I'll break the Fed interventions from 1987 to the present down into
trend segments and discuss the market trend over the course of the trend segment:
1987 Tightening Phase
During the period 2-Jan thru 8-Oct there were 6 rate hikes, with 1
easing in the middle of 1/8 point (so you see the Fed doesn't ALWAYS
ease multiple times in succession). During that period the NYSE
Composite trend was UP, but was beginning to look toppy. Still,
market went UP as rates went UP.
1987 Crash
The Fed reversed course and began an “easing” phase with the Oct 19
ease of a quarter point. The market crashed shortly thereafter. There
were a total of 4 rate cuts from Oct 19, 1987 to Feb 11,1988. During
this easing period, the market crashed and then began building a base
with a slight positive bias.
1988-1989
The Fed again reversed direction Mar 30 1988, and moved to tighten 15
consecutive times thru May 17 1989. The market was up for the first
three upward adjustments in rates, then went sideways for the next 8
hikes, then went sideways again at a slightly HIGHER level for the
next 3, then moved higher into the final of the 15 consecutive hikes.
Overall trend was UP during the 15 rate INCREASES over this span.
1989-1992
We then entered into a period of consecutive easings starting 6-June
1989. There were 24 consecutive downward adjustments which ended on 4-
Sept-1992. The market was up for the first 7 (our first ‘conventional
wisdom' case). The market dropped and then based during the next 5
easings, rose over the next 2 easings, went sideways over the next 8
easings, then trended higher over the final 2.
There was no Fed intervention in 1993.
1994-1995
Fed began a tightening phase consisting of 7 moves from 4-Feb 1994
thru 1-Feb 1995. The market was in a trading range with a slight
upward bias. Market slightly UP while rates were RISING.
1995-present.
During this period we had 6 moves by the Fed. The first 3 were to
ease (the market was up strongly during this period), then to tighten
(the market was up strongly again), then to ease twice, leaving us
where we are today. The period from 6-July 95 to the present had an
overall downward rate trend if you ignore the intermediate
tightening. During that time the market trend was strongly higher.
This is probably the period used to come up with the conventional
wisdom case, and it is most certainly true over this period, but it's
by no means a rule or even a dominant behavior over the last decade.
So you see the conventional wisdom anti-correlation between Fed
intervention and markets (i.e. rates down means markets up) is weak.
Adding some arbitrary delay of 6 months or 3 months or 12 months or
whatever, does not improve the (anti)correlation to the point that it
is a reliable indicator (plus, which lag do you use and why?). You
pick up some new correlations and you lose some old correlations as
you time-shift the plots.
Time-shifting the plots does not give us the market's correlated (or
uncorrelated) behavior to the fed intervention. It may be a way to
judge the effectiveness of the intervention at a later point, if you
assume stock prices are a good proxy for the economic health of the
economy, but that is not the proper way to view the data in the
context of market impact and the correlation of Fed intervention to
market prices.
It appears that a CHANGE in policy (from tightening to easing, for
example) has more significance than, say, another easing after a
string of many consecutive easings.
P.S. I got the Fed data from Ed Yardeni's site (www.yardeni.com), and
the NYSE historical data from the NYSE website. There's an Acrobat
file of Fed policy changes which I scanned, OCR'd, and brought into
Excel. Here's the Fed data if you'd like to look for yourself:
Date Fed Funds
1987 2-Jan 6
30-Apr 6.5
20-May 6.75
2-Jul 6.625
3-Sep 6.875
4-Sep 7.25
8-Oct 7.3125
19-Oct 7.0625
4-Nov 6.8125
1988 28-Jan 6.625
II-Feb 6.5
30-Mar 6.75
9-May 7
25-May 7.25
22-Jun 7.5
19-Jul 7.6875
8-Aug 7.75
9-Aug 8.0625
IO-Nov 8.25
22-Nov 8.375
15-Dec 8.6875
1989 5-Jan 9
9-Feb 9.3125
23-Feb 9.5625
24-Feb 9.75
17-May 9.8125
6-Jun 9.5625
7-Jul 9.3125
27-Jul 9.0625
22-Aug 9
6-Nov 8.5
20-Dec 8.25
1990 13-Jul 8
29-Oct 7.75
16-Nov 7.5
7-Dec 7.25
18-Dec 7
1991 8-Jan 6.75
I-Feb 6.25
8-Mar 6
30-Apr 5.75
6-Aug 5.5
13-Sep 5.25
30-Oct 5
6-Nov 4.75
6-Dec 4.5
20-Dec 4
1992 9-Apr 3.75
2-Jul 3.25
4-Sep 3
1994 4-Feb 3.25
22-Mar 3.5
18-Apr 3.75
17-May 4.25
16-Aug 4.75
15-Nov 5.5
1995 1 -Feb 6
6-Jul 5.75
19-Dcc 5.5
1996 31-Jan 5.25
1997 25-Mar 5.5
1998 29-Sep 5.25
15-Oct 5
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