US Interest Rates Left Unchanged: Is This Good Or Bad For Stocks?

Stock market participants seem to have a hard time making up their minds these days.

My colleague Stanley Lim had put up an article this morning that referenced a headline from Bloomberg about Asian stocks falling after the US Federal Reserve kept interest rates unchanged yesterday night. Soon after Stanley’s article went up though, Bloomberg had decided to perform an abrupt u-turn on the headline.

This is what the headline looked like initially:  “Most Asian Stocks Fall as Fed Holds Rates; Japanese Shares Slide.”

This is how the headline reads now: “Asian Stocks Outside Japan Advance as Fed Stands Pat on Rates”

Bloomberg’s u-turn is pretty amusing (to me at least), but it speaks to a bigger point as well.

The Fed’s decisions with interest rates have been the focal point of attention for many stock market participants. But all that attention may be an overemphasis.

Take a look at the chart below, which plots how the Federal Funds Rate has changed since 2002:

2015-09 Fed Rate

Source: St Louis Federal Reserve

Over the past 13 years, the Fed funds rate has been all over the place. And how have stocks in Singapore done? The SPDR STI ETF (SGX: ^ES3) – an exchange-traded fund that mimics the fundamentals of the Straits Times Index (SGX: ^STI) – has delivered a total annual return of 7.11% from its inception in April 2002 up till the end of August this year.

Despite the wild swings in the Fed funds rate, conglomerates Jardine Matheson Holdings Limited (SGX: J36) and Jardine Strategic Holdings Limited  (SGX: J37) are just two of the many stocks that have delivered smashing long-term results too. The former’s earnings had jumped by 140% since the start of 2002, resulting in a 705% spike in its share price over the same time frame. The numbers for the latter are similar, with its earnings and share price growth being at 350% and 940% respectively.

At the end of the day, it’s a stock’s long-term business performance that matters and it can be very much detached from what US interest rates are doing.

A Fool’s take

Investors today have a choice on where to spend their time.

Would you prefer to spend your minutes in chasing one u-turn after the other in order to invest? Or would you rather just sit still with the shares of good companies and let long term compounding do its work?

I’ll chose the latter. How about you?

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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 contributor Chin Hui Leong doesn’t own shares in any companies mentioned.