FOMC Chairman Powell answers a reporter’s question at the October 30, 2019 press conference.

In the Financial Times, Liz Ann Sonders examines what might happen if the Fed is done hiking rates. She writes:

Whether the recent rate rise by the US Federal Reserve caps off the most aggressive tightening cycle in four decades is still being debated.

The CME FedWatch Tool — which tracks the probabilities of rate changes implied futures trading data — indicates that investors believe that there is about an 95 per cent likelihood of no change to rates at the June monetary policy-setting meeting of Federal Open Market Committee.

Staying with those odds for now, perhaps it’s time to dust off the “what happens when the Fed is done hiking” playbook. The problem is the playbook has had many different (and diverging) chapters over the history of rate rise cycles. Be mindful of the fact that the sample size is relatively small at 14 main rate rise cycles since the S&P 500’s inception in 1928. That suggests caution around thinking there is a consistent pattern to apply to investment decision making.

It is indeed possible to construct an average trajectory of the S&P 500 from six months before the final rate rise of each main cycle out to the following year. Focusing only on the average would suggest a pattern of weakness leading into the final rise, some strength in the immediate aftermath, and then a significant sell-off out to about 100 trading days after the final rise. Shame on anyone though who begins and ends the analysis with these generalities.

Why? Consider the extraordinarily wide range of outcomes in the 14 cycles — generally in the range of a rise of 30 per cent to a fall of the same scale over the span of the 12 months following the final rate rise.

There is not much of a pattern between the date of the final rise and the S&P 500 performance at the six-month and one-year point. Likewise, the span between the final rise and the subsequent first rate cut. This highlights that there are always myriad influences on market behaviour — not just monetary policy. But it also reinforces one of my favourite adages: Analysis of an average can lead to average analysis.

In the immediate aftermath of the Fed’s announcement in early-May, I saw several headlines that flashed something along the lines of, “typically, the final rate hike has been a positive for stocks”.

The problem is that there is no “typical” when it comes to this analysis. In fact, the pattern associated with the average trajectory of stocks actually never occurred during any individual cycle!

Read more here.