Stock market vs Fed

General Discussion on the Permanent Portfolio Strategy

Moderator: Global Moderator

Post Reply
User avatar
jalanlong
Executive Member
Executive Member
Posts: 829
Joined: Mon Jul 01, 2019 7:30 am

Stock market vs Fed

Post by jalanlong » Wed Apr 06, 2022 11:34 am

The stock market has been down this year for several reasons but mostly because of tough talk from the Fed about curbing inflation by raising rates and letting the bonds on their balance sheet roll off. One comment by a Fed official yesterday has caused almost a 4% slide in the S&P 500.

For those people who know history a lot better than I do, has Fed policy always dictated the movement of stocks this dramatically? Or in the "good old days" did stocks depend a lot more on their intrinsic value then they do now?
User avatar
I Shrugged
Executive Member
Executive Member
Posts: 2062
Joined: Tue Dec 18, 2012 6:35 pm

Re: Stock market vs Fed

Post by I Shrugged » Wed Apr 06, 2022 12:42 pm

I'm not sure. But if you go back far enough, then the answer is obviously that it was more about the stocks themselves.

The maxim that in the short run, the stock market is a voting machine, and in the long run, it's a weighing machine, I'm not sure about that any more. It only seems like a voting machine.
Kbg
Executive Member
Executive Member
Posts: 2815
Joined: Fri May 23, 2014 4:18 pm

Re: Stock market vs Fed

Post by Kbg » Wed Apr 06, 2022 1:41 pm

Fed policy has a significant impact on the economy and business which is why so much attention is given to what they do.

The Fed can have a huge impact on the stock market but it's not like someone at the Fed is waving a wand or rubbing a lamp and saying "Stock Market go down" and poof it happens. Weirdness is what happened between 2008 and 2020. Free market forces were seriously stifled by the Fed with their bond buying actions. The now well known "Fed Put."

What's going on now is a good old fashioned re-accounting and readjustment of asset prices resulting from inflation and rising interest rates...as interest rates go up money reallocates to bonds (to a degree) and the cost of capital gets more expensive. Both make stocks comparatively less attractive vs. other assets.

And for us who are older...kid, this ain't nothin. When indexes are down 40%+ and individual stocks way beyond that and you are in year 3 of a bear market with back to back 20% losses your definition of dramatic will be different.

Hate to be Bogelesque...but if you are younger, stay they course, stay invested and keep your monthly buys going. This will be without fail a benefit to you. I always tell my kids this with their investments; If you walk into Walmart and everything in the store is -20% from three month's ago are you buying or walking out the door? If you don't have to worry about drawdown sequence, there is one correct answer: Buy.
Don
Executive Member
Executive Member
Posts: 286
Joined: Fri Apr 21, 2017 6:21 pm

Re: Stock market vs Fed

Post by Don » Thu Apr 07, 2022 7:52 am

Kbg wrote:
Wed Apr 06, 2022 1:41 pm
Fed policy has a significant impact on the economy and business which is why so much attention is given to what they do.

The Fed can have a huge impact on the stock market but it's not like someone at the Fed is waving a wand or rubbing a lamp and saying "Stock Market go down" and poof it happens. Weirdness is what happened between 2008 and 2020. Free market forces were seriously stifled by the Fed with their bond buying actions. The now well known "Fed Put."

What's going on now is a good old fashioned re-accounting and readjustment of asset prices resulting from inflation and rising interest rates...as interest rates go up money reallocates to bonds (to a degree) and the cost of capital gets more expensive. Both make stocks comparatively less attractive vs. other assets.

And for us who are older...kid, this ain't nothin. When indexes are down 40%+ and individual stocks way beyond that and you are in year 3 of a bear market with back to back 20% losses your definition of dramatic will be different.

Hate to be Bogelesque...but if you are younger, stay they course, stay invested and keep your monthly buys going. This will be without fail a benefit to you. I always tell my kids this with their investments; If you walk into Walmart and everything in the store is -20% from three month's ago are you buying or walking out the door? If you don't have to worry about drawdown sequence, there is one correct answer: Buy.
And what if you're older?
User avatar
Mr. Contrary
Junior Member
Junior Member
Posts: 3
Joined: Thu Apr 07, 2022 9:00 am

Re: Stock market vs Fed

Post by Mr. Contrary » Thu Apr 07, 2022 9:06 am

Don wrote:
Thu Apr 07, 2022 7:52 am
Kbg wrote:
Wed Apr 06, 2022 1:41 pm
Fed policy has a significant impact on the economy and business which is why so much attention is given to what they do.

