What does happen when the Fed starts tightening? I've been through a lot of Fed rate increases and it's not a pretty sight, at least initially. Historically almost all tightenings are accompanied by a catch-all terminology that you better get used to hearing: soft landing and hard landing.
The soft landing people are trying to keep you in. The hard landing people are trying to get you out. The latter represent the worst kinds of commentators because they can always point to some difficult tightening cycles like the one that preceded The Great Recession and make a case that it's time to sell NOW. Given that the market is at a high, their voices will resonate louder than all the others. After they call for it, you can expect the sell call will be self-fulfilling.
But the facts don't bear that thesis out one bit. In fact it is totally fraudulent. The first hike in that tightening cycle meant nothing to the market. Nor did the second. Or the third, or the fourth. I could go on for 13 more times before you find a true impact because Fed Chief Bernanke kept raising and raising and raising in lockstep to cool the housing market. Had he just said that from now on people had to put down 50% to buy a house - not his purview but so what, he did a lot of things outside his purview for the next two years, we might have prevented the worst recession in U.S. history.
But my point is that this mother of all tightening cycles did nothing to the market at all until it was too late and the unwitting trip had been laid.
Most tightening cycles are like that. There is so much sturm and drang about them in part because we journalists have to ask and the guests have to answer to the end of the bull rap. It drives me crazy because not only is the questioning totally by rote but that there are enough bears out there, or at least under-invested managers or managers who are so rich they have forgotten what it is like to NEED money.
It would actually be better if we asked people how often the beginning of a tightening cycle is a good time to BUY stocks.
Of course there are outliers. I have repeatedly tried to get you to focus on the December 17, 2015 hike from .25 to .5 by Janet Yellen that was a total bone crusher. The Dow stood at 17,495 when she put through that increase in a failed attempt to predict that the rate was ready for normalizing. I really thought it was about her being worried about inflation, but inflation proved totally transitory, oil collapsed and the Dow plummeted and plummeted and plummeted down to 15,643 on February 11, before hitting bottom.
Yellen judged the stock market prepared for the hike but when commodities collapsed, stock traders thought we were going into a new rate cycle and it would be disastrous. So the selling was endless until the Fed hinted not to worry about it. Still this is the hike that stands out to me as a worst case scenario that is the OUTLIER when it comes to tightenings and have focused on it simply because we have such a strong market that a bad reception can be a possibility that can't be dismissed. Still, the selloff turned out to be a fabulous time to buy.
For months now I said there will come a day when Jay Powell judges the inflation as NOT transitory or we have had much better employment because COVID has been tamed. Are we at that moment? I don't think Powell takes back things he just said a few days ago. He also has learned from his predecessors that there is a right way and a wrong way to raise rates, the right way being to not just stick your finger in the air and say things are fine. He made that mistake a few years ago and we had a nasty selloff but, again, it wasn't after the first hike and it was only because he made such a strong point of talking about needing to tighten many more times that the market went haywire. I think that gaffe wasn't lost on him either
So if you want to sell in the next hike all I can say is you are listening to the bears who, historically, have been shown to talking their own book or simply demonstrating historical ignorance.
