Financial dogma states that “the Fed’s rate hikes are bad for the stock market and economy”. And as in many other cases, financial dogma is wrong. A lot of “trading wisdom” doesn’t stack up against the light of data.
Bloomberg published a very popular tweet from Twitter, stating that the U.S. stock market’s current rally is the strongest rally during a rate hike cycle. The hypothesis is that “the Fed’s rate hikes are bearish for the stock market. How much longer can this go on before all hell breaks loose?”
This an example of sloppy analysis to feed financial media’s need for sensational “the world is about to end” headlines.
For starters, what counts as a “rate hike cycle” is unclear. The author of the above chart defines a “rate hike cycle” as the start of a rate hike to when the Fed cuts interest rates.
However, here’s the more important point. The Fed spends a lot of time flip flopping on rate hikes. Sometimes the Fed will hike rates for a few years, cut rates a little bit, and then hike rates again. While this should be classified as a single “rate hike cycle”, the author of the above chart classifies it as 2 different rate hike cycles.
The reality is that the Fed never hikes rates nonstop throughout the course of an economic expansion.
As a result, a lot of the “rate hike cycles” from the above chart are very short in terms of time. If you combine some of the cycles in which the Fed hiked rates, cut rates, and then quickly hiked rates again, you realize that the stock market can go MUCH HIGHER when the Fed is cutting rates.
Here’s the Fed Funds target rate. As you can see, the Fed doesn’t hike in a linear, nonstop fashion.
If the “stock market will fall because the Fed is raising interest rates” thesis is true, then the stock market should tank once the Fed stops hiking interest rates. After all, mainstream financial dogma believes that “the Fed hikes rates until something breaks”.
But as we’ve proven in a previous study, the stock market actually tends to go UP for half a year after the Fed stops hiking rates.
There are certain things that bullish investors and traders should worry about righ now. The Fed’s rate hikes aren’t one of them. The Fed’s REACTS to economic data. It lags the real-time economy.
And lastly, I’d like to mention that real (inflation-adjusted) interest rates are still historically low. Historical bear markets started when real interest rates were much higher.
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