MACRO MONDAY 10~ Interest Rate & S&P500
Updated
MACRO MONDAY 10 – Historical Interest Rate hike Impact on S&P500
This chart aims to illustrate the relationship between the Federal Reserve’s Interest rate hike policy and the S&P500’s price movements.
At a glance the chart highlights the lagging effects of the Federal Reserves Interest Rate hikes on the S&P500 (the “Market”). In all four of the interest rate hikes over the past 24 years the S&P500 did not start to decline until 3 months into an interest the rate pause period (at the earliest) and in 3 out of 4 of the interest rate pauses there was a 6 – 16 month wait before the market begun to turn over. The move to reducing interest rates (after a pause period) has been the major warning signal for the beginning or continuation of a major market decline/capitulation. We might have to wait if we are betting on a major market decline.
In the chart we look particularly at the time patterns of the last two major interest rate hike cycles of 2000 and 2007 as they offer us a framework as to what to expect in this current similar hike cycle. Why is this cycle similar to 2000 & 2007?.. because rates increased to 6.5% in 2000, 5.25% in 2007 and we are currently at 5.50% in 2023 (sandwiched between the two). These are the three highest and closely aligned rate cycles over the past 24 years. The COVID-19 crash is included in this analysis but has not been given the same attention as the three larger and similar hike cycles 2000,2007 & 2023.
The Chart
We can simplify the chart down to FIVE key points (also summarised hereunder):
1. Previously when the Federal Reserve increased interest rates the S&P500 made significant
price gains with a 20% increase in 2000 and a 23% increase in 2007.
- Since rates started increasing in February 2022 we have seen the S&P500 price make a
sharp decline and then recover all those losses to establish an increase of 5% at present
since the hiking started.
- This means all three major interest hike cycles resulted in positive S&P500 price action.
- For reference, a more gradual rate hike pre COVID-19 also resulted in 20%+ positive price
action.
2. When the Federal Reserve paused interest rates in 2000 it led to a 15% decline in the
S&P500 and then in 2007 it led to a 28% increase in the S&P500. It is worth noting that a
lower interest rate was established in 2007 at 5.25% versus 6.5% in 2000. This might
indicate that this 1.25% difference may have led to an earlier negative impact to the
market in 2000 causing a decline during the pause phase. Higher rate, higher risk of
market decline during a pause.
- At present we are holding at 5.5% (between the 6.5% of 2000 and the 5.25% of 2007).
3. In the event that the Federal Reserve is pausing rates from hereon in, historic timelines of
major hike cycles suggest a 7 month pause like in 2000 or a 16 month pause in line with
2007 (avg. of both c.11 months). For reference COVID-19’s rate pause was for 6 months.
- 6 - 7 months from now would be March/April 2024 and 16 months from now would be
Nov 2024 (avg. of both Jun 2024 as indicated on chart).
4. As you can see from the red circles in the chart the initiation of Interest rate reductions
have been the major and often advanced warning signals for significant market declines,
including for COVID-19.
5. It is worth considering that before the COVID-19 crash, the interest rate pause was for 6
months from Dec 2018 – Jun 2019. Thereafter from July 2019 rates begun to reduce (THE
WARNING SIGNAL from point 4 above)…conversely the market rallied hard by 20% from
2.8k to 3.4k topping in Feb 2020 at which point a major 35% capitulation cascaded over
6 weeks pushing the S&P500 down to $2,200. Similarly in 2007 the rates began to decline
in Aug 2007 in advance of market top in Oct 2007. A 53% decline followed. The lesson here
is, no matter how high the market goes, once interest rates are decreasing it’s time to be
on the defensive.
Summary
1. Interest Rate increases have resulted in positive S&P500 price action
2. Interest rate pauses are the first cautionary signal of potential negative S&P500 price action however 2 out of 3 pauses have resulted in positive price action. The higher the rate the higher the chance of a market decline during the pause period.
3. Interest rate pauses have ranged from 6 to 16 months (avg. of 11 months).
4. Interest rate reductions have been the major, often advanced warning signal for significant and continued market decline (red circles on chart)
5. Interest rates can decrease for 2 to 6 months before the market eventually capitulates.
- In 2020 rates decreased for 6 months as the market continued its ascent and in 2007
rates decreased for 2 months as the market continued its ascent. This tells us that
rates can go down as prices go up but that it rarely lasts with any gains completely
wiped out within months.
