Fed stops rate hike

The conventional wisdom has it that when the Federal Reserves finally stops its rate hike, the share market will rally. Well, the reality is quite different. In a re-post entitled "Fed Pause Good For Stocks?", the Tinker Sense observed that "...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 below, we created a composite chart of the S&P 500's performance during the 'limbo' period of Fed tightening cycles." See Chart 1 below.


















Chart 1: Average S&P 500 Performance from Last Hike of a Tightening Cycle to First Cut in Rates: 1962-2006

Why is that so? In a piece entitled "Betting on Bernanke: Rate Hikes and Reality" in The Stock Advisors, John Bollinger explained that "...both the Fed and the equity markets are forward looking and if the Fed thinks it has strangled the economy sufficiently, the market is not one to argue. A quick check shows that the Fed typically stops raising rates well before the bottom is put in."

In the same article, John Sheperd cautioned that "...the last increase in a rate cycle is not the time to buy stocks, at least in three of the most dramatic examples in the last twenty-plus years." He has also presented a chart which shows how the market had reacted to a stop in the Fed rate hike in the past 20 years (see Chart 2 below).















Chart 2: S&P 500 from 1981-2003