This week’s Fed meeting will provide gutsy contrarians with yet another opportunity to exploit investors’ tendency to jump first and think later. I’m referring to the meeting of the Federal Reserve’s interest-rate setting committee on Tuesday and Wednesday of this week. The press release announcing the Fed’s decision will be released at 2 p.m. ET on Wednesday.
The contrarian strategy: Wait a bit after the release — perhaps 30 minutes — to see if the market has a sharp reaction one way or the other. If it does, then bet that the market will soon correct that initial reaction and move in the opposite direction.
This strategy makes sense for several reasons. First, the Fed hates surprises, going to great lengths to telegraph to the markets in advance what its actions are likely to be. Second, whatever the Fed decides to do with interest rates will have relatively little impact on U.S. corporate profits in coming months and years.
Anything the Fed announces will already have been priced into the markets.
For both reasons, it’s a good bet that anything the Fed announces will already have been priced into the markets, and investors who nevertheless react in a big way will be reacting to nothing of substance.
This isn’t the first column I have devoted to this contrarian strategy, and it’s often (though not always) worked. A case in point was what happened in the wake of the last Fed interest-rate-setting meeting, on April 30 and May 1. The S&P 500
, which had gone up about 0.1% the day before the press release announcing the Fed’s decision, initially reacted favorably and within 30 minutes had risen another tenth of a percent. But then the market abruptly reversed course; the S&P 500 closed down for the day 0.8%.
I know some of you will have a hard time accepting the notion that an interest-rate decision would have little real-world significance. But borrowing costs are going to remain low regardless of what the Fed decides to do this week. They are not the most pressing concerns corporations face nowadays.
That is the clear finding of the latest Duke CFO Magazine Global Business Outlook survey, released last week. In the survey, company chief financial officers were asked “During the past quarter, which items have been the most pressing concerns for your company’s top management team?” Their responses are plotted in the accompanying chart.
As you can see, “borrowing costs” don’t even make the top-10 list. Bear in mind, furthermore, that for much of the quarter in question, prospects were that the Fed might raise rates later this year and in 2020, rather than lower them as the markets now expect. Even so, the costs of borrowing were not a major current corporate concern.
Think about it this way: Within a few days and weeks, you will have completely forgotten about this week’s Fed meeting. Why then make a big deal out of it?
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at [email protected]