September – The Doors to Risk Open
We now understand, as per point 2 above, that an Interest rate pause is the first cautionary signal of potential negative S&P500 price action. Should the Fed confirm a pause in September 2023 we will clearly be moving into a more dangerous phase of the interest rate cycle.
Based on the chart and subject to the Fed pausing interest rates from September 2023 we can now project that there is a 33% chance of immediate market decline (within 3 months) when the pause commences with this risk increasing substantially from the 6th and 7th month of the pause in March/April 2024.
I have referenced previously how the current yield curve inversion on the 2/10 year Treasury Spread provided advance warning of recession/capitulation prior to almost all recessions however it provided us a wide 6 - 22 month window of time from the time the yield curve made its first definitive turn back up to the 0% level (See Macro Monday 2 – Recession Timeframe Horizon). Interestingly September 2023 will be the 6th month of that 6 – 22 month window.
Both todays chart and Macro Monday 2’s chart emphasize how the month of September 2023 opens the door to increased market risk. Buckle up folks.
March/April 2024 – Eye of the Storm
On Macro Monday 2 – Recession Timeframe Horizon our average time before a recession after the yield curve starts to turn up was 13 months or April 2024 (average of past 6 recessions using 2/10Y Treasury Spread).
From today’s review of the Interest rate hikes impact on the S&P500, we have a strong indication that March/April 2024 will be key high risk date also.
Now we have two charts that indicate that the month of Mar/Apr 2024 will come with significantly increased risk.
Its worth noting a pause could last 16 months like in 2007 lasting until Nov 2024, at which point we would be pretty frustrated if we had been preparing defensively since Mar/Apr 2024. Just another scenario to keep in mind.
The Capitulation Signal
Based on today’s chart, should interest rates at any stage decline we should be prepared for significant market decline with immediate effect or within 2 months (at worst). Regardless of any subsequent increases in the market, these would likely be wiped out within 6 – 9 months by a capitulation. An optimist could run a trailing stop and hope it executes in the event of.
Bridging the Gaps
Please have a look at last week’s Macro Monday 9 – Initial Jobless Claims if you would like to measure risk month to month. The chart is designed so that you can press play and have an idea of the risk level we are entering into on an ongoing basis. In this chart we summarised more intermediate risk levels with Sept-Oct 2023 as Risk level 1 (yield curve inversion time window opens and potential rate pause risk increase) and Nov-Dec 2023 as stepping into a higher Risk Level 2 (as increase in Jobless claims average timeframe will be hit). Should the yield curve continue to move up towards being un-inverted and should Jobless Claims increase then Jan 2024 forward this could be considered a higher Risk level 3 leading the path to our Risk level 4 defined today which is March/April 2024.
Final Word
It is worth noting that the Fed could surprise us and start increasing rates again, they may also not pause interest rates in Sept 2023. For this reason I included the small black and red arrows that provide a general timeline across different rate periods to help us gauge a market top (red arrows) and a market bottom (black arrows). The black arrows suggest a time window of 27 – 32 months from now being the market bottom. A lot of people are focused on when a recession or capitulation will start, we may want to start thinking a step ahead and prepare for the opportunity that will present itself at a market bottom. Having a time window can help us plan and be psychologically prepared to consider taking a position in a market of pain and fear should the timing window align. If we are expecting this bottom in between Oct 2025 and Mar 2026, we can make more rational decisions when the streets are red.
We can try to make more definitive calls and decisions on an ongoing bases so please please do not take any of the above as a guarantee. We know the risk is increasing now and a lot of charts indicate incremental increases in risk up to Mar/Apr 2024, Nov 2024 and even January - March 2025. All of theses dates are possible trigger events but ultimately we don’t know. We are just trying to prepare and read the warning signs on the road as we drive closer to a potential harpin turn.
If you have any charts you want me to look at or think would be valuable to review in the context of the above subject matter please let me know, id love to hear about it.
PUKA
This chart aims to illustrate the relationship between the Federal Reserve’s Interest rate hike policy and the S&P500’s price movements.
