Don’t fight the Fed
The expression ‘Don’t fight the Fed” means that your investment choices should be aligned with the Fed’s policy. When rates are low or being lowered, invest aggressively. When rates are high or going higher, select more conservative investments. Today the Fed announced it would be easing its bond buying, This is a first step in pulling back its support of the economy. It means it is likely there will be one, or perhaps two, interest rate increases next year. The market was relieved, it slid up to record closes and everyone just moved on to the next shiny object.
Do we have to worry about interest rates then? Not yet. The Fed usually increases interest rates at a rate of .25%. This means that if we have two increases next year, we will still be below 1%. This means stocks will continue to be an attractive investment into next year, and probably beyond. Like they say, There is No Alternative (TINA).
That said, it is not the time to go all in to the market. Prices are very high, particularly on tech and other perceived growth stocks. Traders like to say, “Its a stock picker’s market,” but that is not true. Index funds are still beating stock pickers by a solid margin, and mostly because the stock selector’s fees eat into returns. Paying someone to manage your money when the stock market is returning 8% is fine, they can have their 1-2% and you still have 6-7%. But if returns are closer to 4%, you lose half your returns to fees. Since investing well relies on compounding, you also have less capital to compound so you lose twice over. So it is time to be smart about what to invest in.
Stocks with high P/Es tend to be stocks that are assumed to have great growth prospects. This could be because they have been growing well in the past, and/or promise to do well in the future. Be careful of these stocks. When the market is at a high like it is, and the Fed has given the ‘all clear’ for the foreseeable future, it is tempting to look to the stocks that have performed well to hope to ride that momentum higher. This is a sound strategy and it has worked for many years now in our low interest environment. But as interest rates begin to rise next year, there will be a market re-set and these high growth, popular stocks may be in for some flat years ahead. Better to look for stocks that may have been overlooked in the growth frenzy of the last few years. Lower P/E stocks, with strong financials and cash flow, and better still with solid dividends, may offer better returns as the market climate begins to chill.
Market Today: Market was up with the Fed treading the needle perfectly. Closed mostly puts. Wrote mostly calls. Four ‘day trades’ - that is opened and closed the contract today. United Rentals (URI) continues to work, as does Shopify (SHOP) and Upstart (UPST). Although the latter should be handled carefully and you need to pay attention - it is risky. It is not a set and forget like Crowdstrike (CRWD) which paid again today. 10.4