‘Don’t fight the Fed’: Wall Street’s old mantra is making a comeback — but now it takes on a whole new meaning

In the years after the Great Financial Crisis devastated the US economy in 2008, Wall Street fell in love with an old mantra: “Don’t fight the Fed.”

The phrase was coined in 1970 by Martin Zweig, a prominent finance professor and investor, to explain the close correlation between Federal Reserve policy and the direction of the stock market. .

It’s a simple idea that goes like this: When the Federal Reserve’s monetary policy is eased, the market tends to move higher, volatility is reduced, and investor risk is reduced. limited, so it makes sense to continue investing and ride out the wave. Why “against the Fed” by selling stocks when it’s on your side?

Investors understood this dynamic well during the recovery from the US housing bubble burst, buying stocks massively while the Fed kept interest rates close to zero and introduced a policy called quantitative easing—Where it buys mortgage-backed securities and U.S. Treasuries to increase the money supply in hopes of boosting lending and investment.

Loose central bank policies have helped bring second longest bull market in the history of the S&P 500 from March 9, 2009 to the COVID-19 bear market in 2020, leaving investors in the blue-chip index with a 400% return.

However, now, with inflation becoming persistent problem in the US and around the world, Fed officials have taken a new stance. And this is less attractive to investors.

The central bank has raised interest rates four times this year, and started shrink its balance sheet after years of quantitative easing pushed holdings to nearly $9 trillion. Its goal is to cool the economy and reduce inflation, but efforts have so far been fruitless.

On Tuesday, the Bureau of Labor Statistics revealed that inflation is once again surprised in August, an increase of 8.3% over the same period last year. Although gasoline prices have fallen 10.6% for the month, economists remain concerned about rising core inflation, excluding volatile food and energy prices.

As a result, Bank of America economists said on Wednesday that they believe the Fed will raise interest rates by 75 basis points at their next meeting. And Nomura economists have even argued that a 100 basis point rate hike could be on the cards.

A whole new meaning

For the founder of the Satori Fund, Dan Niles, another rate hike that means “don’t fight the Fed” takes on a whole new meaning.

With the Fed Chairman, Powell said that his inflation battle now is “unconditionalWall Street’s favorite mantra is now a warning to avoid stocks, or at least take a more cautious approach to investing.

“Don’t go against the Fed and don’t go against the fundamentals,” Niles told CNBC on Monday, warned investors that any stock market rally that comes amid a tight Fed capital is nothing more than a market trap for investors.

Niles, who has a master’s degree in electrical engineering at Stanford and worked for Lehman Brothers, has argued since December that investors should keep a large portion of their portfolios in cash, and he repeated that call this week.

“I think for the retail investor who can’t trade their portfolio on a daily basis, you’re better off losing, as we’ve been saying consistently throughout this year, 5% to 7% of the time. with inflation, rather than potentially 30% to 50% a market decline that I think will continue next year,” he said.

hedge fund manager revealed in March that his fund has allocated 25% of its holdings to cash. He manages nearly $1.5 billion in assets as of April.

And on Monday, he said the fund has also added “a lot of shorts” to its holdings, particularly in “cloud-driven software names.”

By shorting a company, investors can make a profit when that company’s stock falls in price.

But Niles also holds a number of long positions, and he highlights one that in particular can work well during a recession, Walmartnote that the retailer outperformed its peers and the broader markets significantly during the Great Financial Crisis.

However, Niles is not optimistic about the stock market next year. Historically, when inflation, as measured by the consumer price index (CPI), is above 5%, the S&P 500 has traded at 12 times the income it generated year-over-year, he said.

Today, the S&P is trading at 19 times earnings with inflation at 8.3%, which means the stock is expensive on a historical basis. And on top of that, Niles believes corporate earnings will continue to fall this year as interest rates rise.

For investors, the hedge fund manager’s comment should be a warning to take a more cautious approach in this new environment of Federal Reserve policy, because “don’t go against the Fed.” “has a whole new meaning.

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