{"id":1262833,"date":"2023-04-29T17:10:05","date_gmt":"2023-04-29T21:10:05","guid":{"rendered":"https:\/\/bugaluu.com\/news\/what-the-end-of-fed-rate-hikes-means-for-stocks\/1262833\/"},"modified":"2023-04-29T17:10:05","modified_gmt":"2023-04-29T21:10:05","slug":"what-the-end-of-fed-rate-hikes-means-for-stocks","status":"publish","type":"post","link":"https:\/\/bugaluu.com\/news\/what-the-end-of-fed-rate-hikes-means-for-stocks\/1262833\/","title":{"rendered":"What The End Of Fed Rate-Hikes Means For Stocks"},"content":{"rendered":"
\"\"<\/a><\/div>\n

What The End Of Fed Rate-Hikes Means For Stocks<\/span><\/p>\n

\n

Authored by MN Gordon via EconomicPrism.com,<\/em><\/a><\/p>\n

According to this week\u2019s Commerce Department report, U.S. GDP increased at an annualized rate of 1.1 percent during Q1 2023.\u00a0 The experts thought GDP would grow by 2 percent.\u00a0 They were wrong.<\/strong><\/p>\n

By now, it\u2019s very well possible GDP has already slipped into reverse.\u00a0 We won\u2019t know until the Commerce Department\u2019s Q2 report is released in late July.\u00a0 In the interim, there\u2019s an important question to be asked:<\/p>\n

Is a recession bullish or bearish for stocks?<\/strong><\/p>\n

Next week, following the federal open market committee (FOMC) meeting on May 2 and 3, it\u2019s widely anticipated that the Federal Reserve will hike interest rates by 25 basis points.\u00a0 This will take the federal funds rate to a range of 5.00 to 5.25 percent.<\/p>\n

It is also anticipated that this will be the last rate hike of this rate hiking cycle.\u00a0 That the Fed will then hold interest rates, before cutting them later this year to offset the recession.<\/strong><\/p>\n

Interest rate cuts are commonly recognized as being bullish for stocks and stimulative for the economy.\u00a0<\/p>\n

Here at the Economic Prism, we have some reservations.<\/p>\n

In short, we expect there will be a great stock market purge that will take the major indexes to unimaginable lows.\u00a0 We also expect this will coincide with the slashing and burning of interest rates.\u00a0 Here\u2019s why\u2026<\/strong><\/p>\n

The last time a Fed rate hike took the\u00a0federal funds rate<\/a>\u00a0to 5.25 percent was June 29, 2006.\u00a0 If you recall, the Fed then paused and held the federal funds rate at 5.25 percent for roughly 15 months.\u00a0 Then on September 18, 2007, the Fed cut rates 50 basis points.<\/p>\n

A lot happened beneath the surface over these 15 months when the federal funds rate was held at 5.25 percent.\u00a0 Massive stressors were formed, as this rate was relatively higher than the preceding years.\u00a0 In June 2003, for example, the federal funds rate touched 1.00 percent, and remained there until June of 2004.<\/p>\n

Cheap Credit Spawns Bad Debt<\/strong><\/h2>\n

When credit is cheap, opportunities to borrow and spend money are much more manageable. \u00a0<\/strong>When interest rates are ultra-low, consumers, businesses, and governments can make their cash flow pencil out for purchases that would otherwise be extravagant.<\/p>\n

But when the federal funds rate is 5.25 percent, and credit markets are tighter, the cash flow comes up short.\u00a0 Debts go unpaid and slip into arrears.\u00a0 Defaults occur.<\/p>\n

Yet the effects of cheap credit spawning bad debt takes time to filter its way through the economy.\u00a0 Sectors that largely rely on financing to move products \u2013 such as real estate and automobiles \u2013 are generally hit first.\u00a0 While demand for bricks of dry ramen noodles, which even with today\u2019s inflation can still be bought with pocket change, remains even.<\/p>\n

When the Fed brought the federal funds rate to 5.25 percent in June 2006, and then signaled a pause, there was a sense of relief.\u00a0 Professional economists thought the worst of it had come and gone.\u00a0 They believed the stress of higher interest rates had already been realized.<\/p>\n

In fact, on May 17, 2007, Fed Chair Ben Bernanke gave a speech before the Federal Reserve Bank of Chicago, where he\u00a0said<\/a>:<\/p>\n

\u201cThe subprime mess is grave but largely contained.\u00a0 Given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited.\u201d \u00a0\u00a0<\/em><\/p>\n

Did he believe what he was saying?\u00a0 Because at the precise moment he spoke these words the nation\u2019s housing market was rotting just beneath his nose.\u00a0 Did he not smell it?<\/p>\n

Sowing the Seeds of Chaos<\/strong><\/h2>\n

Apparently, Bernanke was missing his sense of smell.\u00a0 Because when Bear Stearns blew up in March 2008, Bernanke was again quick to dismiss it.\u00a0 On June 8, 2008, Bernanke,\u00a0said<\/a>:<\/p>\n

\u201cThe risk that the economy has entered a substantial downturn appears to have diminished over the past month or so.\u201d<\/em><\/p>\n

At the same time, Bernanke was slashing the federal funds rate.\u00a0 Bringing it from 5.25 percent in September 2007 to a range of 0.00 to 0.25 percent by December 2008.\u00a0 Perhaps he thought this would buoy the economy and float stocks higher.<\/p>\n

But then, on September 15, 2008, Lehman Brothers blew up and credit markets frosted over like the Alaskan tundra. \u00a0Three days later Bernanke, along with\u00a0Hank<\/a>\u00a0\u201cmy squirt gun\u2019s a bazooka\u201d Paulson, went to Congress and demanded a mega-bailout of the financial system.<\/p>\n

