Fed rate cutting is a hallmark of bear markets and Fed rate increases go hand in hand with bull markets. This is the opposite of Wall Street’s conventional wisdom, which is often wrong but never in doubt. Yesterday, one of the top trading Stoolies, I_Am_Madness brought up this point over on our message boards at Capitalstool.com
Someone here mentioned back in October that it’s a great time to buy stocks when the fed starts to cut, that historically the market goes up. In fact, historically it has been a good time to SELL when the fed start to cut. All one has to do is check the charts. Look no further than 2000-2003 Dow chart. At this point, we can all conclude that this theory works again. I believe the time to buy might be when the FED pauses.
Stoolie ChicagoBear took up the challenge.
You are right. They cut rates through the last bear and then we rallied as they were raising rates. Now we are cutting and the markets are falling again. It sure seems like the tail is wagging the dog.
I’ll try to update this chart back to 2000. It shows FOMC announcements. Green arrows show rate increases, blue arrows are no change, and red arrows are decreases.
Click to enlarge
Here’s the updated chart of FOMC meetings going back to 1999. Red arrows are rate cuts, green arrows are rate increases, and blue arrows are no change. The black arrows point out emergency meetings and rate cuts. (please note that the arrows are as close as I could get them to the actual weekly line, but some may have shifted when it was uploaded. Close enough for government work).
Click to enlarge
A couple of interesting points: during the last bear, the rate cutting campaign was only for 1 year in 2001. Then they basically sat by, with the exception of one rate cut in 2002 and one in 2003. Raising rates didn’t start until 6 months after the SP regained its moving averages.
Interestingly, I did not know they had an emergency cut on 1/3/01. That was the first cut after the market topped. It was around the 1300 level, which, incidentally, is where we were last week when they did the emergency cut. Hmmm….
Here’s what they said in the 1/3/01 statement:
“These actions were taken in light of further weakening of sales and production, and in the context of lower consumer confidence, tight conditions in some segments of financial markets, and high energy prices sapping household and business purchasing power. Moreover, inflation pressures remain contained. Nonetheless, to date there is little evidence to suggest that longer-term advances in technology and associated gains in productivity are abating.
The Committee continues to believe that, against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future.”
(bold is my edit – I thought that was funny compared to today)
The part I found most interesting was the Fed’s opining that there was “little evidence to suggest that longer-term advances in technology and associated gains in productivity are abating.” Even after the tech bubble had burst, they still didn’t recognize it. When they couldn’t see something that was that obvious, how can we have any confidence today that they really have a clue as to what is going on?
Anyway, there you have it. Rate cutting isn’t bullish. And secondarily, the Fed may have no clue not only as to what the future probably holds, but what’s going on right now. Gives you a lot of confidence does it?
Thanks to ChicagoBear and I_Am_Madness for enlightening us!
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I have a hunch that they fear the big plunge in the stock market. The tide is going out.
The Federal Reserve should not be in the business of manipulating the stock market. Abolish the Fed
Abolish the Feds indeed. Since their not even a part of the Federal Government, their a private entity! That’s pretty much a description of legal insider trading if I ever heard of one.
As for tech and productivity gains, they were mainly talking about bar codes and inventory control…not the internet
As a mortgage broker I look at the relationship of the ffr, dr and 10 year note. The reason is the 30 year mortgage is pegged to the 10 year note. Years ago it was pegged to the 30 year bond. Nevertheless, in 2003, for a good example, the ffr and the dr was 1%. The 10 year note was 3.11, the lowest at that time in 50 years. The 30 year mortgage was 5.25%, again the lowest in 50 years.
So here we are with what was recently an inverted yield curve and now somewhat flat with regard to the ffr, dr and the 10 year note. The traditional interest rate spread between the three is approx 2%. Therfore with the 10 year note at 3.68 the ffr and the dr should be around 1.68%. Clearly the FED has been and is still behind the curve.
Additionally, it still seems a bit early to reenter the equity markets since there continues to be many headlines of job losses. Simply put that translate into less spending which really does have a ripple effect.
By the way, I went to 100% cash on July 5th and I am still in cash. It will be the pause, by the way well said, when it will be the time to reinvesting into the equity markets.
Just a bit of info from someone who was an investment broker for many years and has been a mortgage broker for 18 years.
Charts:
Great charts by the way!
I did an overlay of the 10 year note and the ffr and dr in 2003. Note how the 10 year note ratches down with the rate cuts.
Also note that in anticipation of a ffr and dr rate cut the 10 year note rate goes up. That is because of experienced investors selling the note and shorting the note which cause the rate to go up. It is truly an absolute inverse relationship. So when others see the rate higher they buy the note which, in turn, pushes up the price of the note and lowers the rate. Then the experienced investors and traders cover their short positions which ultimately ratches down the rate. 2003 was the last very clear picture of this.
Makes sense. The Fed doesn’t usually cut rates in good times, but they do cut in bad times. I don’t think they specifically target the stock market, but are looking at the broader picture of assets, particularly bank assets. Since the deregulation mixed these businesses, stocks are one of the assets that affects these balance sheets. I also notice the Fed seems to follow bond rates, so when stocks go down, money shifts to bond, lowering the rates, and the fed follows them down. I don’t pay attention to what the fed committee says, although I do read some of their staff reports. The committee’s public relations statement is just hot air.
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This from Sudaca over at Capitalstool.com:
Not to rain on anyone’s parade, but I checked some facts and found the following:
There are actually several periods of Fed easing that were accompanied by rising stock markets. The 1989-1992 easing cycle was one, the 1995-1996 was another, and the 1998-1999 was yet another.
June 1989: Fed Funds 9.6% , SPX 325
Sept 1992: Fed Funds 3% , SPX 421
July 1995: Fed Funds 6%, SPX 550
March 1996: Fed Funds 5.25% , SPX 657
Aug 1998: Fed Funds 5.50%, SPX 950
March 1999: Fed Funds 4.75%, SPX 1300
So given the fact that there are also a couple of periods in which Fed easing cycles were accompanied by falling markets, then the whole notion of causality can be tossed out the window. huh.gif
If the market falls further from here or rallies, I guesss it won’t be related to the Fed’s rate actions.