Everyday, Everyday I Have the Blues
By John Stoltzfus,
Chief Investment Strategist
Trend Analysis
Market Strategy Radar Screen Weekly October 17, 2016
In this article:
- In our view the Janet Yellen / Ben Bernanke-legacy Fed with its hallmarks of transparency
- internal debate
- data dependency and Fed speak by senior officials (hawks and doves) is distinctly different from the Fed led by Alan Greenspan which was fairly opaque in its policy process.
It Ain’t Necessarily So…
A Fed Funds hike cycle doesn’t have to be a problem for the equity market
With all the recent noise surrounding prospects for the Fed to raise its benchmark in December or the worries expressed about how high the yield on the 10-year US Treasury has moved from a generational low on July 8th, one might think the markets had never been through a Fed rate hike or a period of bond price adjustments before.
Or at least one might think that the creators of the racket, dread and gloom about chances that the Fed will get back to rate normalization (and how bad that might be for the economy and the stock market) had forgotten how many times (and for just how many years) the subject of the relationship amongst growth, rates, inflation, deflation and currency had been moved from “the back burner to the front burner” since the Fed moved to what we call “NZIRP” (near zero interest rate) protocol in December 2008.
For all the dread and gnashing of teeth over recent weeks, the trek of the 10-year Treasury’s yield from a record low on July 8th of 1.36% to 1.79% last Friday (an increase in yield of just over 31.6%) remains 21.2% nearly a quarter less than where it started the year at 2.27% (ironically the high for the year so far).
With the level of stress generated in some corners of the market around an increased chance for a rate hike by the Fed on December 14th (which stood last Friday at 65.9%)—it appears to have been forgotten that the probability for a hike was judged by the same measure (Fed funds futures) to be around 98% at the start of the year.
The broad brush of worry about what the process of rate normalization will do to the economy, corporate earnings and the stock market appears to us to be a bit overdone.
As we have pointed out on several occasions previously the last cycle of Fed rate hikes which occurred from the end of June 2004 through the end of June 2006 coincided with the S&P 500 (large caps), the S&P 400 (mid-caps) and the Russell 2000 rising respectively 11.34%, 25.87%, 22.5%.
During that two year period, the Fed raised its benchmark rate 17 times consecutively at each FOMC meeting in the period 25 basis points (0.25%) and in aggregate raised its bench mark rate (from what had been at that time around a 45 or 48 year historical low of 1%, some 425 bps (4.25%) to 5.25% by the end of June 2006.
In the 12 months that followed the two-year period of consecutive rate hikes (from the end of June 2006 through the end of June 2007--six months before the economy would enter the Great Recession that started in December 2007) the Fed held its rate steady at 5.25%.
During the period that the Fed stayed on hold from the end of June 2006 through the end of June 2007, the S&P 500, the S&P 400 and the Russell 2000 respectively gained an additional 18.35%, 17.08% and 15.05%.
Ironically it wasn’t until after the Fed cut its Fed funds rate on September 18th by 50bps and subsequently followed with two respective cuts of 25 bps on October 31st and December 11th of 2007 that market performance began to signal deterioration into the end of the year as it fell 10.09% from a cyclical high on October 9, 2007 through November 26th from which it rallied some to end the year 6.18% from its October 2007 peak.
From September 18th when the substantial declines in the markets which followed in 2008 into the first quarter of 2009 were not as much about the Fed having raised its bench mark rate but rather indication that the Fed had raised its benchmark in aggregate too aggressively and more than the economy and markets could handle.
In our view the Janet Yellen/Ben Bernanke-legacy Fed with its hallmarks of transparency, internal debate, data dependency and Fed speak by senior officials (hawks and doves) is distinctly different from the Fed led by Alan Greenspan which was fairly opaque in its policy process.
We expect in the current Fed hike cycle, which began last December, that the Fed will raise rates by 25 bps (0.25%) at its meeting in mid-December and that the amount of the increase will be readily digested by the market even should the market at first protest some before it collectively recognizes that the Fed’s rate hike may well confirm that “things are getting better” and the sustainability of the current economic expansion is in good stead.
