Todd Bliman
Monetary Policy, Interest Rates

What Does This Messy Chart Say About Rate Hike Fears?

By, 03/12/2015
Ratings384.328948

Here is a terrible chart that makes a really good point.

Almost daily, headlines assure you the Fed will soon hike interest rates, causing havoc in financial markets. There is no shortage of analysts who persist in attempting to guess the date of the next Fed hike, going almost so far as to diagram sentences in meeting minutes and statements. But as we’ve detailed many times, history doesn’t support the notion Fed hikes are automatically bad for stocks. The noise that is Exhibit 1 shows exactly that.

The chart plots the S&P 500 over a 450-trading day period beginning 150 days before a rate hike. The black vertical line is zero hour, hike day. What can you make out of this?[i] More specifically, can you see any useful pattern in this? Anything justifying the fears? I can’t.[ii]

Exhibit 1: S&P 500 Price Index Before and After Initial Fed Funds Hikes

Sources: FactSet, Federal Reserve, as of 3/11/2015. Dates of the initial hikes used were: 7/16/1971; 8/16/1977; 10/21/1980; 3/27/1984; 12/16/1986; 3/29/1988; 2/4/1994; 6/30/1999; 6/30/2004. For what it’s worth, there are three negative 150-day pre-hike periods and one negative 300-day post-hike period.

That, friends, is the point. For all the pixels pundits are spilling over rate hike timing—and all the corresponding angst over what a hike means for stocks—history suggests the exercise is a waste of time. One rate hike hasn’t been proven to have a repeated negative impact in the period before or after. The yield curve has more influence on lending and credit availability, suggesting the pace of hikes and their impact on the yield curve—the spread between long and short rates—are a bigger factor than a hike in isolation.

Even the two series surrounding 1987’s crash (the two after 1986’s hike and before 1988’s) show pretty plainly the initial hike had zero to do with the bear. It didn’t begin until 180 days after 1986’s hike—stocks rose 35.7% between the hike and the 8/25/1987 bull market peak. The ensuing bear ended more than 75 days before March 1988’s hike.

One might argue 1980’s bear market began in November 1980, fairly soon after October 1980’s hike[iii], providing one major negative point out of nine initial hikes shown. However, there are some important asterisks here worth discussing. For one, the effective fed funds rate went from roughly 9% in August to over 20% by December’s close, and the yield curve was inverted for most of the year. And, during the period, the Fed didn’t target fed funds at all (that’s why I just cited the effective rate). If you take a more expansive view of monetary policy, transcripts and official announcements date tightening to October 6, 1979. That day, the Fed actually announced a slate of tightening measures: They hiked the discount rate by one percentage point, boosted reserve requirements for certain lending products and told the world they would stop targeting fed funds—in total, much more sweeping actions than a mere rate hike. The markets fell just over 10%—a correction—but stocks bounced back fast and the bull market continued until November 1980. No matter which dating method you choose for 1980, I’d suggest this period of extreme policy shifts, inverted yield curves and stratospheric inflation shouldn’t be the basis for assessing the stock market impact of a possible hike today.

Ultimately, monetary policy is very important to weigh in assessing conditions for stocks, but the key is to assess actual decisions in light of broader economic and monetary conditions. Assuming there is some automatically negative implication from a single rate hike is leaping to conclusions this messy chart of rate hike history doesn’t support. So if a rate hike comes, I’d suggest staying cool.

 

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[i] Without printing this page out. Then you can make a lot.

[ii] I am even having trouble coming up with a Rorschach test joke!

[iii] We date this hike to October based on the trend of the Effective Fed Funds rate, which was choppy from August to October, and then consistently higher beginning in October. The rate in October was 12.3% and it peaked at 22.0% on 12/31/1980. (Source: FactSet.)

 

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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