Fed’s 1995 Script Playing Out Again

By Bryan RichMarch 26, 5:00 pm EST

Yesterday we talked about the yield curve inversion.

It was driven by the Fed walking up the fed funds rate (i.e. “normalizing rates”) over the course of the past three years.  As we discussed yesterday, with global central banks pinning down the long-end of the yield curve through QE (now led by the BOJ), there were few things better telegraphed than the U.S. yield curve inversion.

The market is now pricing in a 66% chance of a rate cut by the end of the year.  The market is arguing that the rate hike the Fed made in December, was a mistake.

When have we seen this script before?  1995.  As we discussed coming into the year, 2018 was the first year since 1994 that cash was the best producing major asset class (among stocks, real estate, bonds, gold).  And the culprit was an overly aggressive Fed tightening cycle in a low inflation recovering economy.

The Fed ended up cutting rates in 1995 and spurring a huge run up in stocks (up 36%).  That’s the bet people are making again.  But I suspect we’ve already seen the equivalent of a cut through the Fed’s dovish posturing since early January.  Remember, they went on a media blitz the first several days of January, dialing down expectations that there would be any more tightening.

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