At a glance the chart highlights the lagging effects of the Federal Reserves Interest Rate hikes on the S&P500 (the “Market”). In all four of the interest rate hikes over the past 24 years the S&P500 did not start to decline until 3 months into an interest the rate pause period (at the earliest) and in 3 out of 4 of the interest rate pauses there was a 6 – 16 month wait before the market begun to turn over. The move to reducing interest rates (after a pause period) has been the major warning signal for the beginning or continuation of a major market decline/capitulation. We might have to wait if we are betting on a major market decline.
In the chart we look particularly at the time patterns of the last two major interest rate hike cycles of 2000 and 2007 as they offer us a framework as to what to expect in this current similar hike cycle. Why is this cycle similar to 2000 & 2007?.. because rates increased to 6.5% in 2000, 5.25% in 2007 and we are currently at 5.50% in 2023 (sandwiched between the two). These are the three highest and closely aligned rate cycles over the past 24 years. The COVID-19 crash is included in this analysis but has not been given the same attention as the three larger and similar hike cycles 2000,2007 & 2023.
The Chart
We can simplify the chart down to FIVE key points (also summarised hereunder):
1. Previously when the Federal Reserve increased interest rates the S&P500 made significant
price gains with a 20% increase in 2000 and a 23% increase in 2007.
- Since rates started increasing in February 2022 we have seen the S&P500 price make a
sharp decline and then recover all those losses to establish an increase of 5% at present
since the hiking started.
- This means all three major interest hike cycles resulted in positive S&P500 price action.
- For reference, a more gradual rate hike pre COVID-19 also resulted in 20%+ positive price
action.
2. When the Federal Reserve paused interest rates in 2000 it led to a 15% decline in the
S&P500 and then in 2007 it led to a 28% increase in the S&P500. It is worth noting that a
lower interest rate was established in 2007 at 5.25% versus 6.5% in 2000. This might
indicate that this 1.25% difference may have led to an earlier negative impact to the
market in 2000 causing a decline during the pause phase. Higher rate, higher risk of
market decline during a pause.
- At present we are holding at 5.5% (between the 6.5% of 2000 and the 5.25% of 2007).
3. In the event that the Federal Reserve is pausing rates from hereon in, historic timelines of
major hike cycles suggest a 7 month pause like in 2000 or a 16 month pause in line with
2007 (avg. of both c.11 months). For reference COVID-19’s rate pause was for 6 months.
- 6 - 7 months from now would be March/April 2024 and 16 months from now would be
Nov 2024 (avg. of both Jun 2024 as indicated on chart).
4. As you can see from the red circles in the chart the initiation of Interest rate reductions
have been the major and often advanced warning signals for significant market declines,
including for COVID-19.
5. It is worth considering that before the COVID-19 crash, the interest rate pause was for 6
months from Dec 2018 – Jun 2019. Thereafter from July 2019 rates begun to reduce (THE
WARNING SIGNAL from point 4 above)…conversely the market rallied hard by 20% from
2.8k to 3.4k topping in Feb 2020 at which point a major 35% capitulation cascaded over
6 weeks pushing the S&P500 down to $2,200. Similarly in 2007 the rates began to decline
in Aug 2007 in advance of market top in Oct 2007. A 53% decline followed. The lesson here
is, no matter how high the market goes, once interest rates are decreasing it’s time to be
on the defensive.
Summary
1. Interest Rate increases have resulted in positive S&P500 price action
2. Interest rate pauses are the first cautionary signal of potential negative S&P500 price action however 2 out of 3 pauses have resulted in positive price action. The higher the rate the higher the chance of a market decline during the pause period.
3. Interest rate pauses have ranged from 6 to 16 months (avg. of 11 months).
4. Interest rate reductions have been the major, often advanced warning signal for significant and continued market decline (red circles on chart)
5. Interest rates can decrease for 2 to 6 months before the market eventually capitulates.
- In 2020 rates decreased for 6 months as the market continued its ascent and in 2007
rates decreased for 2 months as the market continued its ascent. This tells us that
rates can go down as prices go up but that it rarely lasts with any gains completely
wiped out within months.
