Fed will control the bottom

https://www.wsj.com/articles/stocks-historically-dont-bottom…

**Stocks Historically Don’t Bottom Out Until the Fed Eases**
**Investors ask how long the selloff will last after the S&P 500 posts its worst week since March 2020**
**By Akane Otani, The Wall Street Journal, June 20, 2022**

**...**
**If history is any guide, the selloff might still be in its early stages.**

**Investors have often blamed the Federal Reserve for market routs. It turns out the Fed has often had a hand in market turnarounds, too. Going back to 1950, the S&P 500 has sold off at least 15% on 17 occasions, according to research from Vickie Chang, a global markets strategist at Goldman Sachs Group Inc. On 11 of those 17 occasions, the stock market managed to bottom out only around the time the Fed shifted toward loosening monetary policy again. ...**

**And the Fed has only just gotten started. After approving its largest interest-rate increase since 1994 on Wednesday, the central bank signaled that it intends to raise rates several more times this year so it can tamp down inflation. ...And while corporate earnings are strong now, analysts expect they will come under pressure in the second half of the year. ...** [end quote]

Experts say, “Don’t try to time the market.”

OK. But let me try.

  1. 2020-2021. Covid hits. Fed pumps monetary stimulus like there’s no tomorrow. Ditto Congress with fiscal stimulus. Stock market soars. Inflation begins to heat up in June 2021. Fed says it’s transitory but, oops, it goes higher and lasts longer than expected.
    https://www.bls.gov/cpi/

  2. Early 2022. Fed begins to jawbone about raising rates to quell inflation. The stock market begins to drop and interest-rate sensitive speculative investments (“high growth” tech stocks, crypto) are slammed. The Treasury yield curve rises. Inflation doesn’t subside. In May 2022, the Consumer Price Index for All Urban Consumers rose 1.0 percent, and rose 8.6 percent over the previous 12 months, the highest in 40 years.

The Fed finally starts to act decisively in June by raising the fed funds rate 0.75% and beginning to allow a tiny fraction of their enormous book of long-term Treasuries and mortgage bonds to roll off. Mortgage rates soar. But this is just the start.

https://fred.stlouisfed.org/series/FEDFUNDS
https://fred.stlouisfed.org/series/WALCL
https://fred.stlouisfed.org/series/MORTGAGE30US

  1. Fed Chairman Jerome Powell announces that the Fed will target a “neutral” fed funds rate that doesn’t stimulate or slow the economy. By definition, negative REAL rates (below the inflation rate) are highly stimulative. (Which they have been for many months.) At the same time, the FOMC generates a “dot plot” of expected fed funds rate of 3.25% (median) for early 2023. That’s way below inflation…unless inflation drops a lot.

  2. Powell announces that he won’t stop raising rates until inflation has declined for at least a couple of months. That’s a clear line in the sand which everyone can see.

  3. I read the Fed’s research paper on the forecast for 2022- 2023. It seemed way too optimistic as it projected only a tiny slowing of the economy. Most economists are predicting a recession and some already think the recession has begun. (But NEBR won’t say until after it’s all over.)

  4. We’re already in a bear market. That’s because the air is being let out of the asset bubble as the Fed normalizes rates from its ultra-easy emergency policy. The recession hasn’t even started. Usually, the stock market drops in a recession due to lower corporate earnings, regardless of the Fed. So the stock market will probably drop further once the recession hits.

  5. At some point, if the Fed sticks to its guns, inflation will drop. If the Fed doesn’t stick to its guns and cuts rates prematurely (before inflation falls to near its target of 2%) there will be 1970s style stagflation.

  6. When the Fed decides the recession has wrung the excess inflation out of the system (and/ or when they cave to pressure due to rising unemployment) they will start to cut rates. That will be the bottom.

I don’t know when that will come. Neither does the Fed – they are playing it by ear.

But it would be a mistake to buy stocks before that bottom point. The 1973 - 1975 bear market had several bear-trap mini-recoveries that failed.

Wendy

20 Likes

“it would be a mistake to buy stocks before that bottom point”


It would be a mistake to buy stocks at the high point.
Buying before the “bottom” is clear may or may not be a mistake - dependent upon
an investors goals and whether the companies bought have a way to generate and
communicate that pathway to earnings.

Howie52

4 Likes

8. When the Fed decides the recession has wrung the excess inflation out of the system (and/ or when they cave to pressure due to rising unemployment) they will start to cut rates. That will be the bottom.

Another great post. And now that we’ve all felt the pain of inflation, I bet the Fed will wait longer than usual to start cutting rates.

Experts say, “Don’t try to time the market.”

Why are they experts? Are they saying sell at the top? Or buy at the bottom?

Most people follow the experts.

Most people buy at the top and sell at the bottom. They buy all the way down. They buy all the way up. Most people can not afford to retire. The experts help you with retirement.

Still scratching my head.

I realize some exercises I do not need to understand.

2 Likes

The bottom will happen months before the Fed starts to cut rates.

Bet you anything.

5 Likes

The bottom will happen months before the Fed starts to cut rates.

Bet you anything.

Correct…The Fed just follows the market

1 Like

From the OP: Going back to 1950, the S&P 500 has sold off at least 15% on 17 occasions… On 11 of those 17 occasions, the stock market managed to bottom out only around the time the Fed shifted toward loosening monetary policy again.

Maybe the bottom was June 16th, similar to 1957. More likely, the market will continue falling until the Fed stops raising rates. Don’t fight the Fed.

There were 17 bottoms since 1957 (17% decline to define a trough, and 20% gain to define a peak). Only one of these 17 was after a Fed rate hike more than 0.4 (over 3 months). Sorted by 3-month change in effective Fed Funds rate:

    date     TR   bars  FEDFUNDS  FF-3m  3mChg
12-Aug-1982  -20  430     10.12   14.45  -4.33
3-Oct-1974   -45  436     10.06   12.92  -2.86
20-Nov-2008  -50  283     0.39    2.00   -1.61
26-May-1970  -33  369     7.95    8.98   -1.03
21-Sep-2001  -36  373     3.07    3.97   -0.90
23-Mar-2020  -34   23     0.65    1.55   -0.90
4-Dec-1987   -33   71     6.77    7.22   -0.45
26-Jun-1962  -27  135     2.68    2.85   -0.17
11-Oct-1990  -19   62     8.11    8.15   -0.04
23-Jul-2002  -31   87     1.73    1.75   -0.02
3-Oct-2011   -19  108     0.07    0.07   0.00
9-Mar-2009   -27   42     0.18    0.16   0.02
9-Oct-2002   -19   33     1.75    1.73   0.02
31-Aug-1998  -19   31     5.55    5.49   0.06
7-Oct-1966   -21  167     5.53    5.30   0.23
24-Dec-2018  -19   65     2.27    1.95   0.32
**22-Oct-1957  -20   70     3.50    2.99   0.51**
**16-Jun-2022  -23  114     0.77    0.08   0.69**

TR is S&P 500 total return from top to bottom.
bars is market days from top to bottom.
FF-3m is FEDFUNDS 3 months earlier.
3mChg is FEDFUNDS minus FF-3m.

— links —
Federal Funds Effective Rate (FEDFUNDS)
https://fred.stlouisfed.org/series/FEDFUNDS

Note that this can be done using gtr1 Cycle Returns.
Subject: Bear Markets and Recessions, Date: 8/27/2017
“The Lunde Timmermann algorithm defines Bear markets using two parameters: the percentage decline to define a trough, and the percentage gain to define a peak.”
https://discussion.fool.com/bear-markets-and-recessions-32819220…