Football, Buffett & the Fed

As many of you know, although I graduated from Albion College, I grew up in East Lansing, which means that I bleed green.  And in the fall, I love the weather cooling down, the changing color of our beautiful state, and football.  MSU looks good this year, but a trip to the west coast this weekend will be a good test for this team.

One of the other reasons I enjoy football is because for a couple of hours, at least, I can turn off the news of the economy, global politics, and the stock market.  It seems that ever since the Russians invaded Ukraine, that conflict, combined with the supply chain issues of Covid, has caused inflation to rise.  It is difficult to go very far without the news headlines to cause a bit of anxiety.  But as long as my Spartans continue to play well, I can find refuge while the game is on. 

In football, eventually the head coach will be put to a decision.  The team is marching down the field, but they come up a few yards shy of a first down.  Momentum is on their side.  The game hangs in the balance.  It is 4th down and short.  What to do?  Be aggressive and go for it?  Or be conservative and punt and count on your defense to hold the line?  Aggressive, or conservative? 

After the financial crisis in 2009, the Federal Reserve lowered interest rates to spur on the economy.  And that worked well.  The economy stabilized and for more than a decade asset values increased handsomely. 

Now with inflation rising, the Fed has reversed course and is increasing interest rates to try to cool down the economy.  They’ve raised rates with major hikes – larger than any other time in history.  And they have indicated that there is still a ways to go.  They have been deliberate and have communicated it with little doubt or confusion.  They want to tame inflation at the risk of pushing the economy into a recession. 

Yet, the economic data continues to surprise some on Wall Street.  Inflation is still high.  The higher rates will make borrowing more expensive.  That has caused home sales to slow, and companies to stop hiring. We are likely to see layoffs and lower corporate earnings.  But again, this has been fully communicated.  And the stock market has come down sharply, pricing in these events.  Yet the market continues to be surprised when the data is less than rosy. 

We have had several clients ask what they should do.  My answer, of course, is it depends. 

What’s your time horizon?  Do you need the money soon?  Then we should make sure you have an adequate emergency fund.  Need it within the next 5 years, then we should have a good mix of investments with a plan to access the money when that time comes.  Do you have a longer time frame?  If so, likely ride out the current storm.  Or hedge.  Or better yet, take advantage of lower prices and load up on good investments that are attractively valued.

Warren Buffett once pointed out that the stock market is a wonderfully efficient mechanisim to transfer wealth from the impatient to the patient. 

Patient or impatient. Aggressive or conservative. It is really a matter of time and timing.

With football, there is a finite amount of time.  A game only has 60 minutes.  With investing (as opposed to trading), we tend to have a longer time horizon. 

I came across a great article recently. It has a grim title, but it has an interesting perspective and points out that the longer the time frame, typically, the better the investment returns.  It is worth the read: Investing is Dead to Me.

If you would like to talk about your time horizon, your aggressive or conservative approach, or perhaps some changes or hedges that you would like to make, give us a call or drop us a note; we always love talking with our clients. Especially about college football.

Go Green!

Joe