Redrick:
4 Your Money time now, we are joined again by David Nelson, CEO of NelsonCorp Wealth Management. David, welcome back.
David Nelson:
Thank you Redrick.
Redrick:
So over the last couple of years, the Fed has featured prominently in a lot of our discussions. It still seems to remain a focal point going forward as well. So what is it that’s so important about the Fed as it relates to markets and our economy?
David Nelson:
Well, it’s enormous. The Federal Reserve has tremendous power and they have a mandate that is to maintain maximum employment and stable prices.
David Nelson:
For most people, when they think of the Fed, they think in terms of short-term interest rates, and that’s clearly a very important job that they have. And we’ve seen as far as interest rates being gashed as far as in recent times in March and April, as well as in ’07, ’08, ’09.
David Nelson:
But that’s just one of the tools as far as that they have at their fingertips. And the next one would be quantitative easing. And people probably heard that term more so back in ’08 and ’09. But quantitative easing, or QE it’s commonly referred to, is a pretty simple concept. And it’s strange as far as when we think about it, but basically what the Fed does is we print money and then we take that money that we just printed and we turn around and buy bonds as far as with that, trying to drive interest rates down. It’s a loosening process or an easing process that they go through, as far as to again, try to stimulate things.
David Nelson:
And the Fed certainly did a lot of that as far as in ’07, ’08, ’09. And there are a lot of people that were fearful that as you cut interest rates, at some point, you’ve got to bring the interest rates back up, so when the next crisis arises that you have some ammunition as far as to be able to do it. But what we saw in March and April was the Fed not only cut interest rates even more, they also deployed other tools. And again, took a market that was down substantially and had the market turn around on a dime. And again, finish the year last year after a 35% drop intra year, finish the year up 17%.
Redrick:
So how do you look at the results of some of these policy decisions made at the Fed?
David Nelson:
Yeah, I mentioned there’s a variety of tools as far as the people have, and the chart that I brought along I think we’ll give people a really nice visual. So this chart was created by Goldman Sachs and it’s a financial conditions tool. And this tool again, is basically trying to take all of these metrics and bring them together to try to simplify what it is that’s taking place as far as in the marketplace and primarily looking at the Fed and what they have available.
David Nelson:
Keep in mind a couple terms I brought up earlier just to make it clear, is that an easy money policy or a tight policy, the easy is when basically the cost of debt is low and we have inflation that’s not a concern. And when we’re tightening, it’s just the flip flop of that, lenders aren’t as willing to lend money and interest rates are on the path upward.
David Nelson:
What the chart is showing here Redrick, is that on the far right, it’s the lowest level ever recorded on this index, and this index has been in existence for 30 years. What it’s showing is that conditions are very favorable and the politicians, as well as the Fed have done everything to try to keep this economy moving forward.
Redrick:
Certainly. So how should people incorporate this type of information into their investing decisions?
David Nelson:
Yeah, so this is one input. That’s the monetary aspect. The other two elements that we think are crucial as far as to help people make decisions as to whether they should tilt and put a little more money towards stocks or whether they should go the other direction and take a little bit of risk off the table. So monetary policy is one, the trend itself is just crucial, and that is what’s the market actually doing. The trend is your friend, I talk about that on a regular basis on this program. It really is true, we have to pay attention to that. And then the last one is investor behavior. How are people reacting as far as out there? What are businesses doing? And so that sentiment, as far as what they’re doing. Putting all three of these together can help you make wiser decisions on again, tilting towards risk or tilting away from risk. And again, trying to preserve some of your gains.
Redrick:
Good information as always. David Nelson, thanks for being with us.
David Nelson:
Thanks Redrick.
Redrick:
And if you missed any part of our discussion, we will make it available to you at ourquadcities.com.