One & Undone?

Friday, May 05, 2006 | 01:43 PM

As noted, markets liked the soft jobs data, believing it makes an end to Fed hikes more likely sooner than later.

However, as much as investors are hoping for a "One & Done" scenario, history teaches us its more like "One & Undone for the markets."

There is a disconnect here; We've previously observed that once the Fed finishes, markets do not perform particularly well (See [1], [2], [3] and [4]). I have yet to see a convincing reason not to see that pattern continue.

Just in case you found these four prior discussions wanting (!), here are two more analyses along similar lines to digest:

The WSJ’s David A. Gaffen recently quoted an analysis from Bianco Research. Jim Bianco found that over the past 5 Fed hiking cycles:

“Stocks do well during the tightening period, and mediocre afterward. The S&P 500 index rose at least 6% in four of the five tightening periods, with the February 1994 to February 1995 period being the outlier, when stocks fell 0.5%. By contrast, in the four post-tightening periods, Bianco says stocks have done well twice, and done poorly twice. The two poor periods were late 1987, when the market crashed, and mid-2000 to early 2001, when it slowly deteriorated; the good times were in 1995 and 1989."

That is consistent with prior studies; it also make economic sense.  The Fed stops once they see proof of the economy slowing, which typically suggests weaker revenues and profits for companies. 

Next up, we go once again to TickerSense, where Paul and Justin look at the Average Performance of the average SPX during a full Fed cycle:

Entire_rate_cycle

Hence, the surprising reaction over the past year to any evidence the economy has slowed so much the Fed fears it must halt tightening. 

If you are a Bull, you should be rooting for ongoing hikes, which should mean a robust economy and ongoing earnings growth.

Once the Fed stops, the party is typically over for the macro economy.

Friday, May 05, 2006 | 01:43 PM | Permalink | Comments (8) | TrackBack (0)
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In other words, the Fed doesn't put away the punch bowl until it is empty and all the drunks are heading for the parking lot. Look out below.

Posted by: Ned | May 5, 2006 3:33:56 PM

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