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Fed Forecasts and Investor Mishaps

The can-do spirit dies hard in us Americans, and usually that’s a good thing. But when applied to investing, active energy is less advisable, especially if it involves trying to outsmart the market by chasing expert forecasts.

Hopefully, you’ve already figured out that you’re best off ignoring the garden-variety talking heads like Jim Cramer and his ilk as more flash than substance. But what about those super-powered Federal Reserve chairmen and chairwomen? If anyone could see what’s coming in the market, shouldn’t it be they, who not only have their finger on the pulse but are actually responsible for regulating the heartbeat of our financial being?

It may be tempting to think you can stay one step ahead of the market by heeding what Federal chairs have to say and trading accordingly. The problem is, just because a piece of market-impacting information may be more thoughtfully formed or more credibly sourced does not mean it is more helpful to a stock-picking or market-timing cause. Whether the advice is coming from fool or from sage, the collective market is still weighing each bit of incoming news with lightning speed and is still adjusting prices with relative efficiency, and nearly as instantaneously as the high-frequency traders’ computer networks will allow (which is really, really fast).

Princeton Professor and Wealthfront CIO Burton Malkiel is best known as author of A Random Walk Down Wall Street, the 1973 classic now in its 11th edition and still essential reading for anyone who wants to understand the underlying principles of efficient investing, as summarized above. Malkiel’s recent op-ed in The Wall Street Journal helps us further understand why placing trades in reaction to Federal Chair commentary remains as impractical as responding to a sensationalistic “Booyah!” call to action.

In his op-ed, Malkiel reports on Federal Chairwoman Janet Yellen’s recent comments that pricing seems “quite high,” in the stock market in general, and among bio-tech and social media stocks in particular. He also reminds us of Chairman Alan Greenspan’s similar 1996 “irrational exuberance” statements. In both cases, he describes how investors who reacted to either chairperson’s comments by panic-selling their supposedly overpriced stocks were unlikely to be better off for the trades.

Malkiel concludes: “At some point biotech stocks will endure a ‘correction,’ but neither the Fed nor professional investors know when or how severe it will be.” What we do know, he explains, is that “investors generally move money in and out of the stock market at exactly the wrong times. For the Fed to appear to encourage this kind of behavior is a very bad idea.”

Former Chairman Ben Bernanke certainly received his fair share of investor attention as well, especially during and after the 2007–2008 financial crisis, as the public sought to read the market’s tea leaves based on his economic forecasts. As Bloomberg’s Caroline Baum observed in June 2013, “[Bernanke] said too much. He said too little. He should have said nothing at all. He was too blunt. Too indecisive. He should have reassured the markets. ... Poor Ben. This is one tough audience – especially when it’s on the wrong side of a trade.”

Even more bluntly than Malkiel, Baum commented: “Grow up, people. It’s time to stop blaming Bernanke for your losses. Either you weren’t listening or you heard only what you wanted to hear.”

According to its own “In Plain English” report, the Federal Reserve is charged with “fostering a sound banking system and a healthy economy.” As an investor, you are charged with dedicating your energy to efficiently capturing the market’s long-term growth. That means, at least as they relate to investment management, you are best off ignoring near-term forecasts, regardless of the source. Whether you agree or disagree with their actions, asking the Feds to inform you on how and when to trade in pursuit of your particular goals is like asking a gastroenterologist to examine your head. Similar areas of expertise, way different body parts.

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