Kenji Ongcheap Capital Ventures

As you can see, the U.S. job market is tracking relatively roughly with the 1968-2018 historical average following the first inversion of the 10y/3m yield curve. One point to make is that it is typically when the employment index turns over (i.e., turns negative) that we see the beginning of the recession. This makes sense, as employment is a key metric that the NBER uses to date recessions (think about the HOPE cycle!). We know employment is typically the last thing to break during a pre-recessionary period (and typically breaks once the recession begins).

According to Estrella’s data, the unemployment index typically turns over during months 12 and 13 after the first inversion of the 10y/3m yield curve. Since we know the 10y/3m curve inverted during October of 2022, that would put the beginning of the recession sometime during Q4 2023. At the latest, we might expect a recession to begin during Q1 2024 or Q2 2024 if things move particularly slowly.

I also assess that conditions on the ground are continuing to support the thesis that the labor market weakens into recessionary conditions during 2H 2023/1H 2024. When reading Zip recruiter's shareholder letter, I found these insights regarding the labor market particularly interesting:

“Both SMB [small-to-medium size businesses] and enterprise employers are posting fewer jobs while also spending less to advertise those jobs. This behavior runs counter to the seasonal hiring pattern we have typically observed over the many years we have been in business. The ongoing trend of reduced demand for recruiting services continues, and we believe this is a reality that companies across the recruiting category are facing 

[...] In Q2 both SMB and enterprise employers continued to moderate hiring plans and reduce recruitment budgets in response to economic uncertainty. This has resulted in atypical seasonal hiring patterns, with online hiring demand declining over the first half of 2023.

[...] We had 102k Quarterly Paid Employers in Q2’23, a decrease of 35% year-over-year. The decrease in Quarterly Paid Employers is primarily reflective of weakness among small and medium-sized businesses.”

Weakness in the labor market is beginning to show, and I expect that this will only continue to occur with tightening credit standards and weakening economic indicators. And if the labor market continues to weaken, it follows from our previous reasoning that the economy enters a recession late this year or early next year.

As we explained previously, bottoms for U.S. equity indexes have always followed the beginning of the NBER-declared recession. So if we do enter a recession during Q4 2023 or Q1 2024, it would be plausible to think that US equity indices set new lows during 2024. This includes Bitcoin, which has to this point tracked pretty well with US equity indices (and is also a risk asset).

So, in conclusion, this is my economic thesis (be flexible with the timeframes!):

1. A weakening of the labor market over the next few months as interest rate hikes work their way through the economy and credit conditions worsen; NFP go negative and the employment index turns over late this year or early next year

2. Recession beginning Q4 2023/Q1 2024/Q2 2024 (probably latest case scenario)

3. US equity markets bottom out; Bitcoin retests $20k level and/or $15.5k level

4. Unemployment tops out around 4.5-6%. Fed pivots and cuts rates.

5. Fed runs QE and equity and labor markets recover during 2H 2024/1H 2025.

Again, my thesis remains very uncertain. Q4 of this year will be a critical “main-or-break” time for my recessionary thesis. Only time will tell what happens to the U.S. economy.

I wish you the best in navigating these markets.

2023 May 18

The United States Economy in Turmoil: A Pragmatic Perspective on the Banking Sector's Woes, Sticky Inflation, and the Debt Ceiling

Good afternoon,

I know that it has been a long while since my last update here, and I extend my apologies for my absence. I had a substantial workload since mid-March that placed increasingly large demands on my time. Having recently completed my college finals, however, I anticipate that I will be able to devote more time to putting out updates on financial markets. That is the hope, at least.

A lot has occurred in financial markets since my last update. Volatility in the U.S. banking sector has continued, though the Federal Government took extraordinary measures to minimize the fallout from March’s bank failures. In mid-March, the Federal Reserve created the Bank Term Funding Program, a fund that provides emergency loans to banks, and backstopped all deposits to Signature Bank (another regional bank that failed in March) and Silicon Valley Bank (as discussed in our March update). These measures were designed to calm financial markets, and they appear to have been successful for the time being; for the most part, bank runs across the regional banking system ended following the Federal Reserve’s actions. However, I should mention that I do not believe that the Federal Government’s actions are indicative of a restart of quantitative easing. The Federal Reserve continues to roll assets off of its balance sheet (despite a brief increase in the value of the balance sheet in mid-March), and it continues to maintain its hawkish stance on monetary policy. The Federal Reserve’s main goal, as has been expressed by Fed Chairman Powell, has been to return inflation to its 2% mandate with as little turmoil to financial markets as possible (hence the attempt to achieve a soft landing). And if that is their goal (which, considering the Federal Reserve’s persistence in messaging and action, I think it is), then we should interpret the Fed’s actions as being made in support of that goal. I thus interpret that the Federal Reserve’s actions were made to extend the runway for a period of heightened interest rates to prevent the United State economy from economic recession before the fight against inflation is won. The rumors of QT’s demise have thus been greatly exaggerated.

