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Lindley Estes is a business writer for The Free Lance-Star and Fredericksburg.com. This blog is on Fredericksburg-area business. Send an e-mail to Lindley Estes.

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Is “Don’t Fight The Fed” a good investment strategy?

This is my investment column for the week.

I DO NOT consider myself a follower of CNBC’s Jim Cramer, but I do think he is a smart and entertaining man who does a good job explaining the stock market to the general population.I wouldn’t encourage people to follow Cramer’s stock picks, partly because they tend to change rapidly but mostly because investors should do their own research if they want to buy individual stocks (for the rest, index funds are a good choice).

But a lot of Cramer’s explanations on economic trends and company-specific results make a lot of sense. This was the case during Thursday night’s show, which I happened to catch.

Thursday’s show followed a more than 200-point rally in the Dow Jones Industrial Average that trading day. Cramer’s explanation: The rally was due to the Federal Reserve’s dedication to kick-starting the economy through “quantitative easing.”

The Fed announced this week that it would be adding another $600 billion to its $2.3 trillion balance sheet. The goal is to lower interest rates and encourage lending.

All that money sloshing around in the system has to go somewhere, Cramer said, and that place is likely stocks. So rather than “fight the Fed,” Cramer said, investors should hop in for the ride. It’s not investors’ job to critique the decisions of the Fed, which many think could lead to runaway inflation. Rather it’s their job to simply try to make some money.

Cramer’s argument makes a lot of sense. The Fed wants to see the stock market rise, as that makes people feel wealthier. When you feel wealthier you’re more likely to go out to eat, buy some clothes and maybe even think about getting a new car or house. Psychology plays a big role in getting the economy turned around.

Might these Fed decisions lead to rampant inflation when the economy regains its footing? Perhaps. Even if that should occur, stocks are likely a better bet than bonds. Cramer’s advice: Enjoy the rally while it lasts.

Good year coming?

Here’s one more potentially bullish indicator for stocks: Market gains in the third year of the presidential cycle tend to be strong, according to a recent report by Wells Fargo Advisors. Government bonds tend to lag during that year.

Stock returns since 1950 have been especially strong from the fourth quarter of the midterm election year (which we’re now in) through the first quarter of the post-election year (through March 31).

But as you might expect, the Wells Fargo report included the standard disclaimer that everyone betting on a continuation of this trend should remember:

“Past performance is not an indication of future results.”

Permalink: http://news.fredericksburg.com/businessbrowser/2010/11/07/is-dont-fight-the-fed-a-good-investment-strategy/

  • LarryG

    there are some statements that don’t add up here. Interest rates are already very low. The reason why interest rates is low is at least in part because the demand for loans is not high because most companies and most small businesses themselves are not seen strong demand for goods and services and this is because there are a lot of people out of work and a lot more people working for much lower wages than normal times and that means less discretionary income for them to spend on stuff.

    So…. “investing in the stock market” really only makes sense if you are a person who already has funds to invest to start with. The average person has lost big on their 401Ks and many folks have lost their jobs and are working for less money and have less available not only for discretionary but putting into their 401ks.

    Cramer, bless his heart, clearly does not understand the circumstances of many who are work-a-day folks who are not members of the “investment class”.

    Even in the Fredericksburg Area with it’s plethora of govt jobs, the economy is in distress with many business closings and a LOT of empty… office space.

    A long time ago, I was advised that I should not put money in the stock market that I could not afford to lose – that even “safe” stocks and industries could only really be identified by people whose job was stocks and bonds 24/7 and the average casual investor was playing with fire.

    Now… we say… that our retirement – the money we need to pay our living expenses when we no longer work – that – that money should be in the stock market instead of savings accounts.

    I would posit that in the last 10 years – those who had their money in savings accounts or govt securities came out better than those in the stock market.

    I don’t think the folks in the stock market including Cramer have learned a thing from what has happened in the last 2-3 years.

    I think we are fundamentally changed and the stock market has become an esoteric critter that is not really representative of the main street economy any more..

    I would say that the average person who is really not a 24/7 investor should be afraid – very afraid of putting their money into this stock market.

    My view is that the only people who should be “in” the stock market are those that can and are willing to monitor the markets 24/7 and prepared to take actions frequently to mitigate risk.

    That’s not an good investing environment for the average person.