On September 18, 2008, at an emergency meeting in the Capitol, Bernanke told Nancy Pelosi, Barney Frank, and Chris Dodd:\u00a0\u201cIf we don\u2019t do this tomorrow, we won\u2019t have an economy on Monday.\u201d<\/em><\/p>\n

Two months after firing off Paulson\u2019s bazooka, Bernanke commenced QE1.\u00a0 In doing so, he corrupted financial markets and the economy without end\u2026and sowed the seeds of today\u2019s financial and economic chaos.<\/p>\n

Over this time, as the federal funds rate was being slashed and QE began flooding the financial markets with liquidity, the stock market didn\u2019t go up.\u00a0 Instead, it went down.<\/p>\n

The S&P 500, for example, peaked out at about 1,586 in October 2007.\u00a0 It then slowly slid down to about 1,200 in August 2008.\u00a0 Over this time, investors thought they were buying the dip.\u00a0 That the Fed had engineered a soft landing.\u00a0 They were dead wrong.<\/p>\n

By September 2008, the S&P 500 was freefalling like common ravens descending upon fresh roadkill.\u00a0 Taking it down to a bottom of 666 on March 6, 2009.\u00a0 This amounted to a top to bottom decline of 58 percent.\u00a0 It was brutal.\u00a0 Yet it was also the buying opportunity of a lifetime.<\/p>\n

What\u2019s the point?<\/p>\n

What the End of Fed Rate Hikes Means for Stocks<\/strong><\/h2>\n

Here in the wooded mountains of East Tennessee the vegetated growth is so dense it shuts off the adjacent view.\u00a0\u00a0Hollers<\/a>, as they\u2019re called in southern Appalachia, are undetectable.\u00a0 And in an instant, things can go terribly wrong.<\/p>\n

Take Dennis Martin, for instance.\u00a0 On June 14, 1969, he wandered off a Smoky Mountain trail never to be seen again.\u00a0 Approximately 1,400 search and rescue workers \u2013 including the National Guard, Green Berets, and Boy Scouts of America \u2013 walked narrow transects across a 56 square mile area.<\/p>\n

All that was found were footprints leading to a stream, one shoe, and one sock. \u00a0Martin vanished with hardly a trace.<\/p>\n

Where did he go?\u00a0 Did a black bear eat him?<\/strong><\/p>\n

To this day, no one knows.\u00a0 It\u2019s an unsolved mystery.\u00a0 <\/strong><\/p>\n

What to make of it\u2026<\/p>\n

As we\u2019ve just documented, the Fed stopped hiking rates in June 2006.\u00a0 The S&P 500 continued to inflate until October 2007.\u00a0 The Fed then began cutting rates in September 2007.\u00a0 The stock market didn\u2019t bottom out until March 2009 \u2013 18 months after rate cuts were first initiated.<\/p>\n

\u201cHistory doesn\u2019t repeat itself, but it often rhymes,\u201d<\/em>\u00a0is a clich\u00e9 that\u2019s often attributed to Mark Twain.\u00a0 We don\u2019t know if he actually said it.\u00a0 And we really don\u2019t care.\u00a0 The insight, however, is edifying.<\/strong><\/p>\n

The stresses that are plaguing financial markets and the economy in 2023 are certainly different than those of 2008.\u00a0<\/p>\n

The world has dramatically changed over these 15 years.\u00a0 But if you listen with a trained ear, there are similar rhymes.<\/strong><\/p>\n

Namely, there\u2019s massive amounts of bad debt out there that relatively higher interest rates over the past 14 months have exposed.\u00a0 The commercial real estate market is absolute toast.\u00a0 Pension funds, having stretched for yield, are holding a bag of assets that\u2019s backed by eroding collateral.\u00a0 At the same time, the S&P 500 is still well overvalued relative to its historical mean.<\/p>\n

By this, the likely end of the Fed\u2019s rate hiking cycle next week does not mean we\u2019re out of the woods.\u00a0 Rather, it means we\u2019re just entering the woods\u2026<\/strong><\/p>\n<\/p>\n

And, assuming the Fed starts cutting rates in October of this year, the S&P 500 may not reemerge from the woods until it bottoms out in April 2025.<\/strong><\/p>\n

*\u00a0 *\u00a0 *<\/em><\/p>\n

Like this article?\u00a0 If so, please\u00a0Subscribe to the Economic Prism<\/a>.<\/em><\/p>\n<\/div>\n

Tyler Durden<\/a><\/span>
\nSat, 04\/29\/2023 – 19:00<\/span><\/p>\n

From:Zerohedge<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

What The End Of Fed Rate-Hikes Means For Stocks Authored by MN Gordon via EconomicPrism.com, According to this week\u2019s Commerce Department report, U.S. GDP increased…<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-1262833","post","type-post","status-publish","format-standard","hentry","category-news","wpcat-1-id"],"_links":{"self":[{"href":"https:\/\/bugaluu.com\/news\/wp-json\/wp\/v2\/posts\/1262833","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/bugaluu.com\/news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/bugaluu.com\/news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/bugaluu.com\/news\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/bugaluu.com\/news\/wp-json\/wp\/v2\/comments?post=1262833"}],"version-history":[{"count":0,"href":"https:\/\/bugaluu.com\/news\/wp-json\/wp\/v2\/posts\/1262833\/revisions"}],"wp:attachment":[{"href":"https:\/\/bugaluu.com\/news\/wp-json\/wp\/v2\/media?parent=1262833"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/bugaluu.com\/news\/wp-json\/wp\/v2\/categories?post=1262833"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/bugaluu.com\/news\/wp-json\/wp\/v2\/tags?post=1262833"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}