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The Effect Of First Rate Hikes On The Stock Market at Trader’s Narrative





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This is a guest post by Wayne Whaley (CTA):

Although we are programmed to believe that higher rates are bad for equities, I have done research over the past 6 months that suggest that when rates are very low, the initial signs of rate increase are not necessarily negative for the market. For details, see: What Do Rates Rising from Zero Mean for Equities?

I found two sites that had discount rate history. The first was the New York Fed, with the data range 1970 to today. And the other was from Harp Financial with the data range from 1945 to 1970. The second source is questionable since some of their dates did not exactly match up to those on the Fed Bank site. If someone has a better Discount Rate database, please let me know.

I looked at all times when the Fed Discount Rate was low (less that 5.0) and raised for the first time reversing a policy of declines. Here are my preliminary findings:

Federal reserve policy change S&P500 comparison Feb 2010

Twelve months later, the S&P was positive 7 out of 8 occasions with an average gain of 9.40%. The old adage is “Three steps and a stumble”. I think there is some wisdom to that philosophy and even more so, if rates are extremely low. The announcement today, caught everyone off guard and may have a 1-3 day impact on the market. But I believe, it may end up being constructive that everyone had the evening to do their homework and reevaluate before over reacting.

Also, it went largely unnoticed, but the January 2010 LEI came out yesterday and provided the tenth consecutive monthly increase. It is time for the Fed to work its way out of crisis mode (rates below 1%) to a simply very accommodative mode 1-2%.

For more on the effect of interest rates on the stock market: The Interest Rate Myth - A Bullish Argument

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6 Responses to “The Effect Of First Rate Hikes On The Stock Market”  

  1. 1 Babak

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    Wayne, I think you overlooked the most obvious location for the data: the federal reserve’s main website! I’m pretty sure they have this series but call it “Discount Window Primary Credit”. Their code for it is “H15/H15/RIFSRP_F02_N.D” First go to the link above and choose “Selected Interest Rates (H.15)” at the bottom.

    There are quite a few steps but from there you then have to choose [go to select] and then from the top down and press the continue button each time after selection:

    1. Selected Interest Rates
    2. (scroll down to) DWPC Discount Window Primary Credit
    3. Maturity (NA)
    4. Frequency: Daily

    [add to package]
    [go to format]
    [select dates]
    [file type]
    and I’m sure you’ll figure out the rest

  2. 2 burt

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    thanks a lot Wayne. Good work.

  3. 3 David Forster

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    Hi!

    Interesting to see this research. I was just thinking back to 1994 (sorry I am an old guy) and was reminded of the surprise that occurred back then. The first hike was in February 1994.

    February 4, 1994, Up, 0.25%, 3.25%. March 22, 1994, Up, 0.25%, 3.50%. April 18,1994, Up ….

    The carnage back then was in the bond and currency markets. I believe the S&P declined about 3% on the initial news and then stabilized before completing a 10% correction in to April.

    A move like that now - at least the 3% down would make a lot of sense, as it would shake out some weak longs and allow us to head higher.

    As always, it is ever interesting!

    THANKS for your insightful posts!

  4. 4 Denis Ouellet

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    Also see WHEN THE FED STOPS THE MUSIC (II)

  5. 5 Babak

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    Thanks Denis - no need TO YELL!! we can hear you just fine.

  6. 6 MachineGhost

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    Assuming we’re actually in an strong economic recovery, 1994 would be an example of what lays in store for the future since 1993 was a deflationary year after Clinton was elected. The business cycle bottomed on April 4, 1994. 1994 was also the 3rd year of economic expansion using the NBER criteria. Do note that Japan raised its interest rates before the U.S. in January 1994.

    The anatomy of the bond market turbulence of 1994

    http://www.bis.org/publ/work32.pdf

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