Market Timing Brief for 3-18-2015: What Actually Happened to Stocks When Fed Interest Rates Rose in the Past?

A Market Timing Report about Fed FOMC rate changes and how they have effected the U.S. Stock Market (SPX, SPY) historically…

Fed Funds Rates: Rapidly Falling Rates Are Negative for the U.S. Stock Market (SP500).  Rising Rates Are Mostly Bullish for Stocks.

12-1992 = low of 2.92%

Rates rose and stocks rose strongly.  The low was followed by minor SP500 Index downside and some volatility then a strong rally.

4-1995 = high of 6.05%

No significant SP500 Index downside, then strong rally, but situation was not at an extreme.  This was proven by the fact that rates did not drop much for the next few years. Next low was fairly high, at 4.63% in 1-1999.  In addition, stocks were not that expensive in 1995 vs. 2000.

1-1999 = low of 4.63%

Rates rose and stocks rose strongly.  No significant SP500 Index downside, then strong rally through 1999, the biggest bubble ever in our markets.

7-2000 = high of 6.54%

Rates were lowered quickly and stocks crashed.  SP500 Index sold off hard after that from the July 2000 lower highs in both NASDAQ and SPX. 

12-2003 = low of 0.98%

Rates rose and stocks rose strongly.  Market had rallied strongly in 2003, then after the 12-2003 low in rates rallied further, gave up the gains, and then rallied up until 2007.

2-2007 = high of 4.26%

Rates were lowered quickly and stocks crashed.  Market sold off, then rallied to new high, gave up all gains, then hit a marginal new high and sold off massively from 10-11-2007 top of 1576.09 to 666 on March 6, 2009 intraday.


Is it different this time, or should we expect rising rates to be GOOD for the market? What are the implications for share buybacks with rising rates? How much will growth of earnings per share fall if rates rise X%?

CONCLUSIONS: Unless it is truly different this time, due to distortions of ultra-low rates and the massive Fed balance sheet, it won’t be different this time in the stock market!  I challenge my colleagues to do the calculation of the impact on earnings growth when stock buybacks become more expensive, or come up with other feasible reasons that it is in fact different this time.  Stanley Druckenmiller has said he does not know if the Fed can get out of its balance sheet without causing trouble OR NOT.  Not knowing is being more honest than saying you know, but for no good reason!

History says that gradually rising rates have not been bad for the market for the past few decades.  The backdrop today is very unusual though, as U.S. dollar strength will only get worse if the Fed raises rates while the rest of the world is lowering rates. 

My opinion?  Though I am no fan of low rates, given the Fed’s goals, keeping them steady until a low level of inflation (their 2% goal) returns might be more prudent than raising rates simply to get them “off zero.”

**Fund Funds Rate Reference

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