Despite the Federal Government’s interventions, turmoil in the banking sector continued. On April 29, the FDIC announced that it would be taking over the assets of First Republic Bank, another regional bank based out of California. The FDIC’s announcement precipitated a bidding process for the bank’s assets, ending with the bank’s sale to JP Morgan. First Republic’s collapse occurred despite the actions taken by the Federal Reserve to support the banking sector and a $100 billion capital infusion exclusively to First Republic from major U.S. banks!

Of course, I should not forget to mention UBS’s late March buyout of Credit Suisse. We actually spoke about the prospects of Credit Suisse’s collapse all the way back in October (especially with regard to Credit Suisse’s rising CDS prices). 

Turmoil in the banking sector has continued to spread since late March. Nearly two weeks ago, Pacific West Bankcorp, another regional bank based out of California, announced that it was exploring options for a sale. The developments in the banking sector, to me, confirm the belief that Silicon Valley was not the only bank under pressure due to their irresponsible decisions regarding long-term treasury bond investments. However, I reiterate my view that most (though certainly not all) U.S. banks remain sound at the moment. We’ll probably have continued banking instability, but again, I do not expect a 2008 collapse. Could conditions worsen into Q4 2023/Q1 2024? Of course, and I do expect them to. But considering all the liquidity that remains in the system from the 2020-2021 QE cycle, it will take time. Most probably, the weakness in the banking sector represents a prelude to a period of greater financial instability at the end of the year, particularly due to the effects that tighter lending standards will have on economic growth.

What I see as further evidence to the effect that financial conditions will weaken going into the end of 2023 is the fact that the Federal Reserve remains resolute in its conviction to get inflation under control. At the May 2 FOMC, the Fed raised rates by another 25bps to a target rate of 5.00-5.25%. Yet, despite all the work the Fed has done in tightening financial conditions over the last few months, more work must be done. Inflation has remained sticky – core PCE inflation, while certainly in a downtrend, has been slow to fall and has recently gotten stuck around the 4.5-5.0% YoY mark. Core inflation, which excludes the volatile food and energy sectors from headline inflation, has been stuck around 5.5% since the beginning of the year. Additionally, the labor market remains extraordinarily tight, with the unemployment rate at 3.4% (a secular low), while wage inflation remained very high at 0.5% MoM. Until the balance between labor demand and supply is stabilized, a sustained period of low inflation in the U.S. economy can not be reached. There is absolutely no reason for the Fed to pivot. In fact, most of the incoming economic data suggests that the Fed must stay higher for longer in order to lower inflation (and thus create a sustained period of economic growth).

What is perhaps of more immediate (albeit, still limited) concern at the moment is the U.S. debt ceiling. At the moment, the Treasury suggests that the Federal Government will exhaust its “extraordinary measures” around 1 June and thus may not be able to meet the financial obligations of servicing her debt burdens. A lot of commentary has focused on the effects of any potential default (which makes sense, considering the fact that news media of the day appears to be driven primarily by hysteria and fear), so I’ll try to bring light to other aspects of the situation; while a U.S. default is certainly on the table, I believe that the hysteria surrounding it is somewhat misplaced. The Federal Government can easily avoid a default by raising the debt limit (though whether they actually will is a question that I cannot answer). I would humbly suggest, however, that the politicians in Washington are acutely aware of the risks that a debt ceiling breach poses not only to the U.S. economy (mass unemployment and a significant, possibly deep, recession) but also to their political reputations. With a major election cycle upcoming in 2024, a political crisis is probably not very appetizing for most politicians. Another nuance that is often missed by most commentators, I think, regards the conditions of any compromise met on Capitol Hill to avoid a default. Does the compromise entail less spending by the U.S. Government? If so, which services will be affected? And how will tighter fiscal policy affect economic growth? Or does the compromise just include a raising of the debt limit (how long can we keep that up for)? I will have more to say on the debt crisis if/when a compromise is reached. Until then, the answers to these questions will remain uncertain. What is certain is that Washington will have to act quickly and decisively within the next few days to prevent an economic calamity with unpredictable consequences.

