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