I'm sure a lot of people are eagerly expecting the Fed will pivote soon and it is a common thought an interest rate pivot will boost the stock market. Really? See below what the market will really perform when the Fed pivots. It is not a pretty picture based on past experience.
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But pivots don't always end well…
It's actually been quite the opposite when you look at the last two major bear markets with the 2000 "dot-com" bust and 2008/2009 financial crisis.
The chart below shows the overnight federal funds rate (orange line) and the S&P 500 (blue line). The Fed pivot took place before stocks took their biggest plunge (grey dotted line).
Take a look…
That's because a pivot signals tough times ahead for the economy, and thus corporate profits.
And pivoting is historically a bad signal because it follows the stark realization by Fed officials that they've pushed things too far and took the economy to the brink.
But by then, it's too late.
Take another look at the federal funds rates in the chart below, this time with recessions shown in the grey shaded areas. Pivots happened before the last three recessions hit…
That means pivoting is a sign the Fed has gone too far in their battle against inflation – and is doing serious damage to the economy…
By the time the Fed realizes it's making a mistake, it's already too late for the economy and corporate earnings. And that's why you see further pressure on stock prices.
So don't take a Fed pivot as an all-clear signal. Rather, it's a sign this bear market has room to run.
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