That’s the question for today: Is the Fed an Indicator that leads the market, or do they lag?
click for flaming monkees to sing and dance
chart courtesy of Real Money
What I believe this chart reveals is that the Fed’s action trails the prior market cycle, but can lead the next cycle.
For example, the Fed was steady in the mid-to late 1990s, while the market rallied higher. (They cut a few times to deal with LTCM, but that was rather brief). The Fed started hiking in 1999, and kept tightening straigh thru early 2001. They were clearly late to the party in trying to rein in both inflationary pressures and the 1999 exuberence. That rate hiking cycle lagged.
If you are a bit of a contrarian, then you may wish to consider the Fed’s tightening as an early warning that the cycle was long in the tooth. Shorting into a Fed tightening — when you get the approriate technical confirmations — ain’t a bad strategy.
In the 1999 cycle, for example, the market were way ahead of the Fed, and had already anticipated a slowdown. By the time the Fed started cutting rates, we were already deep into a recession.
The next tightening cycle began in June 2004. But as the chart makes clear, the markets had already rock-n-rolled: Waiting for the Fed means you missed the big lift off of 2003.
Indeed, what a Fed rate cutting cycle should suggest to you is that thigns already are el-stinko, and you want to begin looking for when to step back into the market.
So the answer to a query — Does the Fed lead or lag? — is Yes, a little of both.
Don’t Fret the Fed
Gary B. Smith
RealMoney.com, 5/3/2005 8:30 AM EDT