Contrarian investors possess an easy technique for turning a short-term profit from the Fed’s interest-rate-setting meeting this week: Wait a couple of minutes after the Fed broadcasts its choice on June 13, and guess that the stock market will quickly reverse nevertheless it initially reacted.
The purpose contrarians are drawn to this technique: The Fed’s decision itself gained’t have a lot impression on U.S. company prospects. So we all know prematurely that Wall Street’s knee-jerk response — no matter whether or not it’s up or down — gained’t be based mostly in actuality.
You may discover it arduous to consider that a decision on rates would have so little consequence. But keep in mind that charges will stay extraordinarily low even when the Fed decides to boost charges this week and alerts an aggressive schedule for extra hikes at upcoming conferences. Any hike, or collection of hikes, is unlikely to have considerable impact on companies’ capital spending selections over the near-term and even the intermediate time period.
I’m basing this not simply on first rules but in addition on arduous knowledge from the Duke CFO Global Business Outlook survey. This survey, which has been carried out quarterly since 1996, polls CFOs on optimism about their corporations’ prospects and capital funding plans, in addition to anticipated GDP progress.
Wednesday of this week is the discharge date for the subsequent CFO Survey, so this column was written with out the good thing about the newest info. But, in an interview, John Graham, the director of the CFO Survey, informed me that he’d be stunned if this week’s survey exhibits that CFOs’ optimism basically, or capital expenditure selections particularly, are considerably depending on rates of interest remaining as little as they’ve been in recent times.
In reality, he stated, current interactions he’s had with CFOs persistently have proven that their outlook is just not notably delicate to what the Fed does over the close to time period. Optimism will stay excessive and capital expenditures strong even when rates of interest over the subsequent yr rose by even a number of proportion factors.
News headlines virtually invariably lead you within the incorrect course.
Take what occurred within the wake of final December’s rate-setting meeting, which is the last time I wrote about this contrarian strategy. As you can see from the chart under, the market initially rallied within the wake of that call, after which virtually as shortly reversed itself.
To make sure, few of us are so short-term targeted that we might even need to attempt this contrarian technique on Wednesday afternoon. But it’s nonetheless necessary to understand the rationale for this technique, because it makes a broader level about how information headlines virtually invariably lead you within the incorrect path.
This level was made just lately by an interesting post on the Abnormal Returns weblog, which is edited by Tadas Viskanta. In this specific publish, Viskanta gathered quite a few provocative feedback about how little consideration prime merchants pay to monetary headlines.
One was from Stefan Cheplick, a social media editor at StockTwits.com: “I know no great investor who has ever attributed their success to news or headlines. If you know anyone who thinks like this, I will be straight up in awe… The money in headlines is shaking people out. It’s tricking them into dreams of grandeur, then shattering them. Headlines are glass castles.”
One response to this, in fact, is to not learn any of the headlines, however that’s unrealistic for nearly all of us. But, as Viskanta factors out, we can “choose to engage the financial news on our own terms. Those terms should include a knowledge of how the game is played and how not to get played in the process.”