You are here

One Year Later/The Next Fed Rate Increase/The Facts

The following post apperared 12/9/2016 at Trader Scott's Market Blog:

So here we go one year later and, just like last year, the Fed is widely expected to raise interest rates once again next week. They last raised them on December 15, 2015. And while we all hear the wild claims about what will "obviously" be the different market reactions to the rate increase, let's stick to the facts, not fake news. There are 4 charts attached showing where markets were, and what actually happened in and around the expected rate increase last year. I'm not showing these, so we can use tracing paper and crystal ball it this year, but merely to show what actually occurred. And as usual,  a market's reaction to "news" is heavily dependent upon its' own technical position prior to the "news".  Meaning how prepared are they. The charts are 10 year US Treasury yields, and gold, and the S&P 500, and the US$. The charts are all marked showing December 15th. So here's what actually happened.  The 10 year yield hit a low on 12/11 and then rallied 20 basis points to the day after the meeting 12/16. That was the high and it finally bottomed at the bubble low of 1.32% on 7/6/2016. I thought rate increases were bearish for bonds.

As for gold, it hit a high on 12/4 and then fell $40 to retest the multiyear low of $1046 on December 17, finally a buy point for me. It then rallied to hit a multiyear high of $1374 on 7/6. I thought rate increases are bearish for gold.

As to stocks, the S&P bottomed on 12/14 and then rallied 85 points and with volatility hit its' peak on 12/29. It then proceeded to drop 271 points to its' bottom on 2/11. I thought the stock market had "priced in" a rate increase. And it even "proved" it by rallying for 2 weeks after the meeting. To be fair it has since rallied to new all time highs.

And lastly, the old US$, which I have been bullish on for years, and still am. This one was a little trickier last year, as the stock market sell off, safe haven buying helped it. But it bottomed on 12/9 and rallied 2.20 points out to 1/29. It then fell a a large 8 points on the index to 91.93 on 5/4. This low was a classic spring (sell stop run) of the big trading range. So once again, I thought the $ always rallies substantially after a rate increase. And it has since rallied to 2003 highs.

And to show how even more ridiculous the rate increase vs. market reactions is, let's take a longer term look. Instead of making this boring and going thru each wildly inaccurate claim about the effects on all markets of rate increases, let's just focus on gold in three rate increase cycles, and one rate decrease cycle in particular. From February 1971 to July 1974, the Fed raised rates 10% points. And gold rallied about 5x up to around $200. But I thought.... And then it fell during the next rate decrease to $102 in August 1976, even though rates dropped 8% points during that time. But I thought....And then gold rallied to the bubble high of $875 on January 21, 1980. And, you guessed it, rates increased substantially that whole time. But I.... And more recently, rates went from 1.25% in June 2003 (The Maestro era) to 5.25% in June 2006 (Chopper Man Bernanke era). And you guessed it, gold doubled during this time. But.....Once again, so much for the market experts.

And for the final bit of humor, last December the brain surgeons at the Fed "projected" (predicted) rates would be 1.4% in December 2016. Those PHDs at it again.