Chart of the Month
Don’t Fight The Fed
- To help combat the fallout from the COVID-19 pandemic crisis, the worlds central banks acted quickly and decisively to flood the markets with liquidity to divert a disaster.
- At the same time, here in the U.S., the Fed acted decisively to lower interest rates and commit to purchasing various fixed income financial assets in huge amounts in order to help the financial markets function more normally.
- Since lower and falling interest rates are bullish, more liquidity is bullish and low inflation pressures are bullish, this trifecta led to a strong cyclical bull market in stocks and hefty gains in bonds from late March 2020 on to now.
- One of the investing rules we like to follow is: “Don’t fight the Fed.” In short, no matter how ugly certain news can look or be or how many pundits speak of shutdowns, depressions, disruptions and bankruptcies, the Fed is a powerful force to keep in mind and to avoid fighting.
- The above chart illustrating Yields on Key 10-Year Governments, shows how low worldwide rates have fallen, even within open market assets like these 10-year government guaranteed instruments. Corporate bonds, municipal bonds and mortgage rates have all followed suit, enabling businesses, governments and individuals to refinance debt at or near historically low levels. Such refinancing is bullish as well.
- In conclusion, while we certainly have our reasons to be concerned about certain economic dangers and threats, we must balance the weight of evidence and make asset allocation and vehicle decisions in light of all such market intelligence. Choosing to avoid fighting the Fed is an investment philosophy that has worked for decades and has no signs of reversing itself anytime soon.
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