To me, the next cyclical market down trend is linked to Fed Policy and the timing of their change in interest rate policy. For now, I remain in the Don’t Fight the Fed or The Trend camp (constructive on equities).
So what happens when the Fed raises interest rates? Do you have a plan in place to deal with the risk? Important questions as you’ll see the equity markets do not do well when the Fed raises interest rates.
One can argue that this time might be different but that is a tough bet as noted in the following chart. It shows the number of times the Fed has hiked rates without a negative equity market consequence. The data goes all the way back to July 1, 1954 and tells us we should stand on guard. Out of the 15 times the Fed has raised rates, there were ZERO times when the market gained. Not once did it avoided a negative outcome. The average decline was -23% (note the Subsequent % Decline in Market column – red arrow).
So it is pretty clear that the market does not do well when the Fed raises interest rates though I’ll add that, historically, it is typically after the second rate hike that market indigestion begins. Further, I believe that given the unprecedented six years of Fed zero interest rate policy, this time could be even more challenging. Don’t know – we’ll see.
Steve Blumenthal
Founder & CEO CMG
Stephen Blumenthal founded CMG in 1992. He is CEO, Chief Investment Officer and portfolio manager at Capital Management Group, Inc. where he manages equity and tactical investment portfolios. He is a frequent speaker and writer on investment strategies and has been featured in various media sources including the Wall Street Journal, Barron’s, Investor’s Business Daily, Pensions & Investments Magazine, Investment News, RIA Biz and Smart Money. He has been a guest on CNBC, Wall Street Journal Live, and Bloomberg. Mr. Blumenthal is a frequent speaker at industry conferences (NAPFA, IMCA, Index Universe, Opal Financial Group Indexing & ETF Summit and NAAIM) and is author of CMG’s popular investment research commentary. With 30 years of investment management and industry experience, prior to founding CMG, Mr. Blumenthal worked for Merrill Lynch Institutional, Merrill Lynch Retail and Prudential Securities.
Mr. Blumenthal graduated with a Bachelor of Science degree in Accounting from Pennsylvania State University. He is married, has three children and is active in his community coaching youth soccer.