The Fed can have a huge impact on the stock market but it's not like someone at the Fed is waving a wand or rubbing a lamp and saying "Stock Market go down" and poof it happens. Weirdness is what happened between 2008 and 2020. Free market forces were seriously stifled by the Fed with their bond buying actions. The now well known "Fed Put."

What's going on now is a good old fashioned re-accounting and readjustment of asset prices resulting from inflation and rising interest rates...as interest rates go up money reallocates to bonds (to a degree) and the cost of capital gets more expensive. Both make stocks comparatively less attractive vs. other assets.

And for us who are older...kid, this ain't nothin. When indexes are down 40%+ and individual stocks way beyond that and you are in year 3 of a bear market with back to back 20% losses your definition of dramatic will be different.

Hate to be Bogelesque...but if you are younger, stay they course, stay invested and keep your monthly buys going. This will be without fail a benefit to you. I always tell my kids this with their investments; If you walk into Walmart and everything in the store is -20% from three month's ago are you buying or walking out the door? If you don't have to worry about drawdown sequence, there is one correct answer: Buy.
And what if you're older?
I think "stay the course" still applies, but you shouldn't be that exposed to stocks anyway if you are older. In a permanent portfolio, you probably wouldn't be down more than a few percent, if at all.
Don
Executive Member
Executive Member
Posts: 286
Joined: Fri Apr 21, 2017 6:21 pm

Re: Stock market vs Fed

Post by Don » Thu Apr 07, 2022 10:33 am

Mr. Contrary wrote:
Thu Apr 07, 2022 9:06 am
Don wrote:
Thu Apr 07, 2022 7:52 am
Kbg wrote:
Wed Apr 06, 2022 1:41 pm
Fed policy has a significant impact on the economy and business which is why so much attention is given to what they do.

The Fed can have a huge impact on the stock market but it's not like someone at the Fed is waving a wand or rubbing a lamp and saying "Stock Market go down" and poof it happens. Weirdness is what happened between 2008 and 2020. Free market forces were seriously stifled by the Fed with their bond buying actions. The now well known "Fed Put."

What's going on now is a good old fashioned re-accounting and readjustment of asset prices resulting from inflation and rising interest rates...as interest rates go up money reallocates to bonds (to a degree) and the cost of capital gets more expensive. Both make stocks comparatively less attractive vs. other assets.

And for us who are older...kid, this ain't nothin. When indexes are down 40%+ and individual stocks way beyond that and you are in year 3 of a bear market with back to back 20% losses your definition of dramatic will be different.

Hate to be Bogelesque...but if you are younger, stay they course, stay invested and keep your monthly buys going. This will be without fail a benefit to you. I always tell my kids this with their investments; If you walk into Walmart and everything in the store is -20% from three month's ago are you buying or walking out the door? If you don't have to worry about drawdown sequence, there is one correct answer: Buy.
And what if you're older?
I think "stay the course" still applies, but you shouldn't be that exposed to stocks anyway if you are older. In a permanent portfolio, you probably wouldn't be down more than a few percent, if at all.
Including inflation, you'd be down in double digits.
Kbg
Executive Member
Executive Member
Posts: 2815
Joined: Fri May 23, 2014 4:18 pm

Re: Stock market vs Fed

Post by Kbg » Thu Apr 07, 2022 5:14 pm

Don wrote:
Thu Apr 07, 2022 7:52 am
And what if you're older?
If you are on this board then a couple premises of the PP are that people are horrible at predicting and we do not know the future. I accept both in my investing approach. If you accept the above and are retired or nearing retirement then hopefully you are aware of safe withdrawal rates. SWR are ultimately a big (and pretty darn complex backtest) with no guarantee of history repeating itself. However, there's some pretty crazy economic periods covered which means there are some pretty good stress cases in the data. Not a total future proof approach, but definitely better than making something up. Accordingly, you should have a portfolio allocation by now and a matching SWR...and to be very clear you can't tinker with the former without adjusting the latter. They are inextricably linked. (and we all hope SHTF doesn't happen in our lifetimes). That's the best we can do.

