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Aaron Brown

Can Your Portfolio Outsmart the Three Fed Bears?

Guessing the future can produce above-average returns, but prudent investors plan for being wrong as well as for being right.

Are stocks headed into a bear market?)

Are stocks headed into a bear market?)

Photographer: Michael Smith/Getty Images

Once upon a time, Goldilocks saw inflation at 6.8% and knew the Federal Reserve would have to act. Worried about the value of her home and stock portfolio, she visited the Fed house. First, she saw Papa Fed Bear who was big and scary. “We’re in a bubble. I’m going to cause asset prices to crash, especially stock and real estate prices. Interest rates and the cost of capital will soar, leading to bankruptcies and major recession. Only after a major purge can healthy economic growth resume.”

Next Goldilocks met Baby Fed Bear, who was small and cute. “I won’t hurt your portfolio Goldilocks. I’ll just do a little cosmetic tightening and pull back at any sign of market unease or complaints from elected officials. The main thing is not to disrupt the economic healing from the pandemic.” But Goldilocks knew that was as scary as Papa Fed Bear. A timid, politicized Fed in the 1970s managed to drag down the economy without taming inflation, leading to stagflation and perverse government policies like wage and price controls.