I think that’s all for now – this post is getting a bit long anyway. We’ve got a long road ahead of us, folks. Be nimble, flexible, and cautious in the way that you approach financial conditions within the next few months. 

Thanks for reading, and all the best,

Kenji Ryu

2023 March 12

The extremely concerning prelude to a period of severe economic downtown: A rational perspective on the current market situation

Good morning,

The United States economy is under severe strain. Financial markets are currently in significant turmoil following this week’s instability in the banking sector. However, I believe that a rational perspective on this week’s events reveals that they are likely only the prelude to a much more severe economic event later this year. It is unlikely that the weakness in the banking sector proves to be a catalyst for a catalyclysmic economic event in the near-term.  But what is likely is that they are the preview for one within the next 6-12 months. I will have more to say on this matter after briefly reviewing this week’s developments in the financial sector.

The principal cause for the deterioration in financial sentiment this week was the collapse of Silicon Valley Bank (SVB), which was the 16th largest bank in the United States at the time of its collapse. Deteriorating confidence in SVB’s ability to honor deposits last week catalyzed an extremely rapid bank run on deposits. By 10 March, California regulators officially shut down SVB and secured the remainder of its assets in order to protect investors.  From start to finish, the fall of SVB took only about 48 hours. The collapse of SVB constitutes the largest bank failure since 2008, and the second largest in United States history. SVB’s investors, which include nearly 50% of U.S. startups, lost a total of ~$161 billion in the bank’s collapse. Around 93% of SVB’s investor deposits (~$150 billion) are uninsured by the FDIC’s $250k rule. It is hard to overstate the pain and suffering that the collapse of SVB has and will continue to cause.

It is important to note that the causes that contributed to SVB’s collapse are not unique to SVB. Fundamentally, SVB’s liquidity crisis was caused by severe losses in its Treasury Bonds investments. Following the COVID-19 Pandemic, SVB invested a large portion of its deposits into longer term treasury bonds in order to achieve a higher yield than would have been possible with shorter term bonds. However, the rise in inflation during 2021 and 2022 from pandemic-driven stimulus contributed to a rapid repricing of treasury bonds (and the eventual inversion of the yield curve). For this reason, the yield from shorter term bonds, when compared to that from longer term bonds, fell significantly. As a result, SVB suffered from a large number of unrealized losses in its Treasury Bond department. It is true that SVB is likely not the only bank to be irresponsibly long on longer term treasury bonds leading into the rise of inflation. However, it is also possible to overstate the similarities between SVB and the majority of the financial sector. Financial institutions today generally have a much more diversified portfolio than simply being long on long term treasury bonds, a result of the increased regulations placed on banks following the Great Financial Crisis. Thus, SVB’s problems may apply to a few other major banks, but they are unlikely to affect all U.S. banks. Analogs between SVB’s collapse and 2008 are generally wrong at this point, I believe. In 2008, most U.S. banks had a similar portfolio and were all significantly levered up on MBS products. Thus, a decline of MBS asset prices led to significant turmoil in all banks exposed to MBS products. In 2023, things are significantly different. Could SVB’s collapse be indicative of the root causes that ultimately lead to the collapse of more banks? Sure. But will they be the immediate cause of a 2008-style banking crisis? I don’t think so. What is more likely is that they are the prelude to a more catastrophic financial crisis.

What is more concerning to me is the fact that the collapse of SVB has occured at a relatively early time in the Fed’s hiking cycle. The Fed hasn’t even pivoted yet, and if Chairman Powell’s comments this week are any indication, they are unlikely to do so anytime soon. The labor market remains far too overheated, despite some mixed signals in this month’s employment report (The U.S. economy added 310k new payroll jobs, but the unemployment rate rose from 3.4% to 3.6%). The current CPI inflation (6.41%) remains significantly higher than the Fed’s inflation mandate (2.00%). So, the Fed is likely to continue hiking into the foreseeable future. The markets agree – currently markets see a 68.3% chance of a 50bps hike at the March FOMC. However, the fact that the economy is showing strain this early is extremely concerning. Past research reveals that it takes approximately nine to twelve months for the full effects of rate hikes. The first rate hike (25bps) was twelve months ago. We have yet to see the full effects of the remaining 425bps hikes from the rest of 2022. And turmoil is already arising in the financial markets. If history is any indication, things will only worsen from here as the full effect of hikes is felt. The United States economy is unlikely to be able to weather a sustained period (>six months) of rates at 4-5% without something breaking. There are already cracks showing, and they will probably only continue to widen.

