Stock investors may expect the Federal Reserve to halt interest rate hikes soon, offering rate cuts before the end of the year, but history shows that such a move doesn’t guarantee a stock market rally, Wall veteran says Street David Rosenberg. .
Rosenberg, former chief U.S. economist at Merrill Lynch and now president of Toronto-based Rosenberg Research, noted that since 1950, 11 of the 14 rate-hike cycles ended in recession.
Based on historical data, the average time between the S&P 500 SPX,
peak and the start of the recession is about 6 1/2 months away, according to a Wednesday report from Rosenberg. And it takes an average of 12 1/2 months for the S&P 500 to go from peak to trough, which is usually before a recession ends. (See charts below.)
NBER, Haver Analytics, Rosenberg Research
Haver Analytics, Rosenberg Research
“My guess is that May 3rd is an insurance hike to appease the FOMC hawks and that we’ll hear (as we always do at the height of the rate cycle) about the need to wait, be patient, and assess delays in the politics”. Rosenberg wrote, referring to expectations that the Fed’s Federal Open Market Committee expects another hike when it concludes its next policy meeting.
Rosenberg said he expects the Fed to start cutting rates in the fourth quarter, which would mark the start of an easing cycle.
The relaxation cycle could be large, Rosenberg said. Historically, the Fed tends to offer modest rate cuts of about 75 basis points in soft landings, or slowdowns that don’t turn into a full-blown recession. But in recessions, the central bank tends to cut its key interest rate by 500 basis points and/or completely reverse its previous tightening cycle, Rosenberg noted.
For now, the S&P 500 could drop another 20% before bottoming out, Rosenberg argued.
Haver Analytics, Rosenberg Research
Reads: Fed “crash” could send S&P 500 down 20%, warns stock strategist David Rosenberg. Here are 3 ways to protect your money now.
“Fundamental bear market lows need the equity risk premium to widen to more compelling levels of +425 basis points or more than double where we are today,” Rosenberg noted. The equity risk premium refers to the difference between the estimated real return on stocks and Treasury bonds.
Reads: Buying shares simply isn’t worth the risk, as stocks are at their most unattractive since 2007
“The combination brings us to close to 3,200 in the S&P 500 (not the end of the world, but about another 20% haircut from here) and a drop in the 10-year T-bill yield to 2, 5% at the same time. at least,” noted Rosenberg.
