008 was not a repeat of 1929 was that Ben Bernanke had immersed himself, as an academic, studying the causes of the Great Depression. He knew how badly conditions had deteriorated and the type of strong fiscal and monetary measures needed to stop us from repeating the mistakes of the 1930s. Importantly, it took us seven decades to dig the type of hole that we created in the 1920s (it takes time, maybe a generation or two to forget past lessons). They idea of a repeat in the near-term, a fear many have, seems a bit far-fetched. These events are like earthquakes. It takes a long time for the pressure to build on the tectonic plates of the market and economy. Regardless, if history is a guide, there will be other 1929/ 2008 events. It is baked in the cake.
On the plus-side, history (according to Jeremy Siegel) would say stocks were a good place to have your money (especially after debacles a la 1929 and 2008). In Siegel’s book, “Stocks for the Long Run,” a 20o year study of equity returns showed stocks giving a compound total real rate of return equaling 6.8%, while bonds delivered 3.5%. There were lots of booms, busts, scams, corrections, bears and bulls during the two century period covered.
Again, if history is a guide, equities should be an asset class to be friendly to. Don’t let the noise and short-term thinking get the best of you. If you are looking for history and perspective, kortsessions.com is here to help.
More Perspective and History
For peace of mind, if you wish to dig a bit deeper, here are commentary and links to several short articles that might be of help.
As to the question, ‘What might be the downside/duration of the current correction?’, former client and friend, Bill Greiner, (Chief Investment Strategist, Mariner Wealth Advisors) provides appropriately enough, “Let History Be Your Guide.” This piece examines what one might expect of this correction, based on a look back at previous corrections from similar market environments. Though no one can know for certain if this decline will not be a worse or more-shallow correction than the norm, you do get some parameters as to potential downside.
The second comes from another friend and former client, Marc Vincent, Managing Director, Redstone Advisors. As Redstone is primarily a fixed income money manager, I thought Marc a very credible source on that market’s history. Redstone’s “Economic and Market Review” from the first quarter of 2015 contains a great rundown on three major Fed rate moves in the last 25 years (pages 7 & 8). The piece refers to these as ‘tightening cycles’. Importantly, they did not reel in money supply to tighten. They just raised the price. That will be the case this time as the Fed moves the price of short-term money up a measly 25 basis points. An abundance of liquidity will remain in the system.
The 2004 -2006 should be of interest, because, during that move the Fed Funds rate was increased by 425 basis points (from 1% to 5.25%) while the yield on the Treasury 10-year note hardly budged. The curve flattened. We see this same phenomenon happening today, every time there appeared a threat of the removal of QE or a fed fund lift-off, yields spike on the threat, then back off on fear the rate increase will bring economic weakness … a flight to safety. Again, my bet is that when lift-of does occur we will see a similar action. Fear continues to TRUMP greed and that is good psychological base for the market.
We began this post with a comment on Randall Forsyth’s “up and Down Wall Street” column, “Why The Fed Should Stand Pat.” For a more sanguine view of any upcoming Fed moves, I Include Ben Appelbaum’s piece in this morning’s New York Times (9/13/15), “The Fed’s Policy Mechanics Retool for a Rise in Interest Rates” (Wall Street Journal / Barron’s subscribers only). This article gives you a sense that they are prepared for many potential outcomes on their actions, and that we are not looking at a runaway train.
What is your take?
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