This is a simplistic, but highly useful, Wall Street investment guide that strongly recommends that you adjust your portfolio’s balance among Stocks, Bonds, and Cash in harmony with the Federal Reserve’s (“The Fed’s) monetary policies. This market wisdom was mentioned in Martin Zweig’s book “Winning on Wall Street” published in 1970. Still worth reading today.
When the “Fed” is pursuing an easy money policy, as they have been for most of the years since the financial crisis of 2008-2009, it was best to emphasize growth and speculative stocks, over bonds and cash.
In mid 2021, the easy money policies, together with covid lockdowns, and international supply chain issues, were causing increases in consumer, commodity and many other asset prices.
Since one of the major goals for the Fed is to maintain “price stability” rising inflation is a major problem for them. In response to these pressures, which they considered “transitory” in mid 2021, the Fed indicated it would probably have to slowly reduce its easy money-stimulus programs in the coming months.
By year end, it was painfully obvious to most observers, including the Fed, that the inflationary factors, were much more pervasive and they would have to deal more forcefully with the problem in coming months.
Early in the New Year of 2022, the Fed indicated it was going to have to deal more forcefully with the problem, with significant increases in interest rates in May, June and July.
To anyone watching the Fed’s monetary outlook, it was becoming clear that the era of above average gains in stocks was drawing to a close. That 2022 was not likely to be a positive year for stocks and bonds.
So the correct strategy at the beginning of this year might have been to increase cash holdings, and reducing percentages allocated to growth and speculative stocks and bonds.
With the exception of a few counter trend rallies, this has been good guidance. What will the balance of the year bring?
.Nothing is certain in market outlooks but it is still good advice:
“Don’t fight the Fed.”