I wish the words “Don’t Fight the Fed” had the same impact on me early in my investment career as did touching a hot stove early in my life. I remember my first burn (or is it the first burn I remember) and I remember both of my daughters' first burns: one was an actual stove (wood burner, ouch!), the other was a result of open-fire roasted marshmallow melt gone bad. But I had to research back and think about the first time I got burned for not heeding the words – Don’t Fight the Fed (1995 I think). Tragically, now with nearly 30 years of investing experience, I believe I have been burned more by Don’t Fight the Fed, than by actual stoves. WHY? And why is this important again today?

The Whys:

1. Immediate Physical Pain vs. Abstract Consequences

• Touching a Hot Stove: The lesson is immediate and visceral. Touching a hot stove results in instant physical pain, providing a direct, tangible consequence of your action. The brain is hardwired to avoid pain, so this immediate negative feedback creates a strong, lasting memory to avoid repeating the action.
• Don't Fight the Fed: The consequences of ignoring this advice are abstract and often delayed. Financial losses or missed opportunities may not be felt immediately, and the connection between the Fed's policies and individual investment outcomes can be complex and indirect. The abstract nature of financial markets and the delayed repercussions of investment decisions make it harder for the brain to learn and adapt quickly.

2. Complexity and Understanding

• Simple Cause and Effect: The cause (touching the stove) and effect (getting burned) relationship in the stove scenario is straightforward and easy for the brain to process and learn from.
• Complex Systems: Understanding how the Federal Reserve's decisions affect the economy and, subsequently, individual investments involves grasping complex economic principles, market psychology, and the interconnectedness of global financial systems. This complexity requires a deeper level of knowledge and cognitive processing, making it harder to learn and apply quickly.

3. Personal Experience vs. Conceptual Learning

• Direct Experience: The lesson from the stove comes from personal, direct experience. Experiential learning is one of the most powerful forms of learning because it engages emotional and sensory pathways in the brain.
• Conceptual Learning: "Don't fight the Fed" requires learning from historical data, theoretical concepts, and often second-hand experiences. Without personal loss or success tied directly to this concept, it might not resonate as strongly or be as easily internalized.

4. Emotional Impact and Memory

• Emotional Salience: The pain from touching a hot stove creates a strong emotional response, which enhances memory formation. Emotional experiences are remembered more vividly and for longer periods.
• Less Emotional Connection: Unless one has experienced significant financial loss directly attributed to "fighting the Fed," the emotional impact might be less intense, making the lesson harder to internalize.

In summary, my human brain is more attuned to learning from direct, simple, immediate, and emotionally charged experiences than from abstract concepts that require understanding complex systems and delayed feedback. While touching a hot stove offered me (and my daughters) a clear lesson through a simple and direct cause-and-effect mechanism, "Don't Fight the Fed" required me to develop a deeper understanding of economic principles, patience, and the ability to see beyond immediate outcomes, making it a more challenging lesson to learn quickly.

Lesson: Don’t have your child get burned on purpose, but once he or she does, you can let your guard down a bit for you can be pretty sure they have learned their lesson. However, always hire someone to manage your money that has made lots of mistakes already (been burned enough to remember the consequences).

And why is this important again today?

We are in that period between the stopping of rate increases while we await the next period, which most tend to assume will be rate cuts (though rate cuts are not guaranteed). The meaning behind "Don't Fight the Fed" is straightforward: it advises against betting against the market trends that are influenced by the Federal Reserve's policies. So, what are the trends we should not be fighting against? Last week, the Fed clearly stated they are not ready to cut rates. Why? Some reasons include, they are not sure inflation is fully behind us, the economy is strong, and unemployment is low. However, Fed Chair Jerome Powell, said if inflation stays in check, he is ok to cut rates, but also not afraid to keep them at these levels longer. He is also wary of keeping policy too tight for too long. He and the Fed want to make sure they snuffed out inflation while keeping the job market and economy strong. Sounds like a good plan to us.

The Table Below “Don’t Fight the Fed” shows S&P 500 and Nasdaq returns in the six months after a final rate hike and the six months after the first rate cut.   With a notable exception or two, this time around, we think you should heed the words “Don’t Fight the Fed” and remain generally optimistic until the facts change. Now how do I instill this lesson in my daughters?

This Chart is for illustrative purposes only and does not take into account your particular investment objectives, financial situation or needs and may not be suitable for all investors. It is not intended to project the performance of any specific investment and is not a solicitation or recommendation of any investment strategy. The S&P 500 and Nasdaq indices are designed to be  broad based unmanaged leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe or representative of the equity market in general.

[1] "Don't fight the Fed" is a phrase that has been in use for several decades, becoming particularly popular among investors and financial market observers. While it's difficult to pinpoint the exact moment it entered popular discourse, its usage surged in prominence during the latter half of the 20th century. The phrase embodies the wisdom of aligning one's investment strategies with the monetary policy direction set by the Federal Reserve (the Fed), the central banking system of the United States.

The meaning behind "Don't fight the Fed" is straightforward: it advises against betting against the market trends that are influenced by the Federal Reserve's policies. The Federal Reserve has significant tools at its disposal, such as adjusting interest rates, changing reserve requirements for banks, and conducting open market operations, all of which can have profound effects on the economy and financial markets.

About the Author – Dane Czaplicki, CFA®

Dane Czaplicki is CEO of Members’ Wealth, a boutique wealth management firm that offers a comprehensive approach to serving individuals, families, business owners, and institutions. The firm’s goal is to preserve and grow its clients’ wealth to endure over time, while thoughtfully evolving its strategy to suit an ever-changing world. With over 20 years of wealth management experience, Dane and the Members' Wealth team thrive on bringing clarity and confidence to clients' unique situations. He believes everyone needs sound financial advice from someone whose interests are aligned with theirs, and is determined to put service before all else.

Dane received his MBA from The Wharton School of Business at the University of Pennsylvania and his bachelor’s degree from Bloomsburg University. Outside work, he enjoys spending time with his wife and kids, hiking and camping, reading, running, and playing with his dog. To learn more about Dane, connect with him on LinkedIn.

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