Pro Perspectives 11/19/19

November 19, 2019

Historically, when the Fed ends a tightening cycle, it has been a great time to be in the stock market. 

This year, we’ve had the end of a tightening cycle, and a great stock market.

Let’s take a look back at my December 17th note of last year, for some details on how we got here (from rate hikes, to rate cuts … from a stock market bust to a boom) .  And then we’ll take a look at the year’s stock market performance, relative to the 1995 analog we’ve been projecting all year.

December 17, 2018 – Pro Perspectives

As I said on Friday, stocks clearly have a significant influence on confidence.  And confidence ultimately feeds into economic activity. 

So, stocks matter. 

On that note, the slide in stocks has started to inflict some damage. The consensus view surrounding stocks and the economy seems to have rapidly deteriorated over just the past week.

As you can see in the chart below of stocks, we touched the February correction lows late in the day today. 


This is all setting up for a very big Fed decision on Wednesday.  The Fed has hiked three times this year.  They are said to be data dependent, yet they have systematically hiked seven times since the 2016 election, despite tame inflation.  

With that, this is the first time since 1994 that stocks, bonds, real estate and gold have all been losers on the year (i.e. negative returns).  And it’s the first time since 1994 that cash has been the highest returning asset class.    

It so happens that the Fed back in 1994 was also systematically raising interest rates into a low inflation, recoverying economy — in anticipation that inflation would quicken.  It didn’t happen.  They ended up choking off growth.  The scenario this time looks very similar.  The Fed paused back early 1995, and then ended up cutting rates.  Stocks boomed, returning 36% on the year.  

So, 2018 looked like a repeat 1994.  And 2019 has looked like a repeat of 1995.
With that, in the chart below, I’ve overlaid stock market performance from the current year (2019) onto 1995 (both indexed at 100). … 

You can see the steady 45-degree angle in the rise of stocks back in 1995.  With a very similar backdrop, the rise in stocks hasn’t been quite as tight and pretty, but we continue to climb toward the very big number from 1995 (+36%).  Incidentally, back in ’95, stocks added another 5 percentage points from this mid-November date, through the last trading day of the year.  Following that year, the S&P 500 did +20%, +31%, +27% and +20% to end the 1990s. 

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