Don’t fight the Fed is the mantra of many investors today, but don’t fight the Fed is a dangerous strategy late in an economic cycle.
In January of 2001 the Fed started reducing rates to head off recession. If you had started buying then based on the Fed’s loose policy, you watched the value of your portfolio collapse by 40% over the course of 21 months before the market finally turned in your favor.
The same thing happened in September of 2007 when the Fed decided to cut. If you happily took the signal of the Fed’s cut to indicate a time to buy, you would have been buying through 50% losses, including the rout of Bear Stearns and Lehman Brothers’ disappearance. But don’t fight the Fed!
Don’t ever underestimate the Fed’s ability to distort the market, but rather than basing your investing strategy on a Wall St. adage, using fundamentals is a more prudent approach.