The Rational Investor #008: Howard Marks on Predicting the Fed’s Next Move
Happy Saturday to you,
Welcome to the 8th edition of The Rational Investor Newsletter.
Given that all the talk these days is about when the Fed will cut rates and by how much, I thought it might be helpful to gain some perspective on the topic. To do so, I’m sharing a quote from a Howard Marks memo from November 2022 titled What Really Matters?
I have a bit of commentary to follow.
Onto the main event…
Here’s Howard Marks on Predicting the Fed’s Next Move (Emphasis is Mine):
[regarding short-term forecasts]…this is what I know about the short term:
- Most investors can’t do a superior job of predicting short-term phenomena like these.
- Thus, they shouldn’t put much stock in opinions on these subjects (theirs or those of others).
- They’re unlikely to make major changes in their portfolios in response to these opinions.
- The changes they do make are unlikely to be consistently right.
- Thus, these aren’t the things that matter.
Consider an example. In response to the first tremors of the Global Financial Crisis, the Federal Reserve began to cut the fed funds rate in 3Q2007. They then lowered it to zero around the end of 2008 and left it there for seven years.
In late 2015, virtually the only question I got was “When will the first rate increase occur?” My answer was always the same: “Why do you care? If I say ‘February,’ what will you do? And if I later change my mind and say ‘May,’ what will you do differently? If everyone knows rates are about to rise, what difference does it make which month the process starts?” No one ever offered a convincing answer. Investors probably think asking such questions is part of behaving professionally, but I doubt they could explain why.
The vast majority of investors can’t know for sure what macro events lie just ahead or how the markets will react to the things that do happen.
Here we are late in 2023 and the questions are flying as to when the Fed will start cutting rates. Marks’s answer remains the perfect response. What difference does it make when they start?!
I also love his statement, “Investors probably think asking such questions is part of behaving professionally…” because it cuts many investors (and even more so, financial advisors) so deep. Forecasts are as much a part of finance as they are the weather portion of the evening news which is made all the more remarkable given that forecasts are no better—and are often worse—than a coin flip.
It’s as if investors actually prefer being wrong to facing the cold hard truth of an unknown future.
As you wonder for yourself or field questions about the Fed’s future decisions, remember the wisdom of Howard Marks. You don’t need to know that answer to make sound investing decisions.
Thanks for reading. I’ll be back again next week with more timeless wisdom from great investors.
Enjoy the weekend!
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