For those without blinders;
Not Since 1929
Market Down One Year After Monetary Easing
When Greenspan started to cut interest rates with a surprise inter-meeting decision on January 3, 2001, strategists trotted out their numbers showing that the stock market was ALWAYS higher (usually much higher) one year after the Fed began to ease. At Comstock we believed that this time would be an exception since we were coming off one of the biggest financial and economic bubbles in history, and we wrote about it on numerous occasions (see archives). Now a year has passed since the second rate cut on January 31, 2001, and what do you know?—the market is down. Over the past 12 months the Nasdaq is down 30%, the S&P 500, 18%, and the Dow, 10%.
In noting this event we were interested to see whether the market had ever been down one year after the beginning of a Fed easing move. We found that since January 1915, there have been 20 instances where the Fed has lowered rates at least two consecutive times, including last January. Of the previous 19 times, in every instance but one, the market was up a year later, usually by a significant margin. The one exception was the rate decrease in late 1929 following the October crash of that year. The second instance is the current one.
We believe that these results are no coincidence. The bubble of 1998 to 2000 bears a resemblance to the period leading up to 1929 in a number of ways that we have written about in past comments. The boom has left the market and the economy with a number of important imbalances that have not been corrected by the slowdown experienced to date, and these imbalances will impede any attempt to recover until they are corrected. The stock market has discounted too much too soon, and remains highly overvalued. In our view the recent rally off the September lows has stalled, and the downside risks are high.
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