Norm Conley of the The Street.com and I were discussing the Market reaction post Fed, and we each were wondering why 1980 seems to be such an interesting dividing line.
I’ve been tracking a lot of research in this area, and I summarize the conclusions in a new column today: When the Fed Stops Tightening. Here’s an excerpt:
"1980 seems to be a dividing line when it comes to the Fed. In the majority of cases from 1980 forward, markets did rather well after the Fed finished. Prior to that year, markets were generally lower six and 12 months after a tightening cycle ended.
In October 1982, the Fed shifted its emphasis from money-supply measures and "nonborrowed reserves" to an explicit fed funds rate-targeting procedure. That could very well be part of the basis for the change in results after Fed tightening ends. (See: When Did the FOMC Begin Targeting the Federal Funds Rate? for more detail.)My conclusion is that the context of the Fed hiking cycle is what matters most to markets. During secular bull markets, Fed tightening seems to cool inflation and allows markets to keep rising. During bear periods, the Fed cycle seems to stop just before a major economic slowdown begins. The decrease in revenues and earnings then pressures equity prices.
Let’s examine some of these other studies. InvesTech Research looked at market performance over the following three, six and 12 months after the end of a tightening cycle, from 1929 to 2000 . . ."
More on this tomorrow . . .
>
Source:
When the Fed Stops Tightening
Barry Ritholtz
RealMoney.com, 8/10/2006 9:14 AM EDT
http://www.thestreet.com/p/markets/marketfeatures/10302821.html
Begs the question then…
Are we in a bull market or bear market?
Thank you for this research. Have you or any of these studies compared what market performances were to what prevailing risk-free rates were at the time?
I would think that to be an important independent factor, vis-a-vis relative P/E’s and market over/under-valuation.
Based on prior cycles, we should still be in a secular bear market. Unless you think that 2000-2002 was just a pullback in a continuing bull market that was already longer than average and had larger gains. Or if you think the secular bear only lasted 2-3 years this time and didn’t bring the market down to the normal levels for the end of a bear market. Based on timing ratios, the secular bear should finish somewhere between 2008 and 2012, but things could always be different this time.
“Are we in a bull market or bear market?”
That depends on what the meaning of “are” is.
As with “inflation,” the definition of “bull” and “bear” seem to be open to interpretation, leading to confusion and uncertainty.
The story I’m buying at the moment is that we have been in a CYCLICAL BULL market (since early 2003) in the context of a larger, SECULAR BEAR market that began in 2000. Whether we are right now shifting into a CYCLICAL bear or whether the CYCLICAL bull still has some life in him, will only be known in retrospect. A case can be made that since the markets have basically traded sideways for the past 2 years, the bull’s life has been extended and there is still room for more upside.
Certain sectors, notably Transports, Tech, Housing and Consumer Discretionary, are distinctly bearish-looking at the moment.
Very nice how breadth has been getting stronger all day and now very positive.
However, that new high/low list for both NYSE and the Nasdaq is horrendous.
I’m actually surprised the market recovered so well and is holding up so well despite all the new lows.
This is one bipolar market.
All the comments/opinions re: whether we’re in a bull or bear market remind me of two (three, four — pick your number) technicians reviewing a single chart!
I guess you pays your money and you takes your choice.
PS: For the record, my “choice” is to be heavily in cash.
Barry,
Are you on Kudlow tonight? What happened to you, Noah, and Cody on the regular Thursday night gig? That was fun to watch.
Interesting question and hypothesis! My take is that we are through a rather anomalous market, and who knows what is going on. Nugatory or negative real interest rates have been with us for so long… I tend to symphatize with this idea:
As it sounds like right if things were ”normal”, but perhaqps they aren’t.
I was looking recently at Cisco since their IPO, as a benchmark for Internet stocks:
http://finance.Yahoo.com/q/bc?s=CSCO&t=my&l=off&z=l&q=l
Well, what’s going on? Cisco has been around $20 for a while, a level that it reached in 1999 when its momentum was that it was on its way to $70, and it looked like Cisco owned the Internet.
