We have discussed ad nauseum what has happened after the Fed finished their tightening cycle. It turns out to be a bit more complicated than either the Bulls or the Bears expect.
1980 seems to be a dividing line when it comes to Fed cycles. 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.
There may be two reasons for this:
• In October 1982, the Fed shifted its emphasis from money-supply measures and "nonborrowed reserves" to an explicit funds rate-targeting procedure. That is one possible explanation for the change in results after Fed tightening ends. (See: When Did the FOMC Begin Targeting the Federal Funds Rate?)
• 1982 to 2000 was the biggest Bull Market in history. Results from that specific period may be aberrational, due to the strong Bull rally. Or, those results may be applicable only to other secular Bull markets (which we are decidely not in at present).
I’ll have a column out on this at TheStreet.com later today; I’m travelling, but I will try to get a post up with an excerpt and the link.
In the meantime, here’s a quick overview of what we have discussed in the past:
Ned Davis Research compiled all of the Fed hiking cycles going back 75 years: Once Fed Hikes Stop, Markets Fall.
Investech Research looked at market performance over the following 3, 6 and 12 months: After Final Discount Rate Hike
Birinyi Associates’ Ticker Sense put together a composite chart of the post Fed tightening cycles since 1962: More evidence: Fed Pause Not Good For Stocks.
Comstock Partners looked at when Markets bottomed after the Fed has engaged in a series of rate hikes. In 10 of 12 instances over the last 53 years, the S&P 500 subsequently declined an average of 22% ten months after the end of tightening: When the Fed Stops Tightening.
Merrill Lynch‘s chief North American economist, David Rosenberg points to periods of "Financial Crisis" shortly after the Fed goes on hold: Beware Periods of Crisis Post Fed.
More on this later . . .
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