Fed action will be centre stage this year. On Jan. 14, I posted EQUITIES BEHAVIOR AROUND INTEREST RATE INCREASES based on RBC Capital Markets’ work on how equities have behaved prior and after the Fed starts raising rates.
Bespoke Investment documents equity behavior during periods of “long pause” following an easing cycle.
In the five prior periods where the Fed went on hold for more than a year following an easing cycle, the S&P; 500 averaged a gain of 33.2%.
Interestingly, once rates begin to rise after a long pause, 4 out of 5 times stocks have dropped in the following 3 months. The RBC chart tends to confirm this. It also shows that stocks normally resume their rise thereafter.
Related post: When the Fed Stops the Music
February 19th, 2010 at 17:19
That is an interesting angle to take and I appreciate the heads up. My thesis was based more on the impact of first time rate hikes, when interest rates were extremely low.
http://www.tradersnarrative.com/the-effect-of-first-rate-hikes-on-the-stock-market-3649.html
And even with the difference approaches to the study, the results don’t conflict that much, as your study shows solid gains for all time periods except 3 mts. Also the negative average returns for the 3 mt period were driven heavily by the one data point encompassing the 87 crash when bond yields were at 9% in an overheating economy, much different than today’s environment. Some would probably argue that the Sept 87 Discount Rate hike is probably a questionable data point for this study because it followed a previous Fed Funds Rate hike in April of 87.
Let’s see how it turns out.
February 20th, 2010 at 09:14
Thanks for these details. Trends in corporate profits and inflation (i.e. long term rates) will be key factors in how equities react to the rising headwind coming from higher short term rates.