After Final Discount Rate Hike

Wednesday, April 19, 2006 | 09:15 AM

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:


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?

Wednesday, April 19, 2006 | 09:15 AM | Permalink | Comments (18) | TrackBack (1) add to | digg digg this! | technorati add to technorati | email email this post



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Tracked on Apr 20, 2006 12:19:19 AM


Janet Yellen on Power Lunch at noon today.

Posted by: bsteve | Apr 19, 2006 9:33:50 AM

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