10-Year Trends: S&P 500 vs Fed Rate Cuts
A: For kicks, I just wanted to check out how the S&P 500 has performed when compared to fed actions over the past 10 years. I wondered if the relationship was clear. It was! Basically, if you SELL when the fed starts to cut rates and you BUY when the fed starts to raise rates, in the short-medium term you probably will do just fine! It's strange how a short term equity investment strategy may be as simple as this!
Lets get right to the 10-year chart:
S&P 500 Chart courtesy of MSN Money
Fed Funds Target Rate courtesy of Moneycafe.com
Its clear that substantial easing or hiking campaigns resulted in a subsequent selloff and rally respectively. Granted, when the fed started hiking in mid-1999 the time to sell was when the fed stopped hiking rates in mid-2000, and not at the next ease. If there is any relationship that is noteworthy here (which would be for periods of time where fed action is aggressive), its that if you buy when the fed starts a hiking campaign, you probably will have missed the majority of the pain that occurred during the slowdown period prior. On the same note, if you sell when the fed starts a new easing campaign (tricky part is realizing when fed action will be aggressive and drawn out), you probably are getting out before the slowdown hits full force! Also, the longer the period of PAUSE after a hiking or easing campaign seems to relate to the length of the current trend in the S&P.
Ok, thats done.
Relating To Todays Fed Announcement: Today's fed move probably means fewer rate cuts down the road. In my opinion, the hidden gem in today's announcement is the targeted nature of the shot that will limit pipeline inflation (geez, there's enough of that as is) by reducing the need to cut fed funds rates as aggressively as previously expected. That means the US dollar may not become as weak as expected and commodities priced in dollars may lose a dose of steroids (rate cuts) that they were betting on. If you want to get real crazy, what if we assume that international markets are lagging the US and they are about to enter a period of financial distress similar to what we have been through for past 4-6 months? Our currency could bounce further if foreign cb's start easing at a time when our fed found a way to limit future rate cuts. Ehh, just a thought with many if's.
Time will tell, as this is a more medium term idea (3-4 quarters) to be watching for; for now, we still have pain to go through waiting for the damaged economic reports to show the carnage left in the wake of the ongoing credit storm.
Comments (3)
How does it look like for earlier cycles? I doubt you can draw any conclusions which are generally valid from such a small sample you show here.
Posted by John Doe | March 11, 2008 4:55 PM
ill look, but you have to admit that relationship is hard to argue..logic makes sense to.
Fed starts to cut, they see problems. Fed starts to hike, they want to cool things down. We know fed moves take a lag to funnel through system, so I would expect this trend for the most part to be somewhat similar
Posted by Noah | March 11, 2008 6:07 PM
I'm looking for a chart of S&P returns over last 10 years and Manhattan real estate (upper east side if possible) returns over the same period. Does this exist somewhere on the site?
Posted by Luke T | January 25, 2009 10:33 PM