              Conditions in the U.S. debt market also suggest that a severe credit event is possible in the 2H 2023. Data from Moody’s shows that nearly 24.8 million Americans are delinquent on their loans, a number that hasn’t been rivaled since the depths of the Financial Crisis. And if we assume that conditions in the labor market will cool (as the full effects of rate hikes become more clear), how bad will this number get? While it is true that the total amount owed by Americans is generally lower than it was in 2008-2009 (due to fiscus stimulus), it doesn’t have to be that high to cause severe damage to American families and businesses. The American consumer is already weak and is vulnerable to a severe, prolonged credit event.

            Let’s also not forget the U.S. sovereign debt ceiling crisis. At the current rate, the U.S. Government will surpass the debt ceiling limit by June this year, constituting a selective default. The potential repercussions from a U.S. government default are likely to be extremely severe and damaging to the United States economy.

Current financial conditions remain complex and complicated. It’s possible that the Fed decides to pivot to a more dovish fiscal policy ahead of what is currently expected (thus exposing the economy to the risks of both prolonged inflation and/or a crippling recession). It’s also possible that they keep hiking in the summer. However, they don’t have to in order to cause severe damage to the economy. That has probably already occurred/is occuring, for the full effect of rate hikes won’t be seen untl later this year. My base case at this moment remains a severe, prolonged recession that begins somewhere around Q42023/Q12024. Economic conditions will worsen. Prepare accordingly.

Let us end with a note of positivity. We should remember that periods of economic downturn typically lead to fantastic buying opportunities. There are likely generational opportunities coming for a wide variety of asset classes.

I wish you all the best.

2023 February 2

Analysis of the 1 February 2023 FOMC/Big Tech Earnings

To all readers,

Yesterday, the Federal Reserve raised the Federal Funds rate by 25 bps, for a target rate of 450 to 475 bps. Today, I want to discuss some of the implications from yesterday’s FOMC and my general thoughts on the meeting.

Jerome Powell adopted a notably more dovish tone in yesterday’s FOMC. For the first time in this business cycle, Powell noted that the “deflationary process” had begun and that inflation has “moderated recently.” Powell mentioned that the U.S. economy “slowed significantly last year,” and that financial conditions had tightened significantly since last year: the housing sector continues to weaken and goods inflation is falling relative quickly. However, Powell maintained some of his past hawkisness. For example, he re-emphasized that further work was required to reduce inflation to the Fed’s 2% mandate, and that it was “premature to declare victory” in the fight against inflation. In addition, Powell expressed that further rate increases would be necessary, implying that 25 bps hikes would extend at least into the March FOMC. Powell also said that he did not foresee rate-cuts through the end of this year, though that would be dependent on the rate at which inflation fell in the United States, and that the United States could not sustainably return to 2% inflation without a better balance between demand and supply in the labor market.

I believe that investors should not take Powell at face value. For example, Powell stated that financial conditions had tightened significantly since last year. However, data from the Chicago Fed (shown above) shows that financial conditions have eased significantly from their lows in October, and are comparable to levels seen in Q1 2022. We’ve seen the effects of this easing of financial conditions in equity markets – the S&P is up nearly 10% year to date. Why would Powell say that financial conditions have eased now, instead of sometime earlier? I think to answer this question, we should ask what would cause the Fed to pivot to dovish monetary policy. We saw a notable shift in the Fed’s philosophy to a more dovish tone, so finding the root cause could help us answer the question above. 

In previous business cycles, the Fed has pivoted from a hawkish to dovish monetary policy when the market showed weakness (when the unemployment rate started to rise). Consequently, I evaluate that the Fed may be attempting to set conditions for a pivot due to worsening economic conditions in the United States.  But even then, Powell made it clear that he didn’t foresee rate cuts/a pivot before the year’s end (unless inflation fell more rapidly than expected). Can the economy really survive 4.75-5% rates for a year? There are no clear answers – but I am skeptical, to say the least.

And we’ve seen tech companies start to weaken even now. New orders and manufacturing data has continued to disappoint – manufacturing indices have underperformed expectations. Apple, Google, Amazon, and Microsoft, four of the biggest American tech giants, have all missed expectations for Q4 2022 earnings (shown above). Many tech companies are beginning to cut workers. What could this forebode for the economy? 

