From the desk of Willie Delwiche.
- Stocks struggle when the Fed is aggressive
- Pace of tightening likely to be more than twice as fast as last cycle
- Bond yields at multi-year highs, rising at fast pace in a decade
After waiting and watching as inflation soared to its highest level in 40 years (and got there at the fastest pace in nearly three-quarters of a century), the Fed now finds itself behind the curve and needing to accelerate quickly. Post-mortems can be done later, and future historians can write papers about how the Fed was too focused on labor supply and supply chains and not focused enough on money supply as it delayed lift-off. Our focus is not on those “why’s” but on these “what’s”: what is the path for rates going forward and what is the impact of this for the stock and bond markets.
Let’s start with the punchline and work back through the evidence. Stocks typically struggle for traction when the Fed is pursuing an accelerated pace of tightening. This is a sharp departure from the typical experience in gradual tightening cycles, during which stocks continue to trend higher (albeit with more volatility than was seen prior to the first rate hike).