September – The Doors to Risk Open
We now understand, as per point 2 above, that an Interest rate pause is the first cautionary signal of potential negative S&P500 price action. Should the Fed confirm a pause in September 2023 we will clearly be moving into a more dangerous phase of the interest rate cycle.
Based on the chart and subject to the Fed pausing interest rates from September 2023 we can now project that there is a 33% chance of immediate market decline (within 3 months) when the pause commences with this risk increasing substantially from the 6th and 7th month of the pause in March/April 2024.
I have referenced previously how the current yield curve inversion on the 2/10 year Treasury Spread provided advance warning of recession/capitulation prior to almost all recessions however it provided us a wide 6 - 22 month window of time from the time the yield curve made its first definitive turn back up to the 0% level (See Macro Monday 2 – Recession Timeframe Horizon). Interestingly September 2023 will be the 6th month of that 6 – 22 month window.
Both todays chart and Macro Monday 2’s chart emphasize how the month of September 2023 opens the door to increased market risk. Buckle up folks.
March/April 2024 – Eye of the Storm
On Macro Monday 2 – Recession Timeframe Horizon our average time before a recession after the yield curve starts to turn up was 13 months or April 2024 (average of past 6 recessions using 2/10Y Treasury Spread).
From today’s review of the Interest rate hikes impact on the S&P500, we have a strong indication that March/April 2024 will be key high risk date also.
Now we have two charts that indicate that the month of Mar/Apr 2024 will come with significantly increased risk.
Its worth noting a pause could last 16 months like in 2007 lasting until Nov 2024, at which point we would be pretty frustrated if we had been preparing defensively since Mar/Apr 2024. Just another scenario to keep in mind.
The Capitulation Signal
Based on today’s chart, should interest rates at any stage decline we should be prepared for significant market decline with immediate effect or within 2 months (at worst). Regardless of any subsequent increases in the market, these would likely be wiped out within 6 – 9 months by a capitulation. An optimist could run a trailing stop and hope it executes in the event of.
Bridging the Gaps
Please have a look at last week’s Macro Monday 9 – Initial Jobless Claims if you would like to measure risk month to month. The chart is designed so that you can press play and have an idea of the risk level we are entering into on an ongoing basis. In this chart we summarised more intermediate risk levels with Sept-Oct 2023 as Risk level 1 (yield curve inversion time window opens and potential rate pause risk increase) and Nov-Dec 2023 as stepping into a higher Risk Level 2 (as increase in Jobless claims average timeframe will be hit). Should the yield curve continue to move up towards being un-inverted and should Jobless Claims increase then Jan 2024 forward this could be considered a higher Risk level 3 leading the path to our Risk level 4 defined today which is March/April 2024.
Final Word
It is worth noting that the Fed could surprise us and start increasing rates again, they may also not pause interest rates in Sept 2023. For this reason I included the small black and red arrows that provide a general timeline across different rate periods to help us gauge a market top (red arrows) and a market bottom (black arrows). The black arrows suggest a time window of 27 – 32 months from now being the market bottom. A lot of people are focused on when a recession or capitulation will start, we may want to start thinking a step ahead and prepare for the opportunity that will present itself at a market bottom. Having a time window can help us plan and be psychologically prepared to consider taking a position in a market of pain and fear should the timing window align. If we are expecting this bottom in between Oct 2025 and Mar 2026, we can make more rational decisions when the streets are red.
We can try to make more definitive calls and decisions on an ongoing bases so please please do not take any of the above as a guarantee. We know the risk is increasing now and a lot of charts indicate incremental increases in risk up to Mar/Apr 2024, Nov 2024 and even January - March 2025. All of theses dates are possible trigger events but ultimately we don’t know. We are just trying to prepare and read the warning signs on the road as we drive closer to a potential harpin turn.
If you have any charts you want me to look at or think would be valuable to review in the context of the above subject matter please let me know, id love to hear about it.
PUKA
Note
FOMC Release day today FOMC vs S&P500 - Historical Summary
1) Rate increase = positive S&P500 price action
2) Rate pause = positive S&P500 for 6 - 16 months before capitulation.
3) Rate Reduction = Major & often advanced warning of market decline (red circles). Rates can decline for 2 -6 months before capitulation.
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