Personal Wealth Management / Expert Commentary

Fisher Investments Reviews the Market Impact of Central Bank Decisions

Fisher Investments’ founder, Executive Chairman and Co-Chief Investment Officer, Ken Fisher, examines the historical market impact of central bank policy decisions. According to Ken, central bank policy is widely discussed and pre-priced by markets. Therefore, Ken believes it’s better to let others do the worrying because what central bankers do shouldn’t affect stocks much.

Ken also says the conventional wisdom that rate hikes are bad for stocks is wrong. Today’s bull market began amidst a rate hiking cycle and has thrived despite higher rates. Conversely, Ken notes central bank cuts have not been overwhelmingly positive for stocks, as they typically occur too late amidst a weak economy. Instead of dwelling on what central banks may or may not do, Ken suggests focusing on what everybody else isn’t worried about, as surprises tend to move stocks the most.

Transcript

Ken Fisher:

So, I can't tell you how annoying it is to me when I say all the things that I always say. And if you've heard me before many times, you've surely heard me say, many times, that largely you should ignore all of the ongoing chatter about central banks and what they're going to do and what they might do. And what if they do this instead of that? And what are the betting markets saying that they're about to do? And if they don't do that, might they do this? And what impact would that have?

This is all just in terms of rational decision making and markets utter nonsense. The fact of the matter is it's best ignored. It's always best ignored. Is there a time and a place where that might be wrong? Yes. Can you figure that out in advance? No. Therefore, it's not really wrong. The fact is, anything that everyone's focusing on— central bank or not? Interest rate or not? If they're all focusing on it, you shouldn't be wasting your time on it. They're doing it for you.

They're worrying about, for good and for bad, this thing that everybody's worried about. So it's as effectively priced as it could be in the marketplace. First, if you think you can outthink all of them, you really don't understand how markets work because markets pre-price. They take everybody's fears about all the things we talk about and they fit them into today's pricing.

The fact is, and I've said this forever, I won't live forever but I hope to live a long time. And so I'll be saying it for a long time, I hope. Central bankers be crazy. The fact of the matter is, in the history of central banks, all my life, central banks operate off of spurious notions with groupthink, which again, is an inefficient way to deal with marketplaces. I've written about this so much, for so long that I always find it annoying when people ask me, what if the central bank does this instead of that? All this stuff's priced.

Now, let me just go to a different point here. Just think back over the last couple of years. If you look at when central banks raised rates, if you had used the common motif that most people believe, which is when the Fed and other central banks hike rates, you got to get out of stocks. That would have helped you for a couple of months in 2022. And by the time you got to the middle of the summer in 2022 and into the earnest part of the rate hiking, it would have put you on the wrong side of the market the whole time.

Because from June of 2022 on, when the Fed started hiking rates 75 basis points at a crack almost every month, we're only a couple of months away from the market going up, and the beginning of the bull market that we're currently in, as I speak in 2024. And the fact of the matter is, the basic common wisdom that says central bank hikes got to be bad for stocks, because it was common wisdom, was wrong from the beginning because it was already priced. And as soon as everybody could see central bank hikes coming in front of them, those had already been priced into the marketplace. We got a bull market starting at the beginning of October of 2022. This is a robust bull market in the face of central bank hike after hike after hike after hike after hike.

Flip that on its head. The actual history—and I'm not making a forecast here— the actual history of when central banks have cut rates have been reacting to what they've seen too late as a bad economy. And in that, a falling stock market. Central bank cuts have not been overwhelmingly bullish.

Now, all this nonsense started in an overwhelming sense in the middle of the 1970s, when there had been a period of time from the 60s into the middle of the 1970s, when actually central bank hikes and cuts seemed to work. And that led to this motif that became very popular at the time, led by the phrase, "don't fight the Fed." And the "don't fight the Fed" notion has since then always been wrong.

But the mythology of it, human mythologies die slowly once they get created it makes so much sense to most people that if the central bank hikes rates, that should pull money out of stocks. If they cut rates, money should go into stocks. But the actual correlation of that, the statistical correlation of it is not there to demonstrate that as an efficacious way to proceed.

It just isn't. The fact of the matter, a lot like this bull market, most of the time the fear of the rate hikes was already in the market by the time the rate hikes happened, and the bull market would be off and running.

When you get to the Fed this next cycle, cutting whenever they cut, which might be by the time you see this visual. The fact of the matter is, it's also one of them. They're pointless things that you shouldn't put a lot of time into worrying about, thinking about, getting excited about. Because first, central bankers be crazy. They don't know what they're going to do. They rarely understand what they just did.

A lot of what they think will work won't because they like in the Fed, the US Federal Reserve, they got 300 PhD economists, all of whom were trained the same way, almost all of which doesn't really apply to the real world. It's a kind of, I mean, I was taught in all that stuff when I was young, and very early on I learned that's what I was trained in. I learned this stuff doesn't work in the real world, and I'm trying to figure out what's going to happen. It just doesn't.

So I'm going to go back and revert to my point before. Ignore all the chatter about what central banks are going to do. Up, down, this month, next month, three months from now, what the betting markets say they'll do. It's already in stock prices as best as it can be figured. Anything that everybody worries about, you shouldn't. You should focus on what everybody else isn't worried about.

That's the area where there might be surprises. That's the area where there's payoffs. But whatever everybody's focused on and you can come up with so many of these, whether it's politics, geopolitics, interest rates, tax policy, this, that or the other, none of them actually have forecasting capability for stocks because what everybody else worries about is already in the stock price. Thank you for listening to me. I hope you found this useful and educational.

Voice of Ken Fisher:

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