"Curb Your Enthusiam!"

Authored by Kevin Muir via The Macro Tourist blog,

It’s 819 days since the start of the Fed tightening cycle. Why would I know that so precisely? Because I just finished creating a chart of the stock market performance before and after the first fed tightening.

Indexing the stock market performance around certain events like the first Fed hike is not novel. Tons of market strategists create these sorts of visuals. But Ned Davis created a chart I found so fascinating - what’s that line about good and great artists? Well, I am stealing it.

Actually, I just wanted to see it updated, so I thought it was worth recreating from scratch, but all the credit goes to Ned.

As I mentioned, in a lot of ways it’s just a regular piece of research. The truly insightful part of Ned’s chart was to divide the tightening cycles into slow and fast campaigns. For example, when the Fed began hiking in April of 1955, they raised rates at a gradual, slow pace. This was in contrast to November of 1967 when the Federal Reserve raised rates quickly.

Taking each Fed funds tightening cycle, Ned divided them into slow or fast campaigns. He then took the return of the S&P 500 around those periods. Day 0 represents the first hike and at that point, the S&P 500 is indexed to 100. Taking each bucket, an equal weighted average of the S&P 500 performance is created.

So without further ado, here is the chart of the performance of the S&P 500 before and after the first tightening, but grouped by the speed at which the Fed raised rates.

The fast tightening cycles have typically seen an initial underperformance. But then, they catch up, and by the third year, they actually outperform slower tightening campaigns.

The really interesting part? Today, we are sitting at the outperformance peak for the slow cycles. So if you accept that the current slow tightening cycle plays out like previous ones, then the stock market is about to drift lower in the coming year.

And what does the current stock market performance look like compared to previous ones? To no great surprise, this latest cycle has blown the doors off typical returns.

I would have thought the best development for the stock market would have been an economic pause that allows the Fed to slow down their hikes. Yet this data suggests that what we really should hope for is a rip-roaring economy that causes the Fed to tighten quickly.

There is no doubt that this cycle is different due to QE and other unusual factors, but history suggests it might be time to temper the enthusiasm as the slow cycle rally is about all played out.


Iconoclast421 Thu, 03/15/2018 - 10:08 Permalink

It isnt just about the Fed. Global central banks were still printing like mad even after the Fed stopped. And the dollar is only about 1/3 the global weight that it had 50 years ago. So US markets are that much more susceptible to foreign printings.

tion Thu, 03/15/2018 - 10:27 Permalink

So, I just showed this meme to my kid (who loves cats) and the response was that I should look up the meme ‘orca punts seal 80 feet into the air’

me: Oh this must be what they do right before they eat them

kid: I bet you could use that as a metaphorical meme for the stock market

lolol ^^

DuneCreature Thu, 03/15/2018 - 10:35 Permalink

I like the picture credit = "Narco Tourist"

We call medical tourists "Moonbeam Tourons" up here in the hills of Wes By Ginny.

It looks to me like the kitty is hovering a bit.

I know what Mr. Cool Cat is thinking, "How the hell do I get comfortable enough to pull these spines out of my ass without looking like a agonized pussy?"

Live Hard, Lifting (Distilled) Spirits Since Way Before 'Probation' Was Even A Legal Term, Die Free

~ DC v8.8