“Equity bull markets never die simply of old age. They die of excessive Fed monetary restraint – but the Fed hasn’t even started to raise rates yet.In the past six decades, the average length of time from the first tightening to the end of the business cycle is 44 months; the median is 35 months; and the lag from the initial rate hike to the end of the bull equity market is 38 months for the average, 40 months for the media.”
- The average number of quarters from the first rate hike to the next recession is 11, or 33 months.
- The average 5-year real economic growth rate was 3.08%
- The median number of quarters from the first rate hike to the next recession is 10, or 30 months.
- The median 5-year real economic growth rate was 3.10%
Recessions & Bear Markets
“‘Stocks typically sell-off on the first of a series of rate hikes, but the magnitude and duration of the sell-off depend on conditions. During early cycle hikes the initial sell-off was generally small, quickly recovered and further S&P gains came in next three months and longer (like 2004, 1983, 1972). But many sell-offs on late cyclehikes became corrections or even bear markets. Unfortunately, it’s only in hindsight do we know where we are in the cycle.”
1) Debt servicing requirements reduce future productive investment.2) The housing market. People buy payments, not houses, and rising rates mean higher payments.3) Higher borrowing costs which leads to lower profit margins for corporations.4) Stocks are cheap based on low-interest rates. When rates rise, markets becomeovervalued very quickly.5) The economic recovery to date has been based on suppressing interest rates to spur growth.6) Variable rate interest payments for consumers8) Corporate share buyback plans, a major driver of asset prices, and dividend issuances have been done through the use of cheap debt.9) Corporate capital expenditures are dependent on borrowing costs.
“Do Rising Interest Rates Lead To Higher Stock Prices? This claim falls into the category of ‘timing is everything.’ The chart below has been circulated quite a bit to support the “don’t fear rising interest rates” meme. I have annotated the chart to point out the missing pieces.