I assess that rapid deflation of the U.S. economy will be a significant threat for the next 12-18 months. The market is already showing signs of weakness, and we know that rates will remain elevated for at least the next year. I foresee significant difficulties in the United States equities market for the next year. However, I realize that financial conditions are extremely changeable and difficult to decipher. My fund will remain flexible to market conditions and will adapt accordingly.

2023 January 9

Is the Bottom for U.S. Equities in? If not, when might it be?

To all readers,

First of all, happy new year! I hope that 2023 is starting off well for you and your family!

I wanted to start the New Year off by sharing a model I've been working on for the last week or so. As I’ve constantly expressed over the last few months, my base case for the next few years is that a recession, possibly severe and/or prolonged, will affect the United States economy. Over the last few months, I’ve discussed a few pieces of evidence that suggest that a recession is likely. For example, the spread between the 10-year and 3-month treasury bonds recently inverted to its deepest point since the Dot-Com Bubble. Prior to every recession within the last 25 years, the spread between the 10-year and 3-month treasury bonds inverted, suggesting a strong correlation between recessions and this yield curve inversion. In that way, this most recent inversion suggests that a recession is likely.

There are indications that this recession is beginning. Recently, Apple reduced its orders for components for AirPods, MacBooks, and Apple Watches due to decreased demand. As decreased aggregate demand drives recessions, this is likely one sign of an imminent recession. Of course, this doesn’t mean a recession WILL happen (nothing is ever certain), but it is strong evidence to that effect. From a probabilistic standpoint, a recession is likely to occur.

Let us, therefore, assume for a moment that a recession will occur. When might a bottom for U.S. equities occur?

To answer that question, I’ve assembled a model utilizing data from the last eight recessions, as defined by the NBER. We know that the NBER has not officially declared a recession yet, so if we can find some interesting trends in the data from NBER-defined recessions, we can apply that to this current recession. NBER declarations of recessions provide convenient control variables, from which we can draw some generalized trends and observations.

As we know, NBER declarations are an imperfect measure of when a recession occurred. For example, during the Dot-Com Bubble, the official NBER declaration came almost a year after unemployment reached its low. For the time defined as the recessionary period, I’ve defined the start date as when unemployment reached a trough and the end date as when unemployment peaked. It’s an imperfect variable, but it’s not too important anyway. Its only purpose is to show the imperfections of the NBER declarations and to explain some of the stranger trends that arise in the Dot-Com Bubble. Remember that the NBER declaration is what we really care about.

There are some clear trends we can notice in the data. As we can see, in every single NBER recession, the days to the S&P bottom after the NBER recession began are always positive, meaning that, in every recession, the S&P 500 bottomed after a recession was officially declared. The amount of time it took for a bottom to form varied from recession to recession, from the COVID recession’s 51 days to the Dot-Com Bubble’s 588 days.

We can take the arithmetic mean of the days to the S&P bottom by adding together all of our data points and then dividing the sum by the number of recessions (eight). Doing this gives us an average value of 276.375, meaning that, on average, the bottom for the S&P 500 came about 276 days after the NBER declared a recession.

Okay, so those are some pretty interesting observations. But we know that the length of recessions varies from case to case. For example, the COVID-19 Recession lasted a mere 59 days, while the 1981-82 recession lasted more than seven times that, clocking in at 488 days. By taking the percentage of the NBER-defined recession completed on the day of the S&P bottom, we can adjust for the differing lengths of each recession. 

As a note, the outlier of 240% is because the NBER defined the Dot-Com Bubble from March 2001 to November 2001. I simply took the S&P bottom for the entire Dot-Com Bubble. Since the Dot-Com low came in October 2002, this leads to an outlying value, with respect to our other data points. As such, when I calculated the average percent, I simply excluded the Dot-Com value and took the average of the remaining seven data points. Doing this gives us a value of 66.54, implying that the S&P bottom comes about 66.54% of the way through the NBER recession. I should note, however, that this number is not very precise; the standard deviation of this set of values is 19.10!

