The Federal Reserve has a glorious history of hurting investors
Abridged from Nigam Arora at MarketWatch
Investors would have to be stupid to ignore the Federal Reserve’s history of causing pain. But that is exactly what momentum investors are doing now. History repeats itself, but human nature being what it is, many investors do not learn.
Let us explore, starting with a chart that spans 64 years. This is a particularly useful exercise, given that the Fed increased interest rates Wednesday and plans for two more later this year.
Please notice the following from the chart:
• The chart shows nine instances of recession.
• The chart shows that all instances of recession occurred when the Fed was either raising interest rates or had raised interest rates.
• The chart shows that, since 2009, the Fed has kept interest rates artificially low. Of course, you already know that the bull market in stocks started in 2009, coinciding with artificially low interest rates.
• The chart shows that interest rates are now rising.
The stock market and recessions
Historically the stock market starts weakening six to nine months before a recession starts. Recessions cause bear markets in stocks. When a bear market starts, it is difficult to know how much lower stocks can go. In the Great Recession of 2008, many investors lost half of their money.
For this reason it is extremely important for investors to keep a close eye on the prospects of a recession and the Fed’s policy. The Fed is prone to repeat its historical mistakes and cause investors significant pain.