There's quite a bit of evidence that your allocation doesn't really matter all that much once you are retired within a fairly broad range of possibilities.

If you want to get into the above, deep...head over to earlyretirementnow.com. It's not easy reading but I am unaware of any other place that deals with SWR as comprehensively, transparently and completely data (vs. opinion) based.

IIRC he's even done some analysis using the PP allocation...spoiler alert, it's not a particularly good option compared to other allocations.
dockinGA
Executive Member
Executive Member
Posts: 245
Joined: Tue May 04, 2021 9:29 am

Re: Stock market vs Fed

Post by dockinGA » Thu Apr 07, 2022 7:22 pm

Kbg wrote:
Thu Apr 07, 2022 5:14 pm
Don wrote:
Thu Apr 07, 2022 7:52 am
And what if you're older?
If you are on this board then a couple premises of the PP are that people are horrible at predicting and we do not know the future. I accept both in my investing approach. If you accept the above and are retired or nearing retirement then hopefully you are aware of safe withdrawal rates. SWR are ultimately a big (and pretty darn complex backtest) with no guarantee of history repeating itself. However, there's some pretty crazy economic periods covered which means there are some pretty good stress cases in the data. Not a total future proof approach, but definitely better than making something up. Accordingly, you should have a portfolio allocation by now and a matching SWR...and to be very clear you can't tinker with the former without adjusting the latter. They are inextricably linked. (and we all hope SHTF doesn't happen in our lifetimes). That's the best we can do.

There's quite a bit of evidence that your allocation doesn't really matter all that much once you are retired within a fairly broad range of possibilities.

If you want to get into the above, deep...head over to earlyretirementnow.com. It's not easy reading but I am unaware of any other place that deals with SWR as comprehensively, transparently and completely data (vs. opinion) based.

IIRC he's even done some analysis using the PP allocation...spoiler alert, it's not a particularly good option compared to other allocations.
I think I found the article you're talking about. It's a good writeup, but unfortunately he's including the period when gold was illegal to hold and didn't fluctuate much if at all against the dollar. Everyone can argue for days about how to treat PP/GB backtests from that period, but it certainly isn't very representative of how this portfolio has behaved since the mid-70s.

https://earlyretirementnow.com/2020/01/ ... s-part-34/

What I find interesting is that excluding the 1930's/40's (both 30 year periods almost exclusively covering the period when gold price wasn't floating) the PP holds up fairly well.
User avatar
Xan
Administrator
Administrator
Posts: 4392
Joined: Tue Mar 13, 2012 1:51 pm

Re: Stock market vs Fed

Post by Xan » Thu Apr 07, 2022 8:53 pm

dockinGA wrote:
Thu Apr 07, 2022 7:22 pm
I think I found the article you're talking about. It's a good writeup, but unfortunately he's including the period when gold was illegal to hold and didn't fluctuate much if at all against the dollar.
Definitely strange to include any of that time at all. The current dollar that's the cash quadrant of the PP didn't exist until gold was decoupled from the dollar in the 70s. (Or I guess you could say that it's gold that "didn't exist" in that it wasn't separate from the unit of account.)

Tyler has an item about this:
Why are the long-term returns for gold so low?
which includes this graph:
Image
Tyler wrote:Here you can very clearly see the problem with mixing gold datasets before and after 1971. They may both be called “gold” but they track completely different assets following very different rules.
Kbg
Executive Member
Executive Member
Posts: 2815
Joined: Fri May 23, 2014 4:18 pm

Re: Stock market vs Fed

Post by Kbg » Fri Apr 08, 2022 9:26 am

He’s produced a publicly available spreadsheet where you can run scenarios til your heart is content using any mix of assets and start dates he has in the spreadsheet. Doesn’t change the message on gold though. The problem with gold is it is a complete performance boat anchor when weird stuff isn’t going on which is the large majority of the time (70-80% ish).

I think for really long periods of time it is very difficult to make a case for gold, way too much drag. Depending on starting dates and length of holding period you can.
Post Reply