Another thing of note is the fact that the market cycle bottom for stocks occurs before peak unemployment. As we know, the stock market is not the economy. And of course, for many Americans, the unemployment rate is more important than the stock market. By taking the peak-to-trough period for unemployment, we can determine when we might expect unemployment to peak once the NBER recession is declared. Taking the average of our six data points gives us a total of 501.75, meaning that unemployment peaks more than 500 days after the NBER declaration. The difference between the average number of days from the NBER declaration to the S&P bottom and the number of days gives us a value is 225, meaning that peak unemployment causes more than 200 days after the S&P bottom. This difference speaks to the forward-looking nature of markets, and how they effectively “price-in” a recessionary bottom before it actually occurs.

So, in conclusion, the following observations can be made from this analysis:

i. The bottom for the S&P always came after the NBER declaration of a recession.

 ii. The stock market bottom occurs before peak unemployment.

We can also provide some generalizations on the time aspect as well, but these are a bit more dubious than our main generalizations. Applying these two generalizations to the 2022-23 stock market downturn implies that the stock market bottom is likely not in, since the NBER has not officially declared a recession yet. If history is any indication, the peak in unemployment should occur after the S&P bottoms, implying that a significant amount of pain is likely ahead for the U.S. economy.
If I had to take a guess on when the U.S. might enter recession, I would put the timeframe as being sometime during Q42023-Q12024. We know that interest rates take time to work through the economy (typically 12-18 months) and so that would probably be the period of greatest risk.

--------------------------------------------------

2022 December 2

Conditions are favored for a severe price deterioration in US asset markets

To all readers,

I believe that signs are pointing to a deterioration in the valuation of US stock markets between now and sometime during 2023. There are a wide variety of indicators that continue to suggest that a recession is likely, if not already ongoing.

I will first provide a summary of Fed Chairman Powell's speech on November 30, 2022, and the most recent United States jobs report on December 2, 2022. Then, I will provide a few thoughts on why a "pivot" is not a good thing (if it does occur). I'll end by pointing out a striking discrepancy between S&P 500 returns and US 20-year yields.

Chairman Powell's November 30, 2022 speech took on a notably more dovish tone than his previous 2022 speeches have. At the end of his speech, Powell noted that the time for slowing of rate increases may occur at the December FOMC meeting, implying that the rate hike may only be 50bps instead of 75. Powell also addressed the risk of pursuing over tightening monetary policy. To manage that risk, Powell noted the Fed would need to slow rate increases in the near-future. Powell constantly emphasized both in his speech and in the subsequent Q&A session that he did not want to over-tighten. Powell also briefly addressed the idea of a "soft landing" during the Q&A session (i.e., getting inflation back to the 2% goal without triggering a severe downturn in the US economy). Powell stated that he believes that a soft landing is still achievable. 

Though Powell did provide some dovish comments, I perceived that the tone of his speech remains predominantly hawkish. As he has said throughout the majority of 2022, Powell noted that history warned against prematurely pivoting to a dovish monetary policy. Powell also argued that inflation was "far too high", and that the terminal rate for the Federal funds rate would be at a point higher than that expected at the September meeting. Powell also stated that there was insufficient evidence to suggest that inflation had peaked.

The markets reacted strongly to Powell's speech. The SPY broke through $395 and headed immediately to $405. It closed the day at $407.68, up more than 3% on the day.

We also got new employment statistics from the Bureau of Labor Statistics today. The unemployment rate remained constant at 3.7%. However, non farm payrolls beat expectations, as the NFP rose by 263,000, compared to the expected 200,000. NFP payrolls and the unemployment rate are another indication that the labor market remains stubbornly heated. Bringing inflation down will likely require some cooling of labor market conditions. Remember that monetary policy implemented by the Federal Reserve has a time lag of approximately one year before its effects are fully felt. As the Federal Reserve only really began to hike rates in March 2022, one could argue that the affects of these rate hikes will not truly be felt until Q1 2023, at the earliest.

Since Powell's speech, there has been a lot of talk over a "pivot" from hawkish to dovish Fed policy. Personally, I do not agree. Powell has said that the Fed "will stay the course until the job [of breaking inflation down] is finished". I see no reason to doubt it. But for the sake of argument, let us assume that a pivot is on. Then what? Will the U.S. economy return to a period of incredible growth again? If history is any indication, the answer is no.

The following are three charts that show the performance of the S&P 500 following a pivot by the Federal Reserve. Let us define a pivot as a switch to rate decreases after a period of rate increases. For clarity, the pivot is shown by a blue vertical line.

The first example is the Dot-Com Bubble, where the Fed slashed rates from 625 bps to about 100 bps. After the Fed started cutting rates, the S&P fell by another 40%.