The really precedent shattering policy was

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The really precedent-shattering policy was quantitative easing, or fixed income security purchases by central banks. Massive and multi-year QE programs were enacted (on different timetables) in North America, Europe and Asia. So entrenched had quantitative easing become that the period in which global central banks weaned their economies from QE was colorfully described as a “taper tantrum.” This preamble is a reminder that central banks, who are loath to act rashly in any circumstance, have been particularly cautious about hiking rates in the aftermath of the great recession. The U.S. Federal Reserve, in the view of some economists, waited too long to engage in restrictive policy. Once the Fed under Janet Yellen began to hike rates, they seemed ready to stop after they’d barely begun. Acting to hike rates for the first time since 2006, the Federal Reserve raised the Fed funds and discount rates by a quarter- point (25 bps) each in December 2015. The Fed then waited a year before enacting a second hike, citing a range of factors including weak monthly nonfarm payrolls numbers, instability in emerging markets, and other factors that in retrospect seem transitory. The Fed finally enacted a second quarter-point hike in December 2016. The Federal Reserve hiked three more times in 2017, and has now hiked one time in 2018. We expect the Fed to hike two and possibly three more times in 2018, and then approximately two times each in 2019 and 2020. Because we cannot know what the Fed under Jerome Powell will do in the future, we can only analyze the actual policy to date. So how does the current cycle stack up the historical record since 1980? The current cycle may have quite a ways to go, but it is already longer than average. The current cycle is 25 months old, compared to an average duration of 17 months for the five completed rate-hike cycles since 1980. Despite being longer, this one has less bite. The U.S. central bank has raised the Fed Funds rate by 150 basis points (bps), or 1.5%, in the current cycle; the average rate hike across the five preceding cycles was 310 basis points. How has the stock market fared in this cycle compared to past cycles? Better than average over the cycle to date, but with some bumpiness in the beginning. In the six months preceding the Fed’s first rate hike in December 2015, the S&P 500 declined 2%; for the five preceding cycles, the S&P 500 gained 6% in the lead-up six months. In the six months after the current rate cycle got underway in December 2015, the S&P 500 edged up 1.4%; for the five preceding cycles, the S&P 500 gained just under 5% in the follow-on six months. Across the current 25-month-old cycle, the S&P 500 has gained about 29%; for the previous five cycles, average capital appreciation was 9.2%. On an annualized basis, the current 25-month-old cycle has averaged a gain of 14%; the five preceding cycles delivered 6.6% annualized capital appreciation.
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M ARKET D IGEST - 3 - Conclusion The topic of whether rising rates doom the stock market is just one more argument among equally fervent bulls and bears. Other
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