As we digest the Fed statement, let’s put yet another Bullish Myth to rest: Markets do not have an upward bias after a rate tightening cycle ends.
Instead, we see the end of a hiking cycle occuring towards the end of a business cycle. That implies if not an outright recession, than at least a significant economic slow down occuring quite often.
What actually has happened at the end of a rate tightening cycle? USA Today commissioned a study from Ned David Research on just that question. NDR’s conclusion?
"Going back to 1929, the Standard & Poor’s 500 was
actually lower six months after the last rate increase 71% of the time and down
64% of the time 12 months later, according to data that NDR compiled for USA
[W]hat the bulls see as an all-clear signal is far from a sure thing. "There’s quite a bit of talk about the market doing better once the Fed (stops)," says Ed Clissold, senior global analyst at Ned Davis Research (NDR). "However, more often than not the market has struggled after the last rate hike."
That’s not even remotely close to the case promulgated by the Bulls:
Wall Street is betting big on stock prices
heading higher once the Federal Reserve stops raising interest rates. But
there’s no guarantee it will be a winning bet, history shows.
For months, market strategists have been trumpeting the
fact that stocks usually rise when the Fed ends its rate-increasing campaigns.
Many pundits cite the expected end to the current "tightening cycle," perhaps as
early as March, as the key catalyst that will boost stocks.
End of Fed’s rate increases may not be good for stocks
Sources: Ned Davis Research, USA TODAY research
Here’s the classic example of the statistically unlikely scenario:
"Jason Trennert, chief investment strategist at ISI Group,
says the upward bias in anticipation of the Fed stopping makes perfect
"You have the best of both worlds," he says. "Before the
Fed stops, the economy is still performing well, corporate earnings are still
good, and the market benefits from the expectations of the Fed stopping."
More of the same Goldilocks story. Allow me to remind you that Trennart — who is otherwise a nice guy — has been incorrectly predicting the outperformance of Big Caps over Small and Mid-caps for too many quarters to count, as well as a resurgence of Capex spending for even longer. He’s been wrong on both accounts.
There is a silver lining, however: Since
1980, the Fed has tended to start lowering rates (on average) six months after
their final increase.
And falling rates are usually bullish for stocks… eventually.
Odds are that stocks will drop once rate-rising stops
USA TODAY, Posted 1/29/2006 10:58 PM