There’s going to be a reckoning.
And nobody’s going to be able to stop it.
Not the president, not the senate, and certainly not the Fed.
If history is any guide, things are going to get a lot uglier before they can get better.
The good news is there are certain signs to look out for that’ll warn us of the pain that’s yet to come.
But what most people will welcome as good news – like the Fed Pivot – is likely going to have the opposite effect on the market.
Let me explain…
The Fed Pivot is when the central bank will clearly signal it’s done raising rates.
The hope is that a lower cost of borrowing will help stimulate corporate investment, research and development, mergers and acquisitions, and give some much-needed support to a battered housing sector.
On the surface, this logic seems sound.
After all, the S&P 500 more than doubled between March 2020 and January 2022.
It’s not hard to argue that it was precisely the combination of a low-rate environment and steady money printing that was responsible for the post-COVID market recovery.
There’s just one problem with this narrative…
Interest rates peaked around August 2019, several months before the market topped out in February 2020.
It was only after the crash had already happened that the Fed lowered interest rates from around 1.6% to virtually 0%.
But the truth is the Fed had already pivoted well before the crash.
Just look at this chart of the S&P 500 below. It’s a perfect example of how markets tend to ignore conventional wisdom…
This chart shows a clear pattern… Peaks in interest rates precede steep stock market selloffs.
In other words… when the Fed pivots, pain follows.
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Going back over 20 years, the shallowest selloff after a “Fed Pivot” has been just around 35%.
So far, the bear market of 2022 hasn’t even reached a 30% decline, except in the tech-heavy Nasdaq.
But investors are already desperate for the Fed to pivot once again.
Just look at the nearly six million results on Google for “Will the Fed pivot?” in just this last year…
I imagine this number is going to increase dramatically in the next few months, especially if the pain from higher rates and a falling market continues to compound.
To those investors looking for a pivot, I say, “be careful what you wish for.”
Historical data paints a crystal-clear picture…
Fed pivots don’t just result in market selloffs, they also lead to recessions.
The chart below shows the Federal Funds Effective Rate. The grey shaded areas represent recessions…
Every time there’s been a peak in interest rates, a recession followed shortly after.
So, if you feel like there’s still another proverbial shoe to drop, then I don’t think you’re wrong.
Now you know that a good clue to lookout for will be the Fed giving people what they think they want. In other words, easing up on raising rates. And when that finally happens, they might find out the medicine can be a lot worse than the disease.
I know this sounds scary… and it is.
But I’m not here to alarm you.
This is now an environment where skilled traders who have been in the trenches will outperform.
And there’s nobody I know that’s been in more knife fights with the markets than my colleague Jeff Clark.
In fact, he’s just recently opened the doors to a new trading advisory called “The Forever Portfolio” where he recommends beaten-down undervalued stocks that the rest of the market is ignoring. (You can see which stocks he picked right here.)
One of his picks has soared over 20% yesterday… while the S&P 500, Dow Jones Industrial Average, and the Nasdaq all closed around 2% lower.
Happy trading,
Imre Gams,
Analyst, Market Minute
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