Don’t Get Fed Up
Fed watching is an unreliable input into investment decisions because the Fed’s expected actions are already reflected in market prices.
Ask investors what kind of return they expect out of stocks in any given year, and many will respond with the market’s historical average return. For the S&P 500 Index from January 1926 through December 2023, that has been a little over 12%. Unless you have a crystal ball, that is a reasonable guess in any given year.
And yet, history shows us what we end up getting from stocks is likely to be far from the average. Since 1926, only 15 out of 98 years had returns within five percentage points of the 12.2% average. In the other 83 years, the average deviation was over 18 percentage points. Talk about an uncommon average!
Actual returns can deviate from expected returns because information and circumstances change. If the news is better than expected, markets may go up. Of course, the reverse is true if the news is disappointing. In a world with so many potential sources of news (the economy, elections, geopolitical conflict), it should not be surprising that we often receive returns either much higher or lower than the long-run average.
Shaded area is the range spanning the long-term average, plus or minus 5%. In USD. S&P data © S&P Dow Jones Indices LLC, a division of S&P Global. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.
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Fed watching is an unreliable input into investment decisions because the Fed’s expected actions are already reflected in market prices.
During a presidential election year, investors tend to seek a connection between who wins the White House and which way stocks will go.
What do you do if you receive a big bonus at work, inherited some money or enjoyed a recent windfall you would like to invest?
Unfortunately, as human beings, we are prone to behavioral tendencies and mental shortcuts that do not always work in our favor.