Back in February, we noted the Ned Davis Study that concluded once the Fed hikes stop, markets fall. Then this week, we looked at Investech Research’s table of what happened in the past after the final Discount Rate hike.
Today, Birinyi Associates’ Ticker Sense brings us the third part of the trilogy, asking whether the Fed Pause is Good For Stocks. They did this by creating a composite of what all the post Fed tightening cycles looked like — from the last hike to the first cut — since 1962:
click for larger chart
That’s a pretty compelling argument, and is consistent with our prior discussions of casuation and correlation (i.e., past Fed Cycles end when the economy shows signs of slowing).
Note the eupohria leads to an initial 1% or so relief rally, that gives way to an 8% average drop, a 4% bounce, and then a revisit to the lows.
Birinyi Associates notes:
"In the Inverted Yield Curve ~ The End of The Cycle, we analyzed prior Fed rate tightening cycles since 1962. Among our findings was that in the period spanning the Fed’s last rate hike to its first cut (average span of six months), the market has an average decline of nearly 7%, and has only risen during two of the nine periods. In the chart (above), we created a composite chart of the S&P 500’s performance during the ‘limbo’ period of Fed tightening cycles.
Here’s their actual numbers:
The two exceptions — 1989 and 1995 — were smack dab in the middle of an 18 year secular bull market. 1987 was brutal (but unusual), and my work suggests we are closer to the 1973-74 era.
Thanks guys, fascinating stuff.
UPDATE April 22, 2006 8:13am
The chart is in this week’s Barron’s — the Up and Down Wall Street Column – Bull Market in Bull by Randall W. Forsyth
Fed Pause Good For Stocks?
Paul Hickey and Justin Walters
Ticker Sense, April 19, 2006