Posts filed under “Inflation”

After Final Discount Rate Hike

Todd Buchholz was on CNBC this morning. I have recommended his book "New Ideas from Dead Economists" in the past. He may be a good decent economist, but he offers investment advice that is historically unsupportable.

Specifically, this morning he made this statement :

"Every money manager in the country has a little file. It says what to do when the Fed says we’re done. And there’s only one word in that file. Ands its says ‘Buy. Buy stocks, buy bonds.’ "

Buchholz is a recent (former) White House advisor, so that in part explains the cheerleading. But his clever "Join the Crowd" way phrasing things has an emotional appeal. However, the statement he made it is less than factually accurate (and it certainly isn’t precise).

Why? Because numerous studies have revealed that sustained institutional buying is NOT what actually occurs after the Fed finishes their rate hiking cycle. At leats, not in most cases.   

In February, we discussed the Ned Davis Research study on post Fed cycle markets. NDR determined that since 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.

As we noted earlier, bulls (like Buchholz) are now expecting an all-clear signal from the Fed. That is far from a sure thing. Ed Clissold, senior global analyst at Ned Davis Research, observed: "There’s quite a bit of talk about the market doing better once the Fed stops. However, more often than not the market has struggled after the last rate hike."

This thesis has been confirmed by Investech Research. In the majority of past Fed tightening cycles, stock prices were lower six months after the final rate hike:

Spx_gain_loss_1

Source: Investech Research

>

In 10 out of 14 occurences, markets were appreciably lower 6 months later. 2 of the 4 periods where markets did not sell off — 1989 and 1995 — were smack in the middle of major secular Bullmarkets. In 3 of those 4 cases, the Fed had hiked only 4 times or less.

As Mark Twain was reputed to say, "History doesn’t repeat — but it rhymes."

The question for those who like to study these historical precedents is simply this:  Are we in a situation similar to 1980, where 6 months after the last of 14 hikes the SPX was 8% higher? Or, is another era more analogous — 1931, 1957 or even 2000?

Category: Federal Reserve, Inflation, Investing, Markets

Mortgages, Foreclosures & the Fed

Category: Federal Reserve, Fixed Income/Interest Rates, Inflation, Real Estate

Do We Have Inflation?

Category: Data Analysis, Federal Reserve, Inflation

10 Year Yield: 5.043%

Category: Fixed Income/Interest Rates, Inflation

Then & Now

Category: Commodities, Consumer Spending, Earnings, Economy, Employment, Fixed Income/Interest Rates, Inflation, Psychology, Real Estate

Chart of the Week: Yield Curve, 2002 versus 2006

Category: Economy, Federal Reserve, Fixed Income/Interest Rates, Inflation

Did the Yield Curve Send a “False Alarm?”

Category: Data Analysis, Economy, Federal Reserve, Fixed Income/Interest Rates, Inflation, Investing, Markets

“The squalls never matter until they hit”

Category: Federal Reserve, Inflation, Investing, Markets, Psychology

Does the CPI Reflect Reality?

Category: Data Analysis, Federal Reserve, Inflation

Historical Fed Fund Ranges

Category: Data Analysis, Federal Reserve, Inflation