A chart that shows you shouldn’t care about the FED
If Fed Chairman ... whisper to me what monetary policy was going to be over the next two years, it wouldn't change one thing I do.
“If Fed Chairman Alan Greenspan were to whisper to me what his monetary policy was going to be over the next two years, it wouldn't change one thing I do.” - Buffett.
I wanted to share this chart by Jurrien Timmer.
Using that as a baseline, analyzing the S&P 500's behavior over the subsequent year or two. The results are varied, with performances ranging from a decline of 60% or more to gains of up to 80%, creating a complex pattern reminiscent of a spider web.
This shows that there isn't a definitive sign regarding market timing. Even if you accurately predict upcoming events, you can't be certain about the market's response. It's challenging to gauge what's already factored into the prices or how external observers might influence things. The data you're highlighting tracks the S&P 500's performance following the last tightening.
We have known this for a long time as value investors, but it is interesting to have an updated chart showing it so simply.
The financial ecosystem is an intricate dance of policies, economic indicators, investor sentiment, and external events. At the heart of this dance in the U.S. is the Federal Reserve (often referred to as "the Fed"). Its decisions, ranging from interest rate changes to quantitative easing measures, often send ripples across markets. But how do markets typically react to the Fed's moves, and what can we discern from these reactions?
Anticipation vs. Reality
Predictive Nature of the Market: Historically, markets anticipate the Fed's actions. Whether it's a potential rate hike or a new policy announcement, traders and investors often position themselves based on expectations. This anticipatory behavior can lead to significant market movements before the decision is announced.
Accuracy of Anticipation: While markets strive to be predictive, they don't always get it right. The collective sentiment, driven by factors from economic data to global events, can sometimes miss the mark. In some instances, markets might overreact or underreact to anticipated Fed decisions, leading to corrections once the actual decision becomes public.
The Reflection of Collective Sentiment
Market as a Barometer: The market is often seen as a reflection of collective investor sentiment. Every buy or sell decision aggregates to depict a broader picture of how investors perceive economic health and prospects. This sentiment becomes even more pronounced when the Fed is expected to make a significant announcement.
Not Always Right: A common misconception is that the market is always right. However, the market essentially reflects what everyone thinks, and collective thinking is not infallible. External factors, misinformation, or herd mentality can sometimes skew market reactions, leading them astray from economic fundamentals.
The Role of External Influences
Global Events: In an interconnected global economy, events outside U.S. borders can influence market reactions to the Fed's decisions. For instance, economic turmoil in a significant trading partner or geopolitical tensions can amplify or dampen market reactions.
Media and Communication: How the Fed's decisions are communicated to the public and the narratives built around them by financial media can significantly influence market sentiment. Clear, transparent communication from the Fed can lead to measured market responses, while ambiguity can result in volatility.
In Conclusion
We should only focus on what is knowable and important. Even if we could know the FED interest rate hikes or downgrades would be in advance, it wouldn’t be useful for predicting stock prices.