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    How The Fed Controls The Stock Market

    I don’t think of myself as a conspiracy wacko, but I do believe that the U.S. Federal Reserve controls the stock market — at least, to some degree.

    Our True Wealth Systems computers fully back me up on this one, to the point where you could make a lot of money.

    Don’t get me wrong. I don’t think Federal Reserve Chairman Ben Bernanke is sitting on his throne pulling levers to make certain stocks go up or down.

    But I do think that what the Fed does matters to stock prices — a lot.

    History proves it. Let me explain.

    I know this idea might seem crazy. You might think I’m a wacko just for bringing it up. But based on our findings, the Fed’s policies absolutely do affect stock prices, as I’ll show.

    To test this idea, we used our True Wealth Systems computers to look at interest-rate data over the past 50 years. Specifically, we looked for times when the Fed "manipulated" interest rates.

    How did we test when the Fed is "manipulating" interest rates? It’s simple. We compared short-term interest rates (which the Fed controls) to long-term interest rates (which are more market-driven). Whenever these were out of balance, the Fed was trying to manipulate the economy.

    For example, when the Fed wants to give the economy a boost, it cuts short-term interest rates. That makes this spread between long-term and short-term interest rates wider.

    Going back to 1962, when this spread is wider than 1.5 percentage points (which it is about half the time), you make about 9 percent a year in stocks (not counting dividends). That’s versus buy-and-hold of 6 percent (also not counting dividends).

    On the flip side, when the Fed wants to slow down the economy (when the spread is lower than .5 percentage points, which it is about 25 percent of the time), you lose money in stocks. The full details are below.

      Annualized Gain
    All Periods 6.2%
    Spread > 1.5% 8.9%
    Spread < 0.5% -0.5%

    We have sliced and diced this data further. But the gory details probably aren’t as interesting as the big conclusion: When the spread between long-term and short-term interest rates is wide, you want to own stocks. And when it’s tight, you lose money in stocks; so you don’t want to own them.

    Today, we’re deep in what I call the Bernanke Asset Bubble. The Fed has cut short-term rates to nearly zero and created a large spread of about 1.9 percent. So we’re clearly in "boosting the economy" mode.

    No, Bernanke isn’t behind the scenes, pulling levers and causing certain stocks to go up or down. But he is trying to boost the economy.  

    And, historically, that boosts the stock market.

    You want to own stocks now.

    Good investing, 

    — Steve Sjuggerud

    This article was originally published on March 15, 2013, at DailyWealth.com.

    Dr. Steve Sjuggerud is the founder and editor of one of the largest financial newsletters in the world, True Wealth. Since inception in 2001, True Wealth readers have made money every year with safe, contrarian investment ideas. Steve did his Ph.D. dissertation on international currencies, he's traveled to dozens of countries looking at investment ideas, and he's run mutual funds, hedge funds, and investment research departments. Steve's investment philosophy is simple: "You buy something of extraordinary value at a time when nobody else wants it. And you sell it at a time when people are willing to pay any price to get it." It's harder than it sounds, but Steve continues to be able to do just that for his readers. Click here to learn more.

    | All posts from Dr. Steve Sjuggerud

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