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Every downturn is idiosyncratic, with one commonality: They all come after a period of Fed rate hikes – Tim Duy, Twitter, September 17 6:03pm PST
History doesn’t repeat itself but it often rhymes – Mark Twain
17 years ago – on September 18, 2007 – the Fed preemptively cut the Fed Funds Rate by 50 basis points even though the stock market was essentially at all times highs. The S&P surged almost 3% that day – and subsequently rose to new new all time highs in the next few weeks. But here’s what I wrote after the close that day:
I think we are looking at one final, desperate, stratospheric rush higher before the implosion of the housing and credit markets makes it completely clear to everyone that we’re headed for a recession if we’re not already in one – “Bernanke Changes His Tune, Cuts Fed Funds Rate By 50 Basis Points”, Top Gun Financial, September 18, 2007
Three weeks later – on Thursday October 11, 2007 – the S&P surged to new all time highs early in the session before a nasty reversal (, Top Gun Financial, October 11, 2007). That marked the top for that cycle as the crashing housing market subsequently caused The Great Recession. (You can see the intraday chart I posted that day after the close ).Back then I was a 30 year old rookie in my first year managing money professionally. I had dropped out of the Phd Philosophy program at UC Davis to start Top Gun to profit from the popping of the housing bubble which I correctly believed would infect the entire economy.(Click on image to enlarge)
It’s also worth pointing out that the same pattern held the previous time the Fed cut 50 basis points to start a rate cutting cycle when Greenspan did it on January 3, 2001: the markets initial reaction was higher but the market was notably lower a year later as you can see above in the . (Also see my , September 18, 2007).(Click on image to enlarge)
17 years later to the day the Fed is likely to make a similar preventative 50 basis point cut. I expect the market to rally hard to new all time highs in reaction, pulling all marginal buyers into the market – but once again it will be the last hurrah. Get your popcorn ready….More By This Author:
