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New Column up at Real Money (08/10/06)

Thursday, August 10, 2006 | 10:59 AM

RealMoney Norm Conley of the The Street.com and I were discussing the Market reaction post Fed, and we each were wondering why 1980 seems to be such an interesting dividing line.

I've been tracking a lot of research in this area, and I summarize the conclusions in a new column today: When the Fed Stops Tightening. Here's an excerpt:

"1980 seems to be a dividing line when it comes to the Fed. In the majority of cases from 1980 forward, markets did rather well after the Fed finished. Prior to that year, markets were generally lower six and 12 months after a tightening cycle ended.
In October 1982, the Fed shifted its emphasis from money-supply measures and "nonborrowed reserves" to an explicit fed funds rate-targeting procedure. That could very well be part of the basis for the change in results after Fed tightening ends. (See: When Did the FOMC Begin Targeting the Federal Funds Rate? for more detail.)

My conclusion is that the context of the Fed hiking cycle is what matters most to markets. During secular bull markets, Fed tightening seems to cool inflation and allows markets to keep rising. During bear periods, the Fed cycle seems to stop just before a major economic slowdown begins. The decrease in revenues and earnings then pressures equity prices.

Let's examine some of these other studies. InvesTech Research looked at market performance over the following three, six and 12 months after the end of a tightening cycle, from 1929 to 2000 . . ."