Those cycles occurred from february 83 to august 84

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the Fed has embarked on five rate-hiking cycles since 1980. Those cycles occurred from February ’83 to August ’84; March ‘88 to March ’89; December ’93 to March ’95; June ’99 to July ’00; and June ‘04 to Aug ’06. In retrospect, those last two cycles seem poorly timed, given the stock market declines that began in 2000 and 2007. On average, these cycles lasted 16.8 months. The longest cycle began in June ’04; the shortest began in March ’88. On average, the average rate hike across the cycle was 310 basis points (bps). Rates were hiked the most in the June ’04-August ’06 cycle (425 bps) and the least in the June ’99-Jul ’00 cycle (185 bps). Independent Equity Research Since 1934 ARGUS A R G U S R E S E A R C H C O M P A N Y 6 1 B R O A D W A Y N E W Y O R K , N. Y. 1 0 0 0 6 ( 2 1 2 ) 4 2 5 - 7 5 0 0 LONDON SALES & MARKETING OFFICE TEL 011-44-207-256-8383 / FAX 011-44-207-256-8363 ® 2017 - DJIA: 24,719.22 1934 - DJIA: 104.04
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M ARKET D IGEST - 2 - Rate cycles, by the time they begin, are well anticipated; but investors do not act fearful in advance. For the six months preceding the five cycles noted above and up to the first rate hike, the S&P 500 averaged a return of 6.1%. On an annualized basis, that roughly 12.2% gain is a bit better than average annual capital appreciation of 9.7% on the S&P 500 since 1980. However, there is broad dispersion of returns for these six-month pre-hiking periods. The best six-month showing came in 1983, with a 31% surge; the worst started in 1988, when stocks went down 17% in the six months preceding the rate cycle. Once the hikes are actually underway, stocks perform about as normal, though again there is fairly wide dispersion of returns. For the period between the first rate hike and the six months after, the S&P 500 averaged capital appreciation of 4.7%. This includes a 13% gain in the six months following commencement of the February ’83-August ‘84 rate cycle; and negative return of -3.3% in the March ’88-March ‘89 cycle. We mentioned that the average rates cycle lasted 16.8 months. Average capital appreciation across these five rate cycles was 9.2%. On an annualized basis, that equates to approximately 6.6% full-year capital appreciation - about 310 bps below the average annual return of 9.7% on the S&P 500 since 1980. The fact that 310 bps is also the average cumulative rate hike for each cycle is purely a coincidence, though it does make you go “hmmm.” The bigger takeaway is that, given stronger performance early in the rate cycle (first six months), stocks really lag in the final six to 12 months of the cycle. The Fed and the Stock Market, 2015-? The current rate cycle is anomalous in several ways. This is the first cycle since the great recession of 2008-2009 came close to cratering the global financial system. The great recession was followed by historically accommodative policy. The U.S. Federal Reserve cut the Fed funds rate to effectively zero, and some global central bankers went to negative rates.
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  • Spring '12
  • DirkJenter
  • Finance, ........., Market Digest

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