More evidence: Fed Pause Not Good For Stocks

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

Congrats guys!



Fed Pause Good For Stocks?
Paul Hickey and Justin Walters
Ticker Sense, April 19, 2006

Print Friendly, PDF & Email

What's been said:

Discussions found on the web:
  1. Mark commented on Apr 22


    Could you update us on the progress of your subscription service? Thanks.

    P.S. I saw where Charles Kirk went short GLD Thursday morning. I guess I need to pay more attention to those charts! (Spike top.) Little heady action again yesterday.

  2. jab commented on Apr 22

    It is interesting to me that if you exclude the first one on the list the average time from last hike to first cut is 4.5 months! If history follows then the drop will happen quicker than I was expecting.

  3. me commented on Apr 22

    If Kirk is short gld, isn’t that the time to buy? I read him a a contra indicator.

  4. bsteve commented on Apr 22

    Yes, statistically, you’re correct, the market should go down. I wonder, though, if the hype around the stock market is not a greater influence this time around than ever before in history. This is the same media that elected an ill-spoken, mal-intentioned, spoon-fed, half wit for president who would not have made second tier management of a pro-golf shop if he needed to count on his own true abilities. If the media is this powerful–and it certainly wasn’t the half-wit who got himself elected–can’t that same media drive the stockmarket to astronomical heights? True, poll numbers eventually fall but not until multiple, visually and emotionally stunning catastrophe’s that the media cannot hide.

  5. Mark commented on Apr 22


    Contra indicator on Kirk? Have you seen his portfolio results for the past 5 years? Yours must be really smokin’ then.

    Anyway, he entered at 631 and covered at 610 or so for a nice little round trip. Nice ballsy 2 hour play. What did you do, “me”?

  6. wcw commented on Apr 22

    I don’t think there are any analogs to the current dynamic for global macro flows, are there? The Setser/Roach hobbyhorses would seem pretty unprecedented, certainly in scale.

    As I alluded in another comments thread, despite still hating the dollar I am not a gold bug at these prices, but I don’t have the cojones to short futures. I sure wish I’d caught the silver collapse the other day, though. Whew!

    On-topic, I think the rationale for this market behavior makes sense. The Fed overshoots, the market slowly catches on and sells off until the Fed gets it and loosens money again. Since despite US overconsumption globally I see a weak labor market that hardly indicates excess demand, I’m pretty comfortable betting that way this time as well.

Posted Under