Will the Fed Cause a Stock Market Stumble?
Will the Fed Cause a Stock Market Stumble? by Michael Carr, CMT
TDC Note – Yes – the stock market will crash and burn because it is overvalued by, at least, 50%. The “front loaded wealth effect” will end, the algo’s will have no Federal Reserve funds to pump into the market and viola!! Crash and burn.
When the Federal Reserve raises rates, market pundits like to talk about the sell-off they expect to see. There’s even a name for the timing rule that makes a sell-off sound certain: “three steps and a stumble.” This rule tells us to expect a stock market stumble after the Fed moves three steps higher in the discount rate.
This sounds reasonable, but will a stumble really happen?
The chart below shows the S&P 500’s maximum stumble in the year after the Fed’s last 10 third rate hikes dating back to 1955. Three times after the third hike, traders were unfazed, and the S&P 500 kept moving higher, never falling lower than the low on the day of the hike. On average, we see a 7.7% decline.
The steepest declines occurred between 1965 and 1980, a time when the S&P 500 was in a broad trading range. This was when Businessweek proclaimed the death of equities, noting in 1979:
…the institutionalization of inflation — along with structural changes in communications and psychology — have killed the U.S. equity market for millions of investors. “We are all thinking shorter term than our fathers and our grandfathers,” says Manuel Alvarez de Toledo, of Shearson Loeb Rhoades Inc.’s Hong Kong office. Today, the old attitude of buying solid stocks as a cornerstone for one’s life savings and retirement has simply disappeared.
That passage seems comical now. Imagine a time when stocks were avoided because investors were no longer focused on the long term. Stocks are now the ultimate short-term investment for high-frequency traders, and individual investors, such as my colleague Paul Mampilly, have shortened their average holding period for equities.