This week I’d like to highlight a fun little indicator called “Don’t Fight the Tape or the Fed.”
Technically, it’s a model, because it combines two separate indicators. And while we don’t use it directly in our broader modeling process, it still captures an important concept that is embedded in our process—so let’s walk through it.
The first piece of the model measures “the tape,” or the stock market’s trend. It looks at the S&P 500’s total return (green line, top clip) compared to its 12-month moving average (black dashed line). If the index is trading above that average, the signal is positive—and if it’s below, it’s negative.
The second part focuses on the Fed. Here, we compare the 3-month commercial paper rate (orange line, bottom clip) to its 10-month moving average (black dashed line). When short-term rates sit below their average, it suggests the Fed is keeping policy easy—and as history shows, the market tends to like that environment.
Combine the two signals, and you get the red model line shown in the top clip. The rule is simple: stay long the S&P 500 when both indicators are positive and move to commercial paper when they’re not. According to the performance box at the bottom, this simple approach would have hypothetically outperformed the S&P 500 by a material margin—while only being exposed to market risk about 45% of the time. Not bad!
In the end, this combination of indicators serves as a reminder that markets often move in rhythm with both momentum and monetary policy. Fighting either one can be costly. Oftentimes, investors make it harder on themselves than it should be. Why fight reality? While no single indicator should drive investment decisions, “Don’t Fight the Tape or the Fed” reinforces an important investment philosophy: markets tend to reward investors who listen to—and don’t fight—the message of both price and policy.
This is intended for informational purposes only and should not be used as the primary basis for an investment decision. Consult an advisor for your personal situation.
Indices mentioned are unmanaged, do not incur fees, and cannot be invested into directly.
Past performance does not guarantee future results.
The S&P 500 Index, or Standard & Poor’s 500 Index, is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S.