Now I can imagine people buying Cisco in 1999 for $20 when the hope was that it had unlimited upside, but paying $20 for the same stock now that the hope is that it stays at $20 sounds like strange to me.
Sure, the stock dropped briefly into the $10-$15 region in 2003, a bad year, but that was the price in 1998, again when Cisco had awesome upside. And there are a lot of ”blue chip” stocks with the same improbable situation.
So perhaps we are still in a secular bull market. Probably fueled by retirement accounts. Until those accounts are switched into bonds that is…
Speaking of CSCO and tech in general, who thinks that hedgies are taking the Options backdating list and merely shorting the living bejesus out of each and every one of these companies up until earnings release? I really think the Options backdating has been severly hurting the NAZ all year. Once all the tech companies come clean on this issue, P/E ratio’s will be in the low teens and I really think they will be set for a move up. Could be delayed until late ’06 or early ’07, but I’m not sure how long a sector can stay down with the PEG ratio’s most of these companies have.
we have talked about the trannies but how about the utilities. a weekly chart of UTPIX looks frighteningly like a massive double top. what say all you clever chartists out there? Utilities did not rally today.
cheers
Still, I dont get it was is the market not dropping … is it the PPT holding it up WHO comes in and buys today ?
per BS:
“we have talked about the trannies but how about the utilities. a weekly chart of UTPIX looks frighteningly like a massive double top. what say all you clever chartists out there? Utilities did not rally today.”
As I have commented elsewhere recently, double tops/bottoms don’t mean much in themselves except that they identify resistance/support levels in a particular timeframe. Utilities are considered defensive (good dividends) and interest-rate sensitive which makes them a relatively good play during a bear since interest rates go down (altho you will probably still be upside down for a while).
Speaking of which, I fully expect cuts to begin by December notwithstanding whatever the inflation numbers are. Real estate is going away faster than most people expected and BB has already made the choice between stagflation and deflation. I think that we will wind up dealing with both in sequence, but would say that his choices were between bad and bad.
Meanwhile, back at the ranch, I think I saw that the Koreans boosted rates again last night which makes maybe 25 central banks that have done so over the past two months. That should tell you a lot about where the dollar is going to wind up and I’ll probably be shifting some more money into my forex account once some CDs mature in a week or so. Of course, if you have an account held in USD, the only way that gains is via leverage which = added risk, but none of the ads touting forex ever seem to mention that.
per JDamon:
“I really think the Options backdating has been severly hurting the NAZ all year.”
Sorry my friend, but your recollection of history is a little too sunny. The scandal broke in March and involved “a few bad eggs” as always. I don’t think it became public knowledge that it actually involved over 2,000 companies until 6-8 weeks ago. How has this hurt the silly NASDAQ companies “all year?”
“Once all the tech companies come clean on this issue, P/E ratio’s will be in the low teens and I really think they will be set for a move up. Could be delayed until late ’06 or early ’07, but I’m not sure how long a sector can stay down with the PEG ratio’s most of these companies have.”
I see, you a) expect inveterate liars to come clean and b) think that this small bit of moral turpitude is why they’ve crashed? And, to revisit the general idea that CSCO is great so everybody else should be, try this on:
“2-4-6-8, Whose Balance Sheet Don’t We Penetrate?
Of course, dead fish being what they are, nobody asked: If everything is so wonderful, how come in the last year — when revenue rose $1.4 billion — receivables rose $1.1 billion? (Stated differently, revenues were up 21% year-over-year, but receivables were up 50%.) Sequentially, receivables grew only 10.7%, versus a 9% increase in revenues. Thus, making the number is a joke when laid against those receivables. Nevertheless, the bulls’ verdict was: Buy everything in tech.”
http://www.minyanville.com/articles/index.php?a=10972