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Market Crash: Federal Funds Rate 2004

Posted by kdadmin on September 14th, 2015.

Market Crash: Federal Funds Rate 2004

Have a look at this graph from 2004. What does it tell you about the relationship between the Federal Funds Rate and the S&P 500?

In just a few days, the Federal Reserve will meet and make an announcement about the future of the Federal Funds Rate. Wouldn’t you like to know what this means for your portfolio?

If it’s anything like 2004, it means DOOOOOOOOOOM for your stock portfolio. Back then, the Feds raised the Federal Funds rate by 0.50% in seven and a half weeks. The stock market responded by dropping 6.5% over those same weeks. The Fed continued, undaunted, for a few years until they, well, went too far … But more on that later.

Now, it could mean win, lose, or draw for your bond portfolio; depending upon things like duration, maturity, interest rate, and discount price. Maybe this sounds boring. But, in 2004, some bonds actually made 5% during these same seven and a half weeks, while others stayed flat.

NOW, if the Federal Reserve does NOT raise interest rates immediately, things will likely go the other way, at least in the short term; with stocks briefly running up and bonds cratering. But it’s not likely to last. The Federal Reserve simply has to increase the rates in the near term or risk rising unemployment and/or a host of other nasties. They will meet again in about seven weeks.

The real booger about all of this is that you can’t just use amateurish tools like dollar cost averaging, buy and hold, or broad asset allocation. Don’t believe me? Just look at the simply HUGE amount of money sitting in cash in many global funds. If you buy too early, your stock portfolio could get borked. If you buy too late, you could miss the bond rally. If you buy the wrong bonds, you could get clobbered by a Bond Bubble. If you do nothing, inflation will get you; albeit slowly. This is NOT an economy in which you can just mash your money into some target year fund and forget about it. That was 1999, and 2007. Well, you can, but remember what happened in 2000 and 2008?

Bottom Line: If you’re managing your own money, you had better have a plan for the instant the Fed makes their announcement. If you’ve hired a pro, make sure they have a plan. If you have neither, contact me.


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