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“Don’t Fight the Fed” or “Don’t Fight the Tape”?

“Don’t Fight the Fed” or “Don’t Fight the Tape”?

Posted March 21, 2024
Steve Sosnick
Interactive Brokers

Many market veterans favor one of two mantras: “don’t fight the Fed,” and “don’t fight the tape.”  Like many time-tested market adages, there is a valuable element of truth in both.  The former tends to be more relevant for investors, the latter for traders.  But it is clear that “don’t fight the tape” is dominating decision-making for both.

When the FOMC released its latest Summary of Economic Projections, it showed a “dot plot” that continued to show a median estimate of three rate cuts in 2024 even as their GDP estimate rose to 2.1% from 1.4%.  More economic growth AND the continued prospect of rate cuts.  Why not be enthusiastic about that?   Traders could buy stocks without fighting either.

If the Federal Reserve, or other central banks, are accommodative, that typically helps asset prices.  If the banks are restrictive, then it can be a hinderance.   Even though the FOMC declined to cut rates and to reduce quantitative tightening yesterday, they once again acknowledged that they are poised to do both at some point in the near future.  Thus, even though their policies are currently neutral to restrictive, there is a valid reason to expect that those will shift to accommodative in the near future.  Investors are forward looking, and the roughly 80% probability that futures markets are assigning to a June rate cut affirms that viewpoint.

Thus, the prospect of accommodative policies has outweighed the current restrictive bias since stocks have been successfully fighting the Fed for over a year.  The carrot is outweighing the stick.

“Don’t fight the tape” refers strictly to trends and momentum.  When any tradeable asset enters a predictable trend – up or down – it behooves any trader or investor to respect the price action.  When the market is sending a clear message, one should listen – at least in the short-term.  Momentum stocks, and the funds that invest in them, have been big winners recently.  Betting against them, and a wide range of global markets that have been driven by uptrends, has been a painful task.  It is difficult to recall an environment where so many market leaders have managed to keep such long winning streaks over such a long period of time.

Therein lies the problem with following trends.  It is perhaps the easiest strategy to execute, but trends can reverse sharply and unpredictably.   These trends have been particularly persistent – any given month’s winners have been likely to differ little from the prior month’s – but this is the sort of outcome that works until it stops working.  Some other adages come into play here: “trees don’t grow to the sky,” “no one ever went broke taking a profit,” and “be fearful when others are greedy and be greedy when others are fearful.”  It is tough, if not dangerous, to advocate fighting the current trends, but one must show healthy respect for considerations that some of the trends may be fully-, if not over-extended, and the degree to whether greed has potentially outpaced fear.  Taking some well-earned profits and/or considering hedges is far different than fighting the tape.

Yesterday, during a foreign media appearance immediately after Chair Powell’s press conference, I was asked a very probing question.  To paraphrase (and I only got the question in translation): “If the economy and markets are humming and inflation has improved but not yet at the Fed’s target, then why cut rates?”  I replied that it was exactly the sort of question that I would have posed at the presser.  Powell can reiterate his commitment to a 2% inflation target, but he and his colleagues seem willing to cut rates preemptively anyway.  If the goal of rate cuts is to stimulate the economy, it doesn’t seem to need much stimulation.  The goal may be to “normalize” rates, but “normal” is a relative term.  On a post-2008 basis, real rates are uncomfortably high; on a long-term historical basis, they are roughly normal now.  (see chart below)

Bottom line – it may not be timely or even sensible to fight either the Fed or the tape right now.  But perhaps it’s time to consider when either of those market determinants might change their footing.

1-Year Real Interest Rate

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One thought on ““Don’t Fight the Fed” or “Don’t Fight the Tape”?”

  • The S&P chart looks extremely similar to 2021, a steady, persistent climb, with every dip being bought.
    The rally in 2021 began in November of 2020 and the SPY continued ever upward with no pullback greater than $20 until September 2021. Just an observation.
    The Russell 2000 performed very well these last two days, it hit a 52 week closing high today, and it still has a lot of catching up to do.

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