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Investors: Please Ignore What the US Federal Reserve Is Doing

“The [United States] Federal Reserve might be the most powerful institution in the world. If you’re an investor, ignore it.”

The words above appeared in a 19 September 2013 article my colleague Morgan Housel wrote. I was compelled to revisit Morgan’s year-old article when I read a piece in The Sunday Times yesterday titled “Fed decision unlikely to rock Singapore’s boat”.

The main thrust of The Sunday Times’ article was on how Singapore’s markets (property and shares) and gold prices might be affected by the decisions made in the recent meeting of the US Fed’s Federal Open Market Committee (FOMC).

As communicated a few months back, the U.S. Fed announced after its FOMC meeting that it would be ending its Quantitative Easing Programme next month if the U.S. economy continues on its current recovery-trajectory. The U.S. Fed also revealed that it would be keeping interest rates low for a “considerable time” and that it has forecasted benchmark borrowing rates to jump to 1.375% at the end of next year. For some context, the benchmark borrowing rates are between 0% and 0.25% currently.

All the decisions made by the U.S. Fed sound mighty and important – and like the The Sunday Times’ article pointed out, makes it seem like they really matter to investors. The U.S. Fed’s own research also seems to suggest that its FOMC meetings have a big influence on stock market gains, as Morgan pointed out in his article through the following chart:

S&P500 and US Fed

But here’s the thing, the U.S. Fed isn’t the only powerful force affecting market returns in the States. As Morgan wrote, “Real (inflation-adjusted) earnings [in the U.S.] nearly tripled from 1994 to 2011, and U.S. economic output per person grew by more than a quarter.”

And, the idea that growth in earnings had played a huge helping hand in U.S. stock market returns is what investors should really focus on. That’s because a lousy business would still find its long-term share price being weighed down by its poor corporate performance – regardless of what the U.S. Fed does.

Consider the contrasting experience between Singapore Airlines Ltd.  (SGX: C6L) and Vicom Limited (SGX: V01). The U.S. Fed started its QE programme in November 2008 and the conventional belief was that the action would be helping to prop up asset prices. Today, Singapore Airlines has fallen by 10% in price since the start of November 2008 while Vicom has gained some 336%. Why the difference? The chart below showing how their profits have changed over the past few years would be illustrative.

Change in profit

Source: S&P Capital IQ (Vicom’s financial year coincides with the calendar year; for Singapore Airlines, FY2013 would correspond to the year ended 31 March 2014 and so on)

As you can see above, the contrast in the returns of Vicom and Singapore Airlines had more or less matched the difference in the way their profits have grown over the years.

Whatever help the U.S. Fed’s actions might have given to Singapore’s financial markets couldn’t do much for Singapore Airlines’ shares over the long-term given its dismal corporate performance. And so, it bears repeating that it’s really the long-term change in a company’s business which eventually affects its share price, and not what the U.S. Fed may or may not do. As the billionaire investor Warren Buffett once said, “If the business does well, the stock eventually follows.”

I’d leave the last word here to Morgan, who urged readers of his 19 September 2013 article to “[k]eep your eye on high-quality businesses, not government policy changes.”

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn’t own shares in any companies mentioned.