CAMS Weekly View from the Corner - Week ending 10/6/23
October 9, 2023
Along the path of this price inflation era we have all heard the various drumbeats that the Fed was done with rate hikes (X rate hikes ago) and they would be “pivoting” (was always the choice word) to cutting interest rates soon.
Underneath this was outright and/or implied enthusiasm that once the Fed pivoted to cutting rates it would walk us to a moon shot of ever higher stock prices that would underline a brand new bull market for the future history books.
For our part we would hear this type of talk and wonder which planet they were studying market history of because the enthusiasm and underlying near-guarantee of such an experience does not match up with our history, in particular our 21st century history.
In today’s edition we will offer more charts than usual allowing some relatively recent history to speak for itself in the case of rate cuts and the follow-on stock market performance.
The Fed Funds Rate
We will focus on the 21st century and begin with the Federal Reserve’s Fed Funds Rate. This is their benchmark rate that rises and falls with their interest rate policy decisions.
Our red down arrows identify three periods in this century where the Fed began notable interest rate cutting campaigns. We will chart the first two periods by looking at the behavior of the S&P 500 price index itself as well as a performance returns study.
The price charts and returns studies will cover the period of time of the Fed cutting interest rates, i.e. the period of time our red arrows highlight. The question under review is with the Fed cutting rates, i.e. pivoting, do collective stock market participants then view that as an all is good sign and push stock prices higher without concern or caution.
The above chart depicts the S&P 500 price index from January 2001 through early summer of 2003. Per our first red down arrow on the Fed Funds chart the Fed began a consistent campaign of reducing interest rates for a couple of years.
Per the price chart we can see prices ebbed and flowed but along the path found a way to move lower depicting what true bear markets do which is to find a way to go lower. Importantly, viewing the price behavior, they also find a way to move higher quickly (known as counter trend rallies) thereby aiding in establishing a collective belief/sigh of relief that the downtrend is over and it is all good again.
This then can and does lead to rolling over only to move lower duping the masses along the path. True bear markets are brutal in this sense. They seem to do everything they can to prove the most people wrong along the path.
Directly above is a returns study for the S&P 500 price index. We are taking the S&P price chart and depicting what it looked like through the lens of actual percentage performance.
Our red line highlights the damage done along the way. Peak to ultimate trough the S&P went down nearly 50% and we note again this was once the Fed began to cut interest rates from January 2001 through early summer 2003.
Moving Along to 2007 – 2008
Per our second red down arrow in our Fed Funds chart the Fed began another interest rate cutting campaign that began in latter summer of 2007 and went through 2008.
Above is the S&P 500 price index covering the stretch of time that the Fed was in their interest rate cutting campaign back in summer of 2007 – 2008.
Every market environment has a different story. We often say there is no such thing as a stock market per se only a series of market environments that need to be managed accordingly. Know the overall environment and know it well - that is important.
The bottom line is as the Fed began to cut and proceeded through their rate cutting campaign market participants showed little enthusiasm via the price behavior above. At the initial outset prices continued marginally higher but then that changed relatively quickly.
Similar to the 2001/03 time period prices ebbed and flowed and found a way to move lower albeit less volatile than in the 2001/03 time period.
Above is a look at a returns study for the time period of the S&P 500 price chart which again is matching up with the Fed’s interest rate cutting campaign of latter summer of 2007 through 2008.
As offered, in this period there was an initial continued trend but faded relatively quickly and became a full-on down trending market landscape. The peak to trough damage also registered 50% plus similar to the ultimate damage in the 2001 – 2003 experience.
Covid Era
The third down arrow on our initial Fed Funds Interest rate chart covered very recent history of latter summer of 2019 through very early spring of 2020. This we will not chart in that we all know the experience well via the Covid era.
At the outset of that rate cutting campaign there was uncertainty and then after a few months the stock market pushed into a continued trend only to then reverse and fall very hard.
From a historical perspective there is little to glean here in light of the shutting down of the global economy which obviously is not an economic cycle. Rate cuts or not, shut down the global economy and all know the stock market will have problems into the teeth of that process.
Over the decades there are many periods to study of these rate cuts/market performance relationships. To be certain they do not all equal terrible stock market performance but many do which underlines our subject title. To suggest or imply that once the Fed pivots and the rate cuts begin it is nothing but a clear path for a relentless uptrend in the stock market is devoid of historical truths.
The bottom line – be careful with easy assumptions that when the Fed begins to cut interest rates it is a sure thing for the stock market to immediately respond with a rise into a new bull market.
I wish you well…
Ken Reinhart
Director, Market Research & Portfolio Analysis
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