Council Post: Why The Stock Market Follows The Federal Reserve And How Investors Can Take Back Control

CEO of Boron Capital, a private investment firm creating alternative investments through real estate to help investors build legacy wealth.

In response to mass unemployment and financial devastation suffered by American workers, businesses, and industries during the early days of Covid-19, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a historic economic stimulus bill which injected $2.2 trillion in personal checks, unemployment benefits and business loans into the economy. 

Last week, Federal Reserve Governor Lael Brainard said that failure of Congress to pass a second similar stimulus bill soon could significantly damage the economy. While a new stimulus bill remains overdue, the fate of the stock market hangs in the balance. Several weeks ago, Federal Reserve Chairman Jerome Powell released a statement that confirmed interest rates will stay low, but gave no indication of future stimulus – and the stock market took a nosedive. 

We see, perhaps more clearly than ever, that the stock market is subject to plunge at any time, according to what the Federal Reserve does and does not do, which means that every single stock market investor must lean heavily on even the slightest hint of action from the Fed. Because the Fed is able to influence the stock market at the drop of a hat, investors have limited control over how their portfolios perform. This is why investors seeking control, collateral and cash flow typically avoid the stock market.  

The extreme economic volatility incited by the pandemic may present an opportunity for those who are invested in the stock market to reevaluate their strategy by asking a few essential questions. 

What is the relationship between the Federal Reserve and the stock market?

There is a significant correlation between what the Fed is doing and what the stock market is doing. If stocks were tangible assets that held appreciable value, it wouldn’t matter how much or how little stimulus the Fed injects into the economy at any given time. The stock market wouldn’t go for a roller coaster ride according to how much fiscal support is forecasted.  

In September, the Fed reaffirmed that it will keep interest rates close to zero until at least 2023. This was the first time the Fed guaranteed interest rates for a three-year time period. Why did they issue such an extended forecast? Because ensuring continued economic growth through increased lending over the long term boosts investors’ confidence (and keeps them invested) in the stock market.  

How did the Fed become the arbiter of the stock market?

It’s clear that everyone invested in the stock market is following the Fed, but since when did investors give the Fed the keys to their retirement portfolios? 

Despite its name, the Federal Reserve isn’t actually a federal institution. It’s a private bank leading the U.S. central banking system, which is composed of 12 smaller regional banks. Because it was created to conduct the nation’s monetary policy, the Fed essentially holds the proverbial purse, and therefore the attention, of every investor in the world.

The Federal Reserve was founded by Congress in 1913 to prevent financial panics and economic disruptions caused by bank failures and bankruptcies. In the 1970s, when the dollar left the gold standard, the Fed was given power to control interest rates and inflation. And while Congress must first approve spending, the Fed stands ready to prop up the economy at any time. 

How can investors regain control of their assets?

Because the stock market follows the Fed, it’s impossible for investors to control their stock portfolios. By investing in the private market, however, investors can better achieve the three keys of investing: control, cash flow and collateral.  

In an inflationary season, investors need to focus on creating massive wealth in order to avoid massive loss. In this environment, tangible assets provide the best hedge. But while tangible assets like gold can store wealth, they don’t actually create wealth. 

King Solomon, revered for his wisdom since biblical times, is also exalted for his legendary investment strategy. Solomon knew that in order to generate exponential wealth, you have to control the market. This theory continues to prove effective today. 

Today’s Solomon investors look for investments that can stand the test of time, are collateralized and can generate cash flow. Two-dimensional investing, in the form of owning both the business and the real estate on which it operates, allows modern investors to control their own ecosystem, much like Solomon ruled the ancient city of Meggido. 

Can anyone invest in the private market?

Does generating cash flow through two-dimensional investments mean that investors have to manage real estate? The answer is no. Investing with strategic partners who operate the business and manage the real estate allows investors to generate cash flow and grow their private investment portfolio without any additional effort or expertise. And while brokers collect fees that detract from the value of a stock portfolio regardless of how it performs, private investment partners don’t need to collect fees, because they invest with and not for their partners. 

The best and biggest brokers with thousands of employees and computers running their data will tell you that the stock market is a zero-sum game. There will be winners and there will be losers, and whether investors win or lose is largely out of their control. In these uncertain times, when the Federal Reserve is exerting as much control as they can over the public market, the private market offers investors an opportunity to seize control and steward their own financial destiny. 

The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

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