For the complete report, please contact your Oppenheimer Financial Advisor.
Other Disclosures
This report is issued and approved by Oppenheimer & Co. Inc., a member of all Principal Exchanges, and SIPC. This report is distributed by Oppenheimer & Co. Inc., for informational purposes only, to its institutional and retail investor clients. This report does not constitute an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction where such offer or solicitation would be prohibited. The securities mentioned in this report may not be suitable for all types of investors. This report does not take into account the investment objectives, financial situation or specific needs of any particular client of Oppenheimer & Co. Inc. Recipients should consider this report as only a single factor in making an investment decision and should not rely solely on investment recommendations contained herein, if any, as a substitution for the exercise of independent judgment of the merits and risks of investments. The strategist writing this report is not a person or company with actual, implied or apparent authority to act on behalf of any issuer mentioned in the report. Before making an investment decision with respect to any security discussed in this report, the recipient should consider whether such investment is appropriate given the recipient's particular investment needs, objectives and financial circumstances. We recommend that investors independently evaluate particular investments and strategies, and encourage investors to seek the advice of a financial advisor. Oppenheimer & Co. Inc. will not treat non-client recipients as its clients solely by virtue of their receiving this report. Past performance is not a guarantee of future results, and no representation or warranty, express or implied, is made regarding future performance of any security mentioned in this report. The price of the securities mentioned in this report and the income they produce may fluctuate and/or be adversely affected by exchange rates, and investors may realize losses on investments in such securities, including the loss of investment principal.
Oppenheimer & Co. Inc. accepts no liability for any loss arising from the use of information contained in this report. All information, opinions and statistical data contained in this report were obtained or derived from public sources believed to be reliable, but Oppenheimer & Co. Inc. does not represent that any such information, opinion or statistical data is accurate or complete and they should not be relied upon as such. All estimates and opinions expressed herein constitute judgments as of the date of this report and are subject to change without notice. Nothing in this report constitutes legal, accounting or tax advice. Since the levels and bases of taxation can change, any reference in this report to the impact of taxation
INVESTMENT STRATEGY
should not be construed as offering tax advice on the tax consequences of investments. As with any investment having potential tax implications, clients should consult with their own independent tax adviser.
This report may provide addresses of, or contain hyperlinks to, Internet web sites. Oppenheimer & Co. Inc. has not reviewed the linked Internet web site of any third party and takes no responsibility for the contents thereof. Each such address or hyperlink is provided solely for the recipient's convenience and information, and the content of linked third party web sites is not in any way incorporated into this document. Recipients who choose to access such third-party web sites or follow such hyperlinks do so at their own risk. The S&P 500 Index is an unmanaged value-weighted index of 500 common stocks that is generally considered representative of the U.S. stock market. The S&P 500 index figures do not reflect any fees, expenses or taxes. This research is distributed in the UK and elsewhere throughout Europe, as third party research by Oppenheimer Europe Ltd, which is authorized and regulated by the Financial Conduct Authority (FCA). This research is for information purposes only and is not to be construed as a solicitation or an offer to purchase or sell investments or related financial instruments. This report is for distribution only to persons who are eligible counterparties or professional clients and is exempt from the general restrictions in section 21 of the Financial Services and Markets Act 2000 on the communication of invitations or inducements to engage in investment activity on the grounds that it is being distributed in the UK only to persons of a kind described in Article 19(5) (Investment Professionals) and 49(2) High Net Worth companies, unincorporated associations etc.) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended). It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons. In particular, this material is not for distribution to, and should not be relied upon by, retail clients, as defined under the rules of the FCA. Neither the FCA’s protection rules nor compensation scheme may be applied. This report or any portion hereof may not be reprinted, sold, or redistributed without the written consent of Oppenheimer & Co. Inc. Copyright © Oppenheimer & Co. Inc. 2015.
