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Street Signs:  Don't Fight The Fed

January 21, 2020

My fascination with the Federal Reserve dates back to high school when I first visited the Federal Reserve Bank of Dallas with my dad. Somehow, at the tender age of 16, I was asked to give a speech on Free Trade when the scheduled college student was unavailable to present their own dissertation. As Woody Allen once said, 90% of success is just showing up.


What does the Federal Reserve Do? 

The Federal Reserve oversees the nation’s money supply - they can increase it to stimulate growth or decrease it to control inflation. Think of the Federal Reserve as creating a headwind or a tailwind for the economy. You can still progress into a headwind, but it might take a little longer to get where you are going.

Since the financial crisis of 2008, the Fed had been busy creating a tailwind. Their favorite mechanism for this has been buying bonds in exchange for cash. This is known as Quantitative Easing (QE). These bonds then sit at the Fed until they mature. This process has swelled the Fed’s balance sheet from $922 billion pre-crisis to nearly $4.2 trillion today. Lately the Fed insists it is not conducting QE despite some evidence to the contrary.

Fed Balance Sheet 3 Month Nominal Change graph

There is an old saying on Wall Street: Don’t fight the Fed.

At Deupree James Wealth Management we don’t rely on heuristics to protect and grow your wealth. Our financial advisors practice evidence-based investing so we can help you make smarter financial decisions. So, as always, we investigated for ourselves.

We studied the changes in the Fed’s balance sheet and believe “Don’t fight the Fed” is one handy rule of thumb. Investors have enjoyed higher returns with lower risk of losses when the Fed is accelerating its balance sheet expansion. However, investors are more vulnerable when the Fed is slowing its pace of stimulus.

Past 3 Month ROC in Fed Balance Sheet graph

 

What does Deupree James suggest?


We always encourage investors to use a multi-factor approach. However, this Street Sign is suggesting the first quarter of 2020 may not be as kind to investors as the last quarter of 2019. For the first time since August 2019 we observe a negative rate of change in the Fed’s balance sheet. In other words we have a headwind. Given this and our other Street Signs, we favor late-cycle investments such as high-quality stocks, bonds, and some commodities.

Have a question about your specific situation?

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This market commentary is for informational purposes only. Please contact your financial advisor for advice about your specific situation. Past performance is not indicative of future results.

Securities offered through Triad Advisors, LLC. Member FINRA/SIPC. Investment advice offered through Goss Advisors, a registered investment adviser. Goss Advisors and Deupree James Wealth Management are separate entities from Triad Advisors, LLC.