Ask the Rational Investor: Don't Fight the Fed
In 1969 Milton Friedman, famed supply-side economist, wrote about how the Federal Reserve could drop money from a helicopter to stimulate the economy. The unconventional monetary policy, ‘helicopter money’ has subsequently been revived multiple times from the 2000s in Japan, during the Great Financial Crisis, and now, more than ever.
Emotions continue to weigh on investors, as now the fear of missing out (or FOMO) on the stock market rally is yet again causing irrational investment behavior.
It is challenging to understand why the financial markets have rallied back so quickly. But, once again the old mantra of ‘don’t fight the Fed’ seems to be right. During the Great Financial Crisis, the Federal Reserve lowered interest rates, and injected tremendous liquidity into the financial markets through unconventional monetary policies called Quantitative Easing (QE).
Currently, these unconventional policies have been reintroduced and occurred more swiftly and in tremendous size compared to the Great Financial Crisis.
In an unexpected twist, the Federal Reserve is purchasing exchange-traded funds (ETFs) of high-yield bonds. While the US has never bought junk bonds, historically, other central banks around the world have. Investors are now wondering if the Fed might purchase stocks if the market declines substantially again. The rebound in stocks is due to both actions taken by the Fed, and recent moves to restart the economy. These moves support the willingness of investors to look past the current period toward the return to a somewhat normal level.
From a portfolio positioning perspective, focus on companies that are either able to maintain their sales growth momentum, or have the balance sheet to survive until the virus no longer throttles the economy. It is hard to imagine, but some companies’ earnings have not been impacted during the pandemic.
Don’t confuse staying calm and acting rationally with doing nothing.
After the large stock market rally, it is important to review your asset allocation and upcoming cash needs. Do tax-loss harvesting opportunities exist in your portfolio?
Prior to making any portfolio changes discuss your upcoming cash needs and thoughts during the current stock market sell-off with your portfolio manager prior to making any changes.
Beese Fulmer Private Wealth Management was founded in 1980 and is one of Stark County’s oldest and largest investment management firms. The company serves high-net-worth individuals, families, and non-profits, and has been ranked as one of the largest money managers in Northeast Ohio.