Jumping the gun is dangerous when anticipating the timing of the Fed pivot. I’m referring to the guessing game that many on Wall Street are playing, which focuses on when the U.S. Federal Reserve will stop raising rates and begin to reduce them — pivoting, in Fed speak. The reason it’s important to play this game, they argue, is that the stock market is a forward-looking and discounting mechanism. That implies the U.S. stock market will hit bottom and start rising in advance of a pivot.
While there is a certain amount of plausibility to their argument, history does not support it. The stock market typically doesn’t bottom out until after the Federal Reserve begins to reduce interest rates. I count 13 major pivots over the past seven decades, and only in five of them did the stock market bottom in advance of the move. Furthermore, if you date the Fed’s pivot to when it begins to reduce the pace of interest rate increases, then there would have been even fewer occasions in which the stock market hit bottom in advance. That’s particularly relevant to today’s market, since stocks have been rallying in recent weeks on the expectation/hope that the Fed at its December meeting will raise rates by 50 basis points as opposed to the anticipated 75 basis points. To